The yield on the 10-year US Treasury bond surpassed the 4% threshold at a certain point, sparking apprehension among investors…

Illustration – Photo: Bloomberg

On the inaugural trading day of 2024, the US stock market faced a downturn as yields on government bonds increased, prompting certain investors to capitalize on profits following a robust end-of-year surge. Concurrently, crude oil prices exhibited volatility throughout the session, concluding significantly lower amid investor scrutiny of developments in the Red Sea and ongoing concerns about record-breaking US oil production, coupled with a weakening energy demand from China.

At the market close, the S&P 500 index recorded a 0.57% decrease, settling at 4,742.83 points. The Nasdaq index experienced a 1.63% drop, closing at 14,765.94 points, marking the most substantial decline since October. In contrast, the Dow Jones index gained 25.5 points, equivalent to a 0.07% increase, reaching 37,715.04 points.

The downward pressure on the S&P 500 this session was driven by Apple’s significant decline, with a nearly 3.6% drop following Barclays’ downgrade of its hold recommendation. Apple holds over a 7% share in the broadest measurement of the US stock market. Conversely, Dow Jones maintained its gains due to the rise of defensive stocks such as Johnson & Johnson and Merck.

Preceding this session, the US stock market concluded 2023 with noteworthy accomplishments, with the S&P 500 recording a nine-week consecutive gain, the lengthiest streak since 2004. The robust year-end market recovery was fueled by diminishing inflation while the economy remained resilient, and the US Federal Reserve (Fed) signaled the end of interest rate hikes while predicting rate cuts in 2024.

Despite substantial challenges such as the war in Ukraine and the Middle East and the regional banking crisis in the US, the S&P 500 surged by 24% throughout the previous year.

Technology stocks, especially large-cap technology stocks, spearheaded the market’s upward trajectory, with Apple registering a 48% increase, Microsoft seeing an almost 57% increase, and Nvidia soaring by 239%. Consequently, Nasdaq recorded a 43.4% increase for the year, the most robust since 2020.

Dow Jones saw a 13.7% increase throughout the past year, establishing a new record.

The recent decline in US Treasury bond yields in the past weeks has buttressed stock prices. After surpassing 5%, the highest in 16 years, at the end of October, the 10-year US Treasury bond yield fell below 3.9% at the year’s end.

However, during Tuesday’s session, the 10-year US Treasury bond yield momentarily surpassed 4%, causing concern among investors. The escalating yields are considered indicative of the market tempering expectations for interest rate cuts this year.

In discussions with Reuters, Jack Janasiewicz, a strategist at Natixis Investment Managers Solutions, emphasized that the current major concern is whether the market is misinterpreting the economic slowdown for signs of an imminent economic recession. In the event of a recession, the Fed may slash interest rates up to six times, as anticipated by investors in recent times.

“The risk is that there have been some weak economic figures, but most importantly is how the labor market is performing. I sense that the market is anticipating a sharp economic downturn with a hard landing. That could be a mistake,” said Janasiewicz.

The most crucial US economic data this week is the comprehensive employment report for November, anticipated to be released by the US Department of Labor on Friday. If the figures surpass expectations, the anticipation of interest rate cuts may decrease, putting pressure on the prices of risk assets such as stocks and commodity prices.

WTI crude oil prices for February delivery in New York experienced a $1.27 per barrel drop, equivalent to a 1.77% decrease, concluding at $70.38 per barrel. Brent crude oil prices for March delivery in London fell by $1.15 per barrel, equivalent to a 1.49% decrease, closing at $75.89 per barrel.

Throughout the session, oil prices occasionally surged over 2% due to heightened tensions in the Red Sea—a vital artery for global maritime transport. Since the end of last year, Houthi rebels have intensified drone attacks on ships passing through this region, compelling numerous cargo ships to alter their routes through the Suez Canal.

Helima Croft, a strategist at RBC Capital Markets, noted that oil prices have yet to reflect the increasing tension in the Red Sea because traders still believe that there will be no disruption in the supply. “Basically, the market is declaring a wait-and-see approach to see what will ultimately happen. But tensions are increasing every day,” she said.

Currently, traders are focusing more on the record-breaking oil production in the US and the weakened oil demand in China. These factors are exerting downward pressure on oil prices, according to energy security expert Adi Imsirovic of the Center for Strategic and International Studies (CSIS).