The yield on the 10-year US Treasury bond briefly surpassed the 4% threshold, sparking apprehension among investors…

Illustration – Photo: Bloomberg

On the inaugural trading day of 2024, the US stock market faced a downturn as yields on government bonds rose, prompting certain investors to take profits following a robust year-end surge. Meanwhile, crude oil prices exhibited volatility during the session and concluded significantly lower. Investors remained vigilant about developments in the Red Sea and persistent concerns regarding record-breaking US oil production amid weakening energy demand in China.

At the market close, the S&P 500 index slipped by 0.57%, settling at 4,742.83 points. The Nasdaq index experienced a sharper decline of 1.63%, closing at 14,765.94 points—marking the most substantial drop since October. Conversely, the Dow Jones index gained 25.5 points, representing a marginal increase of 0.07%, reaching 37,715.04 points.

The downward pressure on the S&P 500 during this session was influenced by Apple’s substantial decline. Apple, constituting over 7% of the broadest measure of the US stock market, saw a nearly 3.6% drop after Barclays downgraded its recommendation to a hold. In contrast, Dow Jones maintained its gains, buoyed by the ascent of defensive stocks like Johnson & Johnson and Merck.

Before this session, the US stock market concluded 2023 on an impressive note, with the S&P 500 recording a nine-week consecutive gain—the longest streak since 2004. The robust year-end market recovery was fueled by diminishing inflation, a resilient economy, and signals from the US Federal Reserve (Fed) of halting interest rate hikes while anticipating rate cuts in 2024.

Despite significant challenges such as the Ukraine and Middle East conflicts and the regional banking crisis in the US, the S&P 500 registered a remarkable 24% increase throughout the past year.

Technology stocks, particularly large-cap technology stocks, spearheaded the market’s upward trajectory. Noteworthy performances included Apple’s 48% increase, Microsoft’s nearly 57% rise, and Nvidia’s impressive 239% surge. Consequently, Nasdaq achieved a 43.4% increase for the year, the most robust since 2020.

Dow Jones secured a 13.7% increase throughout last year, setting a new record.

The recent decline in US Treasury bond yields has supported stock prices in recent weeks. After surpassing 5%, the highest in 16 years, at the end of October, the 10-year US Treasury bond yield fell below 3.9% at the end of the year.

However, during Tuesday’s session, the 10-year US Treasury bond yield briefly exceeded 4%, causing concern among investors. Rising yields are considered indicative of the market reducing expectations of interest rate cuts this year.

In a statement to Reuters, Jack Janasiewicz, a strategist at Natixis Investment Managers Solutions, highlighted that the major concern currently is whether the market is misinterpreting the economic slowdown as a sign of an impending recession. In the event of a recession, the Fed may cut interest rates up to six times, as investors have recently anticipated.

“The risk is that there have been some weak economic figures, but most importantly is how the labor market is performing. I sense that the market is anticipating a sharp economic downturn with a hard landing. That could be a mistake,” Janasiewicz said.

The most critical US economic data this week is the overall employment report for November, anticipated to be announced by the US Department of Labor on Friday. A stronger-than-expected figure would diminish expectations of interest rate cuts, putting pressure on the prices of risk assets such as stocks and commodities.

WTI crude oil prices for February delivery in New York fell $1.27 per barrel, equivalent to a 1.77% decrease, closing at $70.38 per barrel. Brent crude oil prices for March delivery in London fell $1.15 per barrel, equivalent to a 1.49% decrease, closing at $75.89 per barrel.

During the session, oil prices temporarily rose by over 2% due to escalating tensions in the Red Sea—a crucial artery for global maritime transport. Since the end of last year, Houthi rebels have intensified drone attacks on ships passing through this region, leading to numerous cargo ships altering their routes through the Suez Canal.

Helima Croft, a strategist at RBC Capital Markets, stated that oil prices have not yet reflected the increasing tension in the Red Sea, as traders still believe that there will be no disruption in the supply. “Basically, the market is declaring a wait-and-see approach to see what will ultimately happen. But tensions are increasing every day,” she said.

Currently, traders are showing heightened interest in the record oil production in the US and the weakening oil demand in China. These factors are exerting downward pressure on oil prices, according to Adi Imsirovic, an energy security expert at the Center for Strategic and International Studies (CSIS).