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Bond Yield Inversion Leads To Sell-Off On Wall Street

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Following the rally seen in the previous session, stocks showed a substantial move back to the downside during trading on Wednesday. With the sharp pullback on the day, the Dow and the S&P 500 ended the session at their lowest closing levels in over two months.

The major averages finished the day just off their lows of the session. The Dow plummeted 800.49 points or 3.1 percent to 25,479.42, the Nasdaq plummeted 242.42 points or 3 percent to 7,773.94 and the S&P 500 tumbled 85.72 points or 2.9 percent to 2,840.60.

The sell-off on Wall Street came amid concerns about a potential recession after the yield on the benchmark ten-year note dropped below the yield on the two-year note.

The inversion is widely seen as an indicator of a recession, although data from Credit Suisse shows the economic downturn typically does not occur until almost two years later.

The yield on the closely watched thirty-year bond also showed a notable decrease on the day, tumbling to a new record low.

The strength among treasuries and the subsequent drop in yields came as a disappointing batch of Chinese economic data led to renewed concerns about the global economy, inspiring traders to seek safe havens such as bonds.

Traders will be given a clearer picture of the strength of the U.S. economy with the release of an avalanche of economic data on Thursday.

Reports on weekly jobless claims, retail sales, and industrial production are likely to be in the spotlight, although data on regional manufacturing activity, labor productivity and costs, business inventories, and homebuilder confidence may also attract attention.

The Labor Department released a report this morning showing import prices in the U.S. unexpectedly showed a modest increase in the month of July.

Import prices rose by 0.2 percent in July after plunging by a revised 1.1 percent in June, while economists had expected import prices to come in unchanged.

The report also showed an unexpected uptick in export prices, which crept up by 0.2 percent in July after falling by a revised 0.6 percent in June. Export prices had also been expected to come in unchanged.

Sector News

Energy stocks turned in some of the market's worst performances amid a steep drop by the price of crude oil. Crude for September delivery climbed off its worst levels but still tumbled $1.87 to $55.23 a barrel amid concerns about global energy demand.

Reflecting the weakness in the energy sector, the Philadelphia Oil Service Index plummeted by 6.2 percent, the NYSE Arca Natural Gas Index plunged by 4.4 percent and the NYSE Arca Oil Index sank by 3.5 percent.

Worries about the outlook for global demand also contributed to a substantial pullback by steel stocks, as reflected by the 4.5 percent nosedive by the NYSE Arca Steel Index.

Banking stocks also moved sharply lower amid the drop in bond yields, dragging the KBW Bank Index down by 4 percent to a seven-month closing low.

Technology, retail, transportation, and brokerage stocks also saw considerable weakness amid the broad based sell-off on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Wednesday. Japan's Nikkei 225 Index shot up by 1 percent, while China's Shanghai Composite Index rose by 0.4 percent.

Meanwhile, the major European markets showed significant moves to the downside on the day. While the U.K.'s FTSE 100 Index tumbled by 1.4 percent, the French CAC 40 Index and the German DAX Index plunged by 2.1 percent and 2.2 percent, respectively.

In the bond market, treasuries moved sharply higher, more than offsetting the pullback seen in the previous session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slumped by 9.9 basis points to 1.581 percent.

Looking Ahead

Trading on Thursday is likely to be impacted by the deluge of U.S. economic data, which could have a significant impact on the outlook for future interest rate cuts.

On the earnings front, Cisco Systems (CSCO) and NetApp (NTAP) are among the companies releasing their quarterly results after the close of today's trading.

Retail giants Walmart (WMT) and J.C. Penney (JCP) are also among the companies due to report their results before the start of trading on Thursday.

For comments and feedback contact: editorial@rttnews.com

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