US equity markets experienced a significant downturn in midday trading on Monday, as rising government bond yields heightened concerns over a potential recession. This unsettling sentiment was compounded by data suggesting a deterioration in inflationary expectations. The Nasdaq Composite plummeted 4.1%, settling at 17,445.2, while the S&P 500 fell 2.7% to close at 5,615.9.
The Dow Jones Industrial Average saw a decline of 1.9%, ending the day at 41,995.3. Notably, both the S&P 500 and the Nasdaq reached their lowest points since mid-September, illustrating the prevailing market anxiety. The sectors most affected included communication services, technology, and consumer discretionary, contrasting sharply with Energy, which emerged as one of the few sectors to gain ground.
Among the most significant decliners were stocks from the so-called 'Magnificent-7', including major players like Tesla, Meta Platforms, Apple, and Nvidia. These companies, identified as mega-cap firms with market capitalizations exceeding $200 billion, were prominent among the 20 worst-performing stocks of the day. Amid heightened volatility, indicated by the CBOE's VIX, which surged 15% to reach a day high of 26.90, the sentiments expressed by political figures have shocked the market.
President Donald Trump, in an interview with Fox News, did not dismiss the possibility of the US economy entering a recession as soon as 2025. He highlighted the potential for a 'period of transition' which he characterized as 'very big'. In his remarks, Thierry Wizman, a global forex and rates strategist at Macquarie, discussed the political implications of the Administration's communication strategy regarding the economy.
Wizman noted, "The US administration's hint that the US may undergo a period of transition and 'detox' may be a mere fact, but it also functions as a strategically placed message with political undertones." He further explained that such messaging could strengthen the administration's negotiating position with various stakeholders, including international trade partners, the Federal Reserve, and the bond market, by indicating a preparedness to risk recession to gain leverage. Trump's statements also hinted at a political calculation, suggesting that any economic adjustments would need to be managed prior to mid-term elections.
This commentary follows his controversial decisions regarding tariffs, including a 25% levy imposed on imports from Mexico and Canada, igniting fears of rising consumer prices as a direct consequence. While some tariffs were postponed to manage the immediate fallout, lingering uncertainty remains, particularly regarding the unchanged 10% tariffs on Chinese imports, given that these nations constitute the US's largest trading partners.
In related economic updates, median inflation expectations rose by 0.1 percentage point to 3.1% for the one-year outlook, as reported by the Federal Reserve Bank of New York. However, expectations remained steady at 3% across the three-year and five-year horizons. Bond market movements reflected this uncertain economic climate, with US Treasury yields declining.
The yield on the ten-year Treasury bond dropped sharply by 9.1 basis points to 4.23%, accompanied by a decrease in the two-year yield, which fell by 7.7 basis points to 3.93%. Amidst these economic shifts, the US dollar weakened, depreciating by 0.6% against the Japanese yen to 147.19. Commodities were also impacted, with West Texas Intermediate crude oil futures decreasing by 1.2% to $66.23 per barrel.
In precious metals, gold futures dipped by 0.4% to $2,901.11, while silver futures fell by 1.1% to $32.45..