Nasdaq soars 1.6% to kick off last full week of March as Treasury yields retreat, Dow sees slight gain

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U.S. stock benchmarks were near session highs Monday afternoon, following losses for all three major indexes last week, as investors weighed brightening economic prospects against worries that interest rates will climb faster than anticipated.

How are stock benchmarks performing?

  • The Dow Jones Industrial Average traded 107 points higher, or 0.3%, near about 32,735, near the session’s high.
  • The S&P 500 added 35 points, or 0.9%, to reach 3,948, also near the session high.
  • The Nasdaq Composite Index advanced 218 points to reach 13,433, a gain of 1.7%.

On Friday, the Dow put in a weekly decline of 0.5%, the S&P 500 and the Nasdaq both slid 0.8%.

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What’s driving the market?

Equity markets have been fixated on rates, but a modest pullback of the 10-year Treasury yield on Monday gave the start of March’s last full week of trading a boost, particularly to technology-related stocks.

Highflying tech shares had been big winners amid the COVID-19 pandemic, but they also have been under pressure in recent months as government bond yields have risen.

The 10-year Treasury yield stood at around 1.69% Monday, down from 1.729% Friday. Rising bond yields have been partially welcomed by Wall Street investors, as a sign of the U.S. economy’s return to health, but caution remains about if another sharp spike in rates could cause disorder in financial markets.

Read: Why you should not freak out about the 10-year U.S. Treasury yield hitting 1.7%

“Rising yields have yet to become overly punitive for the economy and risk assets, but 2.5% on the 10yr may be a key threshold,” a team led by Jason Pride, chief investment officer at Glenmede, wrote in a note Monday.

Investors have been skittish about the outlook for buying stocks on the heels of additional fiscal stimulus, state reopenings and vaccine rollouts that could lead to a major upswing for the economy and higher interest rates, as falling bond prices push yields higher and make speculative and high-growth assets look less compelling.

Video: How this trader is playing 10-year Treasury note futures right now (CNBC)

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“With the federal debt now at $29 trillion and a total debt-to-GDP ratio at an astounding 145%, nominal inflation and interest rates have increased sharply in recent months,” said Phil Orlando, Federated Hermes’ chief equity market strategist, in emailed comments.

He also said sharply higher 10-year Treasury yields “will certainly impair our ability to service that growing debt level.”

Last week’s slide lower for major stock benchmarks came after the Federal Reserve appeared to strike a dovish tone at its policy meeting on Wednesday, but bond yields rose on expectations for economic recovery and inflation this year.

“The Fed itself may remain one of the most important risks in the near term, simply due to market (over) reaction to its comments and (in)actions,” wrote Saira Malik, chief investment officer at Nuveen, in emailed comments.

“Investor fears over ‘disorderly’ rate growth and the Fed’s ability and willingness to react has created rapid bouts of volatility, such as what occurred on Thursday,” Malik wrote.

Richmond Fed President Thomas Barkin, speaking at a virtual event hosted by Credit Suisse Asian Investment Conference, said that he’s hopeful that the U.S. is “on the brink of completing this recovery.”

“Vaccines are rolling out, case rates and hospitalizations are falling, excess savings and fiscal stimulus should help fund pent-up demand from consumers,” Barkin described as “exhausted by isolation and freed up by vaccines and warmer weather.”

Markets have also monitoring any reaction in the Treasury market to the central bank’s decision Friday to sunset a yearlong reprieve that had eased capital requirements for big banks. The move disappointed some investors who had hoped for an extension, raising worries that appetite for bond prices may take a leg lower, putting further pressure on yields, if banks aren’t able to exclude assets like Treasurys from their so-called supplementary leverage ratios.

Meanwhile, Fed Chairman Jerome Powell said Monday that bitcoin lacks key ingredients that would make it a useful currency, saying the cryptocurrency instead is more of a gold substitute, during a webinar hosted by the Bank for International Settlements on innovation in the digital age.

On the public health front, AstraZeneca on Monday said that its COVID-19 vaccine was shown to be safe and 79% effective in preventing symptomatic disease in final-stage U.S. clinical trials. The U.S. trial indicated no increased chance of blood-clotting, which had led to the suspension of the vaccine in parts of Europe.

The U.S., while still the global leader in COVID-19 cases, said its vaccination program was on track to nearly triple its output in March, even as the health situation in Europe has been deteriorating.

In economic news, Chicago Fed national activity index fell to minus 1.09 in February, the first negative reading since last April.

Meanwhile, a report on existing-home sales showed total sales dropped 6.6% from January to a seasonally adjusted annual rate of 6.22 million, the National Association of Realtors reported Monday, following two straight months of gains. Still, compared with a year ago, home sales are up 9.1%.

Which stocks are in focus?

  • Shares of Dynatrace Inc. were up 2% and those of ZoomInfo Technologies rose 9.6% after Goldman Sachs analyst Kash Rangan launched coverage on the two companies with Buy ratings.
  • Canadian Pacific Railway Ltd. is offering to buy Kansas City Southern in a deal valued at $25 billion. Canadian Pacific’s stock was down 3.6%, while those for Kansas were up around 12.2%.
  • Tesla Inc. bull Cathie Wood of Ark Investment released a new four-year target for the electric-vehicle maker of $3,000 a share. Shares of the company were up nearly 6%.
  • Shares of AstraZeneca were up 3.4% after studies confirmed it was safe and 79% effective.

How are other markets faring?

  • The yield on the 10-year Treasury note TMUBMUSD10Y was down 4 basis point to 1.69%.
  • The ICE U.S. Dollar Index DXY, a measure of the U.S. currency against a basket of six major rivals, was down 0.2%.
  • Oil futures were lower, with the U.S. crude benchmark contract CL.1 losing 22 cents, or 0.4%, to $61.20 a barrel.
  • Gold futures GC00 shed 0.2% to $1,738 an ounce on Comex.
  • In Europe, the Stoxx 600 SXXP closed up 0.2% and London’s FTSE 100 UKX gained 0.3%.
  • In Asian equity markets, the Shanghai Composite SHCOMP rose 1.1%, while Hong Kong’s Hang Seng Index HSI lost 0.4% and Japan’s Nikkei 225 NIK tumbled 2.1%.
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