NEW YORK: A two-day slump in U.S. stocks erased weekly gains in the S&P 500 as tumbling government-bond yields sparked a retreat from risky assets.
Financial shares led the week’s declines as the yield on the 10-year Treasury note Friday hit its lowest settlement in three years. Government bond yields in Germany, Japan and the U.K. fell to fresh lows amid economic concerns and a coming vote on whether the U.K. will remain in the European Union
Major U.S. indexes have slipped since Thursday, after rising for the first three days of the week in an advance that carried the S&P 500 near its record close. Since then, two of the forces that bolstered stocks in recent weeks—a weakening dollar and rising oil prices—have reversed.
“The broader market has been incredibly ahead of itself,” said Peter Cecchini, co-head of equities at Cantor Fitzgerald. “The weight of the evidence has been heavily in favor of caution in U.S. equities,” he added.
On Friday, the Dow Jones Industrial Average lost 119.85 points, or 0.7%, to 17865.34. The S&P 500 index fell 19.41 points, or 0.9%, to 2096.07 while the Nasdaq Composite Index declined 64.07 points, or 1.3%, to 4894.55.
That left the Dow industrials up 0.3% for the week, while the S&P 500 was down 0.1%. The Nasdaq Composite fell 1% in that time.
Financial stocks dropped the most over the week, with the S&P sector losing 1.5% as U.S. Treasury yields continued to drop. On Friday, the 10-year Treasury note’s yield fell to 1.639% from 1.678% on Thursday, its lowest settlement since May 2013.
Sectors with companies that pay out high dividends, like telecommunications and consumer staples, held up better than the broader market. Telecommunications stocks in the S&P 500 rose 0.8% Friday, to post a weekly gain of 2.8%, while shares in the consumer staples sector gained 0.1% to finish the week 1% higher.
Energy stocks followed oil prices lower Friday. The S&P’s energy sector fell the furthest in the index, notching a 2% decline. U.S. crude oil lost 2.9% to $49.07 a barrel. Southwestern Energy fell the most in the S&P 500, dropping $1.59, or 11%, to $13.15.
“I’m personally surprised that the market has been able to behave as well as it has,” said Eric Shenker, head of U.S. equity trading at Mizuho Securities USA. “A lot of it has to do with where else are you going to put your money,” he added, pointing to U.S. bonds and stocks.
Declines were steeper in Europe. The Stoxx Europe 600 dropped 2.4%, wiping out all gains for the week.
Government bond yields in Japan, Germany and the U.K. notched record lows Friday. The 10-year German bund yield fell to as low as 0.01%, surpassing its all-time low of 0.025% hit on Thursday, according to data from Tradeweb.
Buying from the European Central Bank has likely accelerated ahead of a late-summer lull, analysts said, helping drag down yields in the eurozone.
The Federal Reserve Building in Washington. Government-bond yields in Japan, Germany and the U.K. were dragged down by central-bank buying and uncertainty over the health of the U.S. economy and the timing of the Federal Reserve’s next interest-rate rise ahead of its meeting next week. ENLARGE
The Federal Reserve Building in Washington. Government-bond yields in Japan, Germany and the U.K. were dragged down by central-bank buying and uncertainty over the health of the U.S. economy and the timing of the Federal Reserve’s next interest-rate rise ahead of its meeting next week. PHOTO: REUTERS
Also, “it’s demand for liquidity, demand for a position you can easily offload, a demand for something which is safe,” said Theologis Chapsalis, rates strategist at HSBC, who estimates that roughly half of German government debt is now negative-yielding.
Investors said they would watch closely next week’s meeting of the Federal Reserve to see how officials assess the health of the U.S. economy and their plans for rate rises later in the year. In question is whether the deterioration seen in the last monthly jobs report points to a broader slowdown in the labor market or simply marks a statistical anomaly.
Concerns about the referendum on the U.K.’s membership in the European Union on June 23 also weighed on stocks and supported government bonds, analysts said. Investors worry that a British vote to leave the EU could undermine global business confidence and hurt risky assets in the U.K. and Europe.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, rose 0.6% Friday. The euro slipped 0.5% against the dollar to $1.1258.
“It’s all quite uncertain,” said Chris Beckett, head of research at Quilter Cheviot, pointing to a range of political and monetary risks. “On both sides of the Atlantic, you worry there isn’t a clear direction for monetary policy and you’re not getting the outcomes that policy makers desire from what they’re doing.”
In commodities, gold for June delivery added 0.3% to $1,273.40 an ounce, advancing more than 2.7% for the week.
