U.S. equities were pushed lower on Tuesday amid big losses for areas of “safety” in the market.
The catalysts for the declines in precious metals, long-term government bonds, yield-sensitive stocks like utilities, and gold and silver stocks was a surge in the U.S. dollar and reports the European Central Bank may be considering tapering its bond buying stimulus program. The dollar’s rise was driven, in turn, by the reappearance of worries about “Brexit,” the United Kingdom’s intention to leave the European Union.
The weakness in bonds pushed up long-term interest rates, something that rattled markets a few weeks ago on reports the Bank of Japan was considering lessening its support to the long-term bonds market — something that was eventually confirmed by policymakers.
In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 Index lost 0.5%, the Nasdaq Composite lost 0.2% and the Russell 2000 lost 0.5%. Treasury bonds were weaker, the dollar gained 0.5% against a basket of currencies to push above its 200-day moving average for the first time since July, gold lost 3.3% for its worst session since December 2013 and oil snapped a four-day rally to lost a fraction.
Financial stocks led the way with 0.3% gain on hopes higher interest rates will pad net interest margins and thus profits. Yield-sensitive utility and telecom stocks were ravaged, down 2.2% and 1.7% respectively. The Utilities Select SPDR (NYSEARCA:XLU) is now down for eight consecutive sessions for a total loss of 7.3% — enough to wipe out more than two years of dividend income.
Pandora (P) gained 3.6% after being added to the conviction buy list at Goldman on valuation and subscription tailwinds. Twitter (NYSE:TWTR) lost 2% on a report from Susquehanna that most of the boost from takeover speculation has been priced into the stock.
Turning back to the dollar’s rise, it was helped by the fact the pound sterling fell near a 31-year low on mounting evidence U.K. prime minister Theresa May is moving forward with a clean break from the EU sometime in 2017 with in interim deal being dismissed and protections for Britain’s financial sector being refused.
Some hawkish commentary from the Federal Reserve helped as well, boosting the odds of a December interest rate hike. Richmond Fed President Lacker said the Fed needed to be more pre-emptive in raising rates noting that such moves can prevent the institution from falling behind the curve on inflation pressure — which would necessitate even more aggressive rate hikes.
He added that employment and inflation is running at or very close to mandate consistent levels and that history suggests interest rates should be at 1.5% or more by now vs. just 0.5% currently.
And finally, turning to the European Central Bank, a Bloomberg report said the bank may begin tapering its bond purchase program before the program ends in March 2017. This would follow the pattern set by the Fed when it tapered its QE3 program before ending it in December 2014.
While this was subsequently denied by the ECB, which claimed such a move hasn’t even been discussed, it shocked many traders who have been penciling in an extension of the ECB’s bond buying further into 2017 or beyond.
For now, and for a variety of reasons, the market is punishing anything sensitive to interest rates. That’s good news for the ProShares UltraShort Treasury Bond (NYSEARCA:TBT), which gained another 2.3% for Edge subscribers today.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.