S&P 500 falls from record levels as rates spike on Fed commentary

Stocks fell Monday as Treasury yields spiked higher on concerns that the Federal Reserve may not cut rates as much as expected. Lacklustre results from McDonald’s also dampened investor sentiment.

The Dow Jones Industrial Average dropped 274.30 points, or 0.71%, to settle at 38,380.12. The S&P 500 slipped 0.32% to close at 4,942.81. The index hit a record high last week as Big Tech stocks moved higher. The Nasdaq Composite edged down 0.2% to end at 15,597.68.

The yield on the 10-year Treasury note was last up more than 13 basis points to 4.168% as investors assessed a fresh batch of strong economic data that suggested rates may stay elevated for longer than anticipated. The benchmark yield traded around 3.81% last week.

Fed Chair Jerome Powell on Sunday reiterated comments made after last week’s January policy meeting, suggesting that a rate cut in March was unlikely. Expectations for cuts have eased since the remarks, with the probability of a cut next month last at 14.5%, according to CME Group’s FedWatch Tool.

Following these comments made by the Fed Chair, The US dollar reached its highest point in approximately three months. Against a basket of six major currencies, the dollar strengthened by up to 0.7% on Monday, reaching its peak level since November 14th.

Earnings season stretched on, with McDonald’s slipping 3.7% after posting a mixed quarter. The results heightened concerns about earnings from companies outside of the technology behemoths and whether they can deliver the rest of the season.

Elsewhere, Boeing slumped 1.3% on more 737 Max woes. Tesla also dragged the broader market, losing 3.7% as worries over rising competition and persistent pricing pressures for the EV giant lingered.

Caterpillar is on track to achieve an all-time high in its stock price after reporting strong fourth-quarter earnings, including improved profit margins. They announced earnings per share of $5.23 on $17.1 billion in sales, compared to $3.86 per share on $16.6 billion in sales the previous year.

Small-cap stocks, as represented by the Russell 2000, exhibited underperformance in Monday's trading session, experiencing a 1.4% decline. This underperformance is part of a broader trend, with small-cap stocks, as measured by the Russell 2000, having declined by over 4% since the beginning of 2024, in contrast to the S&P 500, which has seen a 3% increase during the same period.

In commodity-related news, analysts anticipate a rise in rare earth prices in the near future, driven by increased demand from electric vehicles and wind power. Additionally, China's output quotas are expected to grow at a slower pace this year, following a substantial 21.4% increase in 2023, as China plays a dominant role in both rare earth mining and refined output, contributing to the decline in rare earth prices observed in 2023 due to heightened production and tepid demand growth.

Shifting to US sectors, only Tech and Health closed higher overnight. Materials and Utilities were the worst performers.

Futures

The SPI futures are pointing to a 0.4 per cent fall.

Currency

One Australian dollar at 8.20am was buying 64.83 US cents.

Commodities

Gold lost 0.60 per cent. Silver dropped 1.61 per cent. Copper fell 1.31 per cent. Oil gained 0.75 per cent.

Figures around the globe

European markets closed lower. London’s FTSE fell 0.04 per cent, Frankfurt lost 0.08 per cent, and Paris closed 0.03 per cent lower.

Turning to Asian markets, Tokyo’s Nikkei added 0.54 per cent, Hong Kong’s Hang Seng fell 0.15 per cent and China’s Shanghai Composite fell 1.02 per cent lower.

Yesterday, the Australian share market closed 0.96 per cent lower at 7,625.85.

Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.

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