Wall Street Close: Stocks suffer as yields surge and crude oil prices slump

• Major US indices saw sharp losses on Thursday, with the Nasdaq 100 underperforming of the major indices.
• Rising bond yields were the initial driver of downside but selling accelerated in tandem with oil into the close.

Stocks were hit hard on Thursday, with the major US indices more than unwinding Wednesday’s post-FOMC upside; the S&P 500 dropped roughly 1.5% to sink all the way back into the 3920s from Asia Pacific session highs near 3990, the Nasdaq 100 cratered by over 3.0%, losing its 13K handle in the process. The drop in the Dow was comparatively modest, the index pulling back just 0.5% and small caps were also hit hard, with the Russell 2000 dropping nearly 3.0%. The CBOE Volatility Index (or the VIX) saw a sharp 2.35 rise to above 21.50.

“Growth” stocks (which rely more heavily on expectations for earnings growth) like Big Tech names and Tesla (which dropped nearly 7%) underperformed on Thursday, with the S&P 500 growth index dropping 2.3%, while “value” stocks (whose valuation is more closely dependent on current levels of cash flow) help up better, with the S&P 500 value index dropping 0.6% - rising US government bond yields was behind the hit to growth.

In terms of GICS sector performance; amid a sharp sell-off in crude oil, energy was the worst-hit sector, dropping 4.7% on the day. Information technology (down 2.9%) and consumer discretionary (down 2.6%) were the next worst-hit sectors, while financials (up 0.6%) outperformed, unsurprisingly boosted by higher government borrowing costs.

Driving the day

Much of the losses had already been incurred prior to the open of US trade, with global stocks dropping amid a surge in global government borrowing costs. US debt was hit particularly hard, with the 10-year yield at one point surging above 1.75% - traders attributed a combination of 1) Asia Pacific session reports that the BoJ might tweaks its yield curve control targets, 2) a very strong Australian labour market report and 3) the markets having time to digest the Fed’s new and very bullish outlook for the US economy as factors driving upside.

By the second half of US trade, however, the main driver of equities was crude oil markets; crude prices have seen their sharpest one day drop since last summer (WTI was down nearly 10% at one point) amid concerns regarding the worsening economic outlook in Europe as the bloc’s vaccine rollout continues to stutter and countries head back into lockdown (France was the latest to announce new restrictions) - this inevitably started to weigh on correlated risk assets such as equities, though it has taken some steam out of the rally in global bond yields, given the negative implications a drop in crude oil prices has for inflation expectations.

Pandemic news outside of the USA has been mixed; the country is one course to offer the first Covid-19 vaccine to all of its adults one month ahead of schedule (in May), but the White House Covid-19 Advisor was on the wires warning some states against “letting their guards down”, noting that 17 states are seeing cases rise and variants are spreading more widely. But the news out of Europe has been bad – the EU continues to bungle its vaccine rollout and even though the EU’s central medical agency has vouched that the benefits of administering the AstraZeneca vaccine outweigh the risks, country’s are still split on its safety and appear to be wasting precious time in the race to herd immunity as the bloc heads towards ever-tougher Covid-19 containment-related economic restrictions – as noted above, France was the latest country to announce toughed restrictions to contain the third wave the country is currently experiencing.

Elsewhere, a blockbuster Philly Fed Manufacturing survey for this month (one of the timeliest insights into the health of the US economy) was negated by a worse than expected weekly jobless claims report. Looking ahead, equity investors will be keeping an eye on price action in bond and crude oil markets on Friday, as well as keeping their ears peeled for news as how the Thursday to Friday summit of high-level US and Chinese officials in Alaska (the first meeting between the two sides since Biden took office) has gone.