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Stocks Pull Back Sharply Amid Yield Curve Inversion - U.S. Commentary


Following the rally seen in the previous session, stocks showed a substantial move back to the downside during trading on Tuesday. The major averages moved sharply lower over the course of the session, more than offsetting yesterday's strong gains.

The major averages ended the session just off their worst levels of the day. The Dow plunged 799.36 points or 3.1 percent to 25,027.07, the Nasdaq tumbled 283.09 points or 3.8 percent to 7,158.43 and the S&P 500 slumped 90.31 points or 3.2 percent to 2,700.06.

The sharp pullback on Wall Street came as the yield on two-year notes rose above the yield on five-year notes, which is seen as an indicator of an upcoming economic slowdown.

Profit taking also contributed to the sell-off following the strong gains posted on Monday in reaction to the trade war truce reached by President Donald Trump and Chinese President Xi Jinping.

Uncertainty about whether the 90-day truce will give the U.S. and China enough time to reach a long-term trade agreement inspired traders to cash in on yesterday's strong upward move.

News that U.S. Trade Representative Robert Lighthizer, one of Trump's more hawkish advisors on trade with China, has been tapped to lead the negotiations added to the skepticism.

Trump has appeared optimistic about the potential for an agreement, claiming U.S. relations with China have taken a "big lead forward" as a result of his meeting with XI.

"Very good things will happen," Trump said in a post on Twitter. "We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!"

"President Xi and I have a very strong and personal relationship," he added. "He and I are the only two people that can bring about massive and very positive change, on trade and far beyond, between our two great Nations."

Sector News

Financial stocks showed a substantial move to the downside amid the inversion of the yield curve, with the KBW Bank Index and the NYSE Arca Broker/Dealer Index plummeting by 4.9 percent and 4.1 percent, respectively.

Significant weakness also emerged among oil service stocks, as reflected by the 4.8 percent nosedive by the Philadelphia Oil Service Index. The index tumbled to its lowest closing level in over fourteen years.

The sell-off by oil service stocks came despite an increase by the price of crude oil, as crude for January delivery rose $0.30 to $53.25 a barrel.

Semiconductor, housing, computer hardware, and transportation stocks also saw considerable weakness, moving sharply lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower on Tuesday, although Chinese stocks bucked the downtrend. China's Shanghai Composite Index rose by 0.4 percent, while Japan's Nikkei 225 Index tumbled by 2.4 percent.

Meanwhile, the major European markets all moved to the downside on the day. While the German DAX Index slumped by 1.1 percent, the French CAC 40 Index slid by 0.8 percent and the U.K.'s FTSE 100 Index fell by 0.6 percent.

In the bond market, treasuries extended the upward move seen over the course of the previous session. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, dropped by 6.8 basis points to a nearly three-month closing low of 2.924 percent.

Looking Ahead

With the release of most U.S. economic reports postponed due to the national day of mourning on Wednesday, trading on Thursday may be impacted by reaction to a slew of data.

Traders are likely to keep an eye on reports on private sector employment, the U.S. trade deficit, weekly jobless claims, and service sector activity.

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