Dow Jones slumps in worst day for U.S. markets in eight months

Cornelia Mascio
Ottobre 11, 2018

Global stocks were pummeled on Wednesday amid rising bond yields, renewed tension between China and the United States and concerns that US companies will report compressed profit margins in their upcoming third-quarter financial results.

Wall Street is facing its worst day in eight months, with the Dow Jones index plunging by 831 points. The Nasdaq composite, which has a high concentration of technology stocks, tumbled 244 points, or 3.2 percent, to 7,495.

The 10-year Treasury note yield traded around 3.23 percent, while the two-year yield reached its highest mark since 2008. The broader S&P 500 was down 47.07 points or 1.63 per cent, heading toward seven-week lows. But eventually the high rates worry stock investors, as higher rates tend to increase borrowing costs and cut into profit margins.

Technology and internet-based companies are known for their high profit margins, and many have reported explosive growth in recent years, with corresponding gains in their stock prices. Think of it this way, if the Treasury issues a $1000 bond paying 3 percent interest, investors will not pay $1000 for an older bond paying 2 percent interest.

Stocks from emerging markets were also hard hit.

"It's a risk-off environment as investors are focusing on spiking yields and taking profits off the table as they are concerned about whether the bull market is actually coming to an end", said Ryan Nauman, market strategist at Informa Financial Intelligence in Zephyr Cove, Nevada.

The weakness in tech was led by semiconductor names after Swiss vacuum valve maker VAT Group said demand from chip equipment makers was softening. In retail, Amazon sank 3.6 per cent to US$1803 and Nike gave up 4.4 per cent to US$76.87. The stock fell 35.7 percent to 38 cents in morning trading.

Meanwhile struggling retailer Sears was in focus as the Wall Street Journal reported that it was preparing to file for bankruptcy.

All three indexes hit records between August 30 and October 3, despite the escalating Sino-US trade dispute gnawing at confidence on corporate profit growth through most of the year. Over the years, Sears has closed hundreds of stores and sold several famous brands.

There were, however, slight lifts for Japan's Nikkei, which added 0.2 per cent, and Hong Kong's Hang Seng, which gained 0.2 per cent.

It sets up the Australian sharemarket for steep losses to open the session, with futures at 7:35am AEDT pointing to a fall of 109 points, or 1.8 per cent, at the open.

Fear over higher rates is being best expressed in the bond market where prices have slid lower for weeks. Heating oil fell 1.2 per cent to $2.39 a gallon.

The CAC 40 in France dropped 2.1 percent, Germany's DAX lost 2.2 percent and the FTSE 100 in London fell 1.3 percent.

As investors look for safe bets, utility stocks, which tend to pay big dividends, were also rising slightly Wednesday. Investors see many of these countries as being vulnerable to higher USA interest rates, which can pull away investment dollars. Brazil's Bovespa lost 2.5 percent and the Merval in Argentina sank 2.2 percent.

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