Stocks rose on Wednesday, as geopolitical tensions over Taiwan dominated for a second day and Treasury yields pushed higher while investors continued to look ahead to the Federal Reserve’s pathway on monetary policy.
Futures for the Dow Jones Industrial Average advanced 90 points, or 0.3%, after the index retreated 402 points on Tuesday to close at 32,296. S&P 500 futures signaled a start 0.2% into the green with the tech-stock-heavy Nasdaq poised to open less than 0.1% higher.
Investor sentiment has wobbled since House Speaker Nancy Pelosi (D., Calif.) arrived on her historic visit to Taiwan—an island at the heart of the global chip-making industry that China considers part of its territory. Pelosi’s landing on Tuesday was met with Chinese military aggression, with the world’s second-largest economy planning drills around Taiwan that will be among the most significant in almost 30 years.
After falling on Tuesday, stocks were poised to make somewhat of a rebound in the day ahead.
“Risk assets are attempting to shake off the recent spike in U.S.-China tensions, with …U.S. futures looking to have found a more solid footing after a wobbly start to August,” said Han Tan, an analyst at broker Exinity.
“Amid persistent uncertainty over the pace of U.S. rate hikes and global recession risks, markets now also have to contend with the resurgence in U.S.-China tensions,” Tan added. “The aggressive tone emanating out of Beijing in response to Pelosi’s visit to Taiwan has made for a classic safe haven play in recent sessions, with gold and Treasuries rising in tandem with the U.S. dollar and the Japanese Yen.”
Geopolitical tensions make for a break from the most dominant macro forces moving markets of late—inflation at a four-decade high and the risk of recession from the Fed’s shift to fight red-hot prices with much tighter monetary policy.
But those factors remained salient as U.S. Treasury yields spiked amid renewed focus on the Fed’s pathway of interest-rate increases. The central bank has already raised rates four times this year, including supersize 75 basis-point hikes in both June and July—the highest since 1994—and is expected to keep going as it tames inflation.
“10-year U.S. yields had already climbed 10 basis points before Speaker Pelosi’s safe landing, mostly in the hour or so before the plane landed on comments from San Fran Fed President Daly who said the Fed’s work was ‘nowhere near’ done on fighting inflation,” said Jim Reid, a strategist at Deutsche Bank, noting that the move was the fourth-biggest in five years as investors are “still seeing big volatility in markets.”
The yield on the benchmark 10-year note jumped from around 2.55% to 2.7% on Tuesday and was pushing higher again Wednesday, above 2.75%.
The move in Treasuries may be one factor behind the tech-stock-laden Nasdaq’s underperformance. Higher yields tend to make the valuations of high-growth tech stocks by discounting the present value of future cash, with many tech companies valued based on the prospect of profits years in the future.
In the commodity space, oil prices were falling ahead of a meeting of the OPEC+ group of national producers, which includes Saudi Arabia. The oil cartel is expected to do little to increase output mandates amid concerns around waning demand. Futures for U.S. benchmark West Texas Intermediate crude dropped 1% to $93.50 a barrel.
“Anxieties about a petering of demand seem to be winning in the battle of sentiment,” said Sophie Lund-Yates, an analyst at broker Hargreaves Lansdown. “Very real questions about the health of the global economy mean demand for oil and gas could be in for a contraction that’s so sharp, the supply concerns are void. Continued volatility should be expected.”
Write to Jack Denton at email@example.com