(Tuesday Market Open) With the resumption of trading in U.S. Treasuries, it looks like the trend of rising yields pressuring equities could continue, even as worries about global economic growth because of trade issues get fresh traction.
The International Monetary Fund (IMF) cut its estimates for next year’s growth in China and the United States, citing the impact from tariffs each country has slapped on the other. The lender also reduced its global growth forecasts for this year and next.
Meanwhile, the yield on the 10-year Treasury hit a fresh multi-year high, seeming to help send equity index futures lower as investors appeared to continue fretting about the potential fallout for the stock market. Higher interest rates can mean higher borrowing costs for corporations, investors, and consumers. They can also make equities, which are considered riskier than bonds and have been at record highs recently, less attractive.
The market has been used to interest rates being very low for a very long time and basically eliminating one factor that can pressure stocks. That has helped equities bounce back more quickly and more strongly from other pressuring factors, but that paradigm could be shifting.
Consider watching whether financial stocks continue higher. These tend to do well when rates rise, and market conviction that Treasury yields will maintain their upward trajectory for a sustained period could lead to more strength in the financial sector.
Another thing to potentially keep an eye on is the Cboe Volatility Index (). Wall Street’s main fear gauge is at levels we haven’t seen since June, apparently as investors worry about the potential need to revalue lofty equities prices as yields rise. A VIX that sustains higher levels could be an indication that the market thinks higher yields are here to stay.
In an equities environment that