US Stocks Post Biggest 1-Day Fall Since Brexit Over Interest Rate Fears

New York (Sept 11)  Stocks and bonds tumbled Friday, with the Dow industrials and S&P 500 posting their biggest percentage losses since the Brexit selloff.

Fresh signs that central banks could be backing away from easy-money policies helped boost the dollar, while investors sold shares of dividend payers like utilities and telecommunications companies that have been popular with income-seeking investors while rates have been low. Yields on some government bonds reached their highest levels since late June.

The  Dow Jones Industrial Average fell 394.46 points, or 2.1%, to 18085.45, and the  S&P 500 declined 2.45%, marking the biggest one-day declines for the indexes since late June when a selloff followed the U.K.’s vote to leave the European Union. The  Nasdaq Composite lost 2.5%.

Trading volumes were elevated, traders said, something that typically suggests conviction in the market’s move.

“Today’s volume is notable because it shows people are putting money behind these moves,” said Justin Wiggs, managing director in equity trading at Stifel Nicolaus. Still, he said that wasn’t enough to convince him Friday’s declines were the start of a prolonged market slump.

“It still feels to me like a one-off,” he said.

Developed-world government debt sold off Thursday after the European Central Bank declined to pledge further stimulus. On Friday, German 10-year government bond yields turned positive for the first time since investors piled into haven investments after the Brexit vote. The yield on the 10-year U.S. Treasury note climbed to 1.671%, according to Tradeweb, marking its highest close since the U.K. referendum on June 23. Yields rise as prices fall. 

Federal Reserve Bank of Boston President Eric Rosengren said Friday that “a reasonable case can be made” for tightening interest rates to avoid overheating the economy. Above, the Federal Reserve’s building in Washington.  Photo:  for The Wall Street Journal 

Federal Reserve Bank of Boston President  Eric Rosengren, who has in the past advocated for keeping rates low, said Friday that “a reasonable case can be made” for tightening interest rates to avoid overheating the economy. Fed governor  Lael Brainard is scheduled to speak on Monday, a day ahead of the Fed’s blackout period on giving public comment before its Sept. 20-21 meeting.

Recent gains in stock markets have been underpinned by accommodative measures from the Federal Reserve, European Central Bank, Bank of England and  Bank of Japan,  leaving investors focused on any signs that global central bankers may be changing their tune.

Expectations for a rate increase have bounced around recently in response to economic data and comments from central bankers, though most investors still don’t expect a rate rise in September. Federal funds futures, which are used by traders to place bets on central bank policy, on Friday showed a 24% chance of a U.S. interest-rate rise in September, compared with an 18% chance as of Thursday, according to  CME Group.

In September, “there’s an outside chance the Fed will make a meaningful statement or action,” said Ninh Chung, head of investment strategy at SVB Asset Management, but “markets still react to almost every word a Fed official puts out.”

The  WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, was up 0.5%, as the prospect of higher rates tends to strengthen the greenback.

The Stoxx Europe 600 fell 1.1% as data showed a steep fall in German exports and after the ECB’s decision on Thursday to leave its current stimulus program unchanged frustrated many investors who expected an adjustment to its bond-buying program or hints at other measures to revive the eurozone economy.

European shares fell after the ECB announcement, while the euro gained against the dollar and the region’s sovereign bonds came under pressure. Financial shares climbed on Friday, however, as the prospect of higher interest rates tends to benefit banks’ net interest margins.

 “Compared to expectations, you’d almost say [ECB President]  Mario Draghi was hawkish,” said Michael Metcalfe, head of macro strategy at State Street Global Markets. Both in Europe and in Japan, “we just assumed central banks would push the quantitative easing button when things got bad again, but it seems we’ve reached the limits of that.”

Source: WSJ