U.S. equities moved lower on Tuesday after a surge in Treasury bonds suggested increased fear and risk aversion amongst investors.
No single catalyst was behind the move, with a number of factors including the U.S. Treasury’s crackdown on corporate tax inversions, cautious comments from the International Monetary Fund, strength in the Japanese yen (which hits carry trades) and ongoing lack of progress toward a Russia/OPEC oil production freeze deal.
In the end, the Dow Jones Industrial Average fell 0.8%, the S&P 500 lost 1%, the Nasdaq Composite dropped 1% and the Russell 2000 finished the day 1.1% lower.
The rise in Treasury bonds boosted the ProShares Ultra 20+ Year Treasury Bond (NYSEARCA:UBT) by 2.2% to a total gain of nearly 4% since it was first recommended to Edge subscribers on March 24.
The dollar gained slightly but hit its weakest level against the yen since October 2014. Gold gained 0.9%. And oil rose 0.7% to close at $35.94 a barrel.
Utility were the laggards on the drag from lower long-term yields, falling 1.9%. Walt Disney Co (NYSE:DIS) fell 1.7% on the departure of its chief operating officer widely seen as the company’s next CEO. Oil services player Baker Hughes Incorporated (NYSE:BHI) lost 5.1% on reports regulators could block its proposed $35 billion acquisition by Halliburton Company (NYSE:HAL).
The Treasury Department’s new rules against corporate inversions were tougher than expected, with an effort to crack down on the process known as “earnings stripping” whereby a U.S. subsidiary is loaded up with debt owed to a foreign head office so that interest can be deduced from U.S. taxable income. Treasury Secretary Jack Lew said the focus will be on M&A transactions that generate large interest deductions without financing new investments here in the United States.
Wall Street was focused on the push to go after so-called “serial inverters” — that is, large companies created through multiple takeovers or inversions. The government will no ignore U.S. assets acquired by such companies over the past three years. This is likely to throw a wrench in the $150 billion acquisition of Allergan (NYSE:AGN) — which suffered a 14.8% share price decline — by Pfizer Inc. (NYSE:PFE).
On the economic front, the ISM non-manufacturing index rose to 54.5 in March, up from the 54.1 result in February and ahead of the consensus estimate. This marks the 74th consecutive month of expansion and the first acceleration in output since October.
Still, the drag from other data points led the Atlanta Federal Reserve to lower its GDPNow forecast of first-quarter economic growth to just 0.4% from 0.7% previously.
Stepping back, the big action has been over in Japan over the past week with the Nikkei index down another 2.4% overnight to cap a six-day losing streak that has seen the index drop 8.4% from its late March high. The Nikkei is down nearly 25% from its high last August.
The selloff is being fueled by an erosion of faith in the ability of the Bank of Japan to reinvigorate a long stalled economy via even more aggressive monetary policy stimulus. A big bond buying program has been in place for years. A recent move to cut interest rates into negative territory had a negative effect on bank profitability fears. And with economic data still deteriorating, everyone is asking “So, what now?” Reports are that the BoJ will look to further expand its asset purchase program at its next policy meeting.
The rise in the yen could destabilize currency markets, which were the epicenter for much of the market volatility seen at the start of the year. With stocks at major technical resistance levels, watch for this to unsettle investors and push stocks down and out of the epic seven-week uptrend we’ve just experienced.
For the more adventurous, new short-side opportunities include stocks like General Motors Company (NYSE:GM). Shares are dropping down out of a two-month consolidation range near its 200-day moving average on growing doubts over the ability of red-hot auto sales to persist amid a focus on sub-prime borrowers and a coming wave of off-lease vehicles ready to depress used car prices.
With a break of the 50-day moving average for the first time since December, Edge Pro subscribers are ready to profit with their position in the April $30 GM puts.
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