Nasdaq and S&P 500 tumble on higher bond yields, fears of government shutdown

Rising bond yields and declining consumer confidence both indicate that the Fed’s ‘higher for longer’ interest rate policies are impacting the real economy. One measure in today’s Consumer Confidence Index data pointed to recession. Nasdaq and the S&P 500 were off sharply. Dollar strength and a rising oil price were the standout performances.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Saturday night deadline for US government shutdown impacts bond yields

Full funding of the US government expires at midnight on Saturday September 30^th  unless Congress passes the necessary legislation to continue funding operations and the president signs it – by next Monday the government could be shutdown. Will Congress use this event to enforce funding discipline? US bond yields spiked higher when Fitch lowered its US credit rating on budget concerns, and previously when S&P lowered its credit rating back in 2011 during a similar budget battle. What if Moody’s completes the credit downgrade hat-trick, as they’ve hinted they might?

Moody’s analyst William Foster told Reuters, “If there is not an effective fiscal policy response to try to offset those (fiscal) pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there. And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures are not addressed.”

Congress increasingly finds itself in a position of borrowing more money to not only pay for spending obligations, but also for paying the interest on existing debt. The market must attract enough buyers for those debt certificates at a time when the Federal Reserve, China and Japan are all reducing their purchases by roughly $1.3 trillion per year. Higher bond yields this become a vicious cycle, attracting buyers for new debt and increasing the cost of existing debt.

Rising bond yields is a concern for a wide range of market participants, and gradually erodes the valuation of equities, real estate, and makes holding commodity positions more expensive.

US Consumer Confidence falls to 4-month low in September

• The Conference Board Consumer Confidence Index declined again in September to 103.0, worse than the expected 105.8, down from 108.7 in August – and the worst reading in four months
• The Present Situation Index improved slightly to 147.1, up from 146.7 previously
• However, the Expectations Index fell nearly 10 points to 73.7, dropping back below the "80" level that often signifies a coming recession
• Consumers also indicated concerns about higher interest rates and the current political climate

Feds and states sue Amazon, tech majors under scrutiny

Big Tech is facing unprecedented legal scrutiny. The Federal Trade Commission (FTC) and 17 state attorneys general sued Amazon today, alleging that its dominant online retail store Amazon.com illegally monopolizes markets, violating US antitrust law by reducing consumer choice and blocking online sellers from selling goods at lower prices. The FTC claims that Amazon uses anti-discounting measures, requires sellers use its fulfillment and Prime services, that it benefits its own products in search algorithms, and that it boosts products based on paid ads.

An Amazon spokesman rejected the claims:  "The practices the FTC is challenging have helped to spur competition and innovation across the retail industry, and have produced greater selection, lower prices, and faster delivery speeds for Amazon customers and greater opportunity for the many businesses that sell in Amazon’s store.”

This is the latest in a series of Big Tech legal suits in the US and European Union (EU). Federal agencies and US states have filed antitrust lawsuits alleging that Meta, Google, and Microsoft, illegally suppress competition. The Google case has gone to court, alleging that its illegally pays companies like Apple, Samsung, and Verizon to use its search engine by default. The EU’s antitrust regulator has targeted Amazon, Alphabet, Apple, Meta, Microsoft and ByteDance (the TikTok owner) for detailed scrutiny under new competition rules under the Digital Markets Act.

TODAY’S MAJOR MARKETS

Nasdaq leads equities lower on shutdown fears

• Equity markets resumed their decline, led by Nasdaq and S&P 500’s 1.1% declines, with the more defensive  Russell 2000 down 0.6%
• Foreign markets also fell overnight, with the Nikke1 225 and Dax off 1.1% and 1.0% respectively, whilst the FTSE 100 was unchanged
• The VIX, Wall Street’s fear index, rose sharply to 18.7 (but still below the 25+ level seen earlier this year)

Dollar strengthens on rising bond yields

• 10-year yields fell rose sharply to 4.54%, suggesting real fear of a prolonged government shutdown, and 2-year yields rose to 5.15%
• The dollar index hit a year-to-date high of 106.2, up 0.2%
• Versus the dollar, Sterling was off 0.4%, the Euro was down 0.2% and the Yen was unchanged

Oil rally continues, gold sees selling

• Crude oil prices fell 0.7% to 90.35 per barrel
• Spot gold prices fell 0.8% to $1,921 per ounce, while silver was off 0.9% to $23.2 per ounce
• Escalated bombing of Ukraine ports provides underlying support for wheat prices
• Biofuel demand provides support for soyoil
• Corn and soybean prices felt the pressure of seasonal harvest selling

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]