- The Dow rose by more than 1% in morning trade, before falling 450 points to close 0.7% lower
- Analysts say the move was driven by the market re-interpreting the minutes from the US Fed’s January meeting
- The stock selloff was a reaction to moves in the bond market, as US 10-year bond yields rose sharply in afternoon trade
US stocks have closed a volatile session in the red after a sharp selloff saw the Dow plunge 450 points in the last two hours of trade.
Here’s the move in the Dow:
All the major US stock indexes opened in a buoyant mood ahead of the US Fed’s minutes from its January 31 meeting.
And the price-action in afternoon trade suggests that markets initially saw the minutes as dovish, before re-interpreting their view.
Immediately following the minutes, stocks were holding gains of more than 1% while the US dollar dipped.
But over the course of afternoon trade bond yields rose sharply higher, the US dollar strengthened, and stocks got the jitters.
It sets the stage for an interesting open on the ASX this morning. The most commonly traded ASX200 March futures contracts — which were earlier pointing to a gain of 37 points this morning — are now showing a gain of just two points.
While the minutes from the Fed’s meeting showed the usual divergence of views between the more dovish and hawkish committee members, the overall tone was broadly positive of the US growth outlook.
“It is clear the market has changed its read from dovish to hawkish,” AxiTrader’s Greg McKenna told Business Insider.
McKenna said the Fed’s current stance “is still data dependent, but it’s quite a positive outlook on the economy”.
IG Markets chief strategist Chris Weston highlighted the move in bond markets after traders had time to more carefully analyse the Fed minutes.
US 10-year bonds rose from 2.88% to a multi-year high of 2.95% later in the session, and credit spreads for high yield debt started to widen significantly.
“The January Fed funds future is now holding a higher yield than the dots plot projection of 2.12%, which suggest the market is now gunning for change from the Fed in its March FOMC meeting, to signal four hikes this year, rather than three,” Weston told Business Insider.
“The market is sensing a day of reckoning in the coming years, where excess liquidity becomes a headwind rather than a massive tailwind for risk assets.”
McKenna agrees that the Fed’s relatively positive outlook in its January meeting — which took place before the latest upside surprises in wage growth and inflation — suggests more activity is in store in the bond market.
“There is a growing chance of more rate hikes from the Fed if the economy tracks the way it appears like it will – and the Fed suggests – over the course of this year,” McKenna said.
“If that is the case then at 2.95%, US 10-year bond yields are still expensive and the stock market is going to have to deal with a substantially higher discount rate over coming months. One certainly above 3% and likely 3.2% or above.”