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Treasuries Face a $44 Billion Sale, Sending Stocks Tumbling

May 29, 2024
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The stock market faced renewed pressure as traders braced for a $44 billion sale of seven-year Treasury notes, following two disappointing auctions the previous day. These bond sales have increasingly influenced equities, highlighting how uncertainties over Federal Reserve policies continue to affect markets amid persistent inflation concerns globally. Fears that an increasing supply of bonds will drive yields higher, creating headwinds for stocks, have made these auctions particularly significant. Additionally, the current valuation of stocks, which are not considered cheap, adds to the market's vulnerability.

Matt Maley from Miller Tabak + Co. expressed concern over the current market situation, noting, “The 'set-up' right now is quickly becoming a concern. Not only are yields rising again in the US, but they are also moving higher in other parts of the world. That is not good news for a stock market that’s trading at 22 times forward earnings.”

The S&P 500 fell below 5,300. Specific companies saw notable movements: American Airlines Group Inc. plunged due to a disappointing outlook, UnitedHealth Group Inc. dropped after highlighting issues related to states reducing Medicaid enrollments, BHP Group abandoned its bid for Anglo American Plc., and Marathon Oil Corp. surged as ConocoPhillips agreed to acquire it in a $17 billion deal.

In the Treasury market, longer maturities led losses, with 30-year yields climbing seven basis points to 4.73%. European bond issuance surpassed the €1 trillion ($1.1 trillion) mark earlier than ever before, with German bond yields reaching a six-month high due to accelerating inflation. Australia's latest inflation data suggested that rates would remain high for the foreseeable future.

Andrew Brenner from NatAlliance Securities commented, “Equities wake up to higher global long rates. The Street got too long and is now paying the price. And global rates are starting to look even uglier.”

Tom Essaye from The Sevens Report identified the seven-year Treasury auction as the likely most important catalyst for markets on Wednesday. He noted, “Another soft auction outcome will further pressure stocks, while strong demand for the notes could help stocks stabilize.”

Ahead of the Fed’s preferred inflation gauge release, the central bank will publish the Beige Book survey of regional business contacts. The last report on April 17 indicated that the U.S. economy had "expanded slightly" since late February, with firms facing greater challenges in passing on higher costs.

Win Thin and Elias Haddad from Brown Brothers Harriman & Co. expect a balanced tone in the Beige Book, which would enable the Fed to adopt a wait-and-see approach regarding easing monetary policy.

Fed Chair Jerome Powell and his colleagues have emphasized the need for more substantial evidence that inflation is on a consistent path towards their 2% goal before considering any reduction in the benchmark interest rate, which has been at its highest in two decades since July.

In summary, the stock market is under significant pressure due to rising yields on long-term U.S. government debt and global inflation concerns. Recent disappointing bond auctions and high valuations of stocks further exacerbate the market's challenges. Upcoming key events, including the seven-year Treasury auction and the release of the Fed's Beige Book, will be closely monitored by traders and analysts for indications of future market direction and Federal Reserve policies.

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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