Stocks are under pressure from Treasury yields

Traders work the floor of the New York Stock Exchange on July 25, 2023, in New York City. 

Angela Weiss | AFP | Getty Images

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What you need to know today

Stocks under pressure
U.S. stocks fell Thursday, their third losing day in a row. The 10-year Treasury yield touched 4.284%, the highest since October. The pan-European Stoxx 600 index retreated 0.9%, weighed down by industrials and technology stocks. Meanwhile, Norway’s central bank raised its main interest rate by 25 basis points to 4%.

‘Outdated’ Chinese model
China’s economic boom was fueled by manufacturing exported goods — but that model isn’t likely to generate much economic growth any further, said David Roche, president and global strategist at Independent Strategy. “The Chinese model is clearly washed up on the beach with a huge number of legacy holes in it, and it’s not going to take off again,” Roche told CNBC.

Chinese countermeasures
Separately, China’s Ministry of Commerce said it might respond to the Biden administration’s executive order restricting U.S. investment in sensitive Chinese technology. “We are making a comprehensive assessment of the executive order’s impact, and will take necessary countermeasures based on the assessment’s results,” spokesperson Shu Jueting said in Mandarin, translated by CNBC.

Bitcoin plunges
Bitcoin fell to $26,194, its lowest level in almost two months, after minutes of the Federal Reserve’s July meeting were released. The Fed’s warning that sustained inflation could lead to more rate hikes — and a higher chance of an engineered recession — probably triggered a sell-off in risky assets like cryptocurrency, said Sylvia Jablonski, chief investment officer at Defiance ETFs.

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The bottom line

Rising U.S. Treasury yields are straining stocks. Minutes of the Federal Reserve’s July meeting triggered the 10-year yield to rise more than 2 basis points to hit its highest level in almost a year. But at 4.282%, it’s still lower than the benchmark interest rate of 5.25% to 5.5%.

That’s not even taking into account the last rate hike that the Fed had projected for the year, which would take rates to a range of 5.5% to 5.75%. Investors had hoped — and bet — that the Fed would stop hiking after its meeting in July.

Those bets are slowly unwinding. There’s a 38% chance that the Fed will increase rates by 25 basis points at its November meeting, according to the CME FedWatch Tool.  Those odds were only 27.8% a week ago.

And with rates possibly going higher than that if inflation resurges — as the Fed warned in its minutes — yields could climb further still.

Investors didn’t like the sound of that. The S&P 500 lost 0.77%, the Dow Jones Industrial Average fell 0.84% and the Nasdaq Composite declined 1.17%. All three indexes closed below their 50-day moving average — the first time for the Dow since June.

Trading was brisk, too, suggesting investors sold off stocks because they feared more losses. The SPDR S&P 500 ETF, a fund that tracks the S&P index, traded 95.3 million shares, above its 30-day moving volume of 72.4 million

Indeed, investor sentiment nosedived this week, according to the latest American Association of Individual Investor weekly survey. Just 35.9% of investors are bullish about the next six months, down from 44.7% last week and 49% two weeks ago. The decline snapped a 10-week streak when bullishness had exceeded the historical average of 37.5%, the AAII said.

It’d be a stretch of the imagination, however, to say that a bear market is back. All indexes are still above their 200-day moving average. The S&P is around 9.31% off its record high and has rallied about 14% this year. It’s important to keep in mind that August has historically been a slow, and bad month for stocks. But August is just one month.

— CNBC’s Scott Schnipper contributed to this report.


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