The S&P 500 and Nasdaq logged their first decline in 2018 as traders kept an eye on U.S. bonds following an accelerated rise in the yield on the 10-year Treasury note, prompted by a report that China is considering halting purchases of U.S. debt.
A media report that Canada is expecting President Donald Trump to shortly announce an end to the North American Free Trade Agreement also weighed on sentiment.
How did stock indexes perform?
The S&P 500 index SPX, +0.67% lost 3.06 points, or 0.1%, to 2,748.23, after scoring its highest number of records in a new year since 1964. The Nasdaq Composite Index COMP, +0.68% slid 10.01 points, or 0.1%, to 7,153.57 and the Dow Jones Industrial Average DJIA, +0.89% shed 16.67 points to 25,369.13.
On Tuesday, the trio finished at fresh all-time highs.
See:Jeff Gundlach predicts the stock market’s 9-year winning streak will end in 2018
What drove the markets?
After the record run, Wednesday’s pullback was seen as merely a pause in the rally as traders took the chance to take some profits.
Investors were, however, closely watching U.S. bonds as the yield on the 10-year benchmark note TMUBMUSD10Y, +0.00% rose 4 basis points to an intraday high of around 2.59% after a Bloomberg News report that China is considering halting or cutting its purchases of U.S. government paper.
See:Relax, the Bank of Japan isn’t tapering—yet!
Rising yields can be a double-edged sword for stocks. When the gain comes from a low base, it can signal that investors are becoming more confident about the economic outlook and therefore dumping safe-haven bonds. That fans a risk-on mood — an appetite for riskier investments — in broader markets.
Read:Here’s what could trigger a 30% stock-market melt-up, says investor Bill Miller
However, if yields rise too fast or too high, that move tends to weigh on the stock market, because it becomes more attractive to invest in the bond market rather than in stocks.
Meanwhile, a report from Reuters that Canada is increasingly convinced that Trump will withdraw from Nafta as early as this month dampened efforts by the market to rebound, with the Dow reversing its short sojourn into positive territory.
What were strategists saying?
The market’s weakness shouldn’t be viewed as the beginning of the much-feared correction in the market and is more indicative of investors turning cautious following the rise in Treasury yields, according to Bob Pavlik, chief investment strategist at SlateStone Wealth LLC.
“We’ve had quite a run, so almost anything can be a reason for a pause, but I do think backup in bond yields is impacting sentiment a bit,” said David Donabedian, who oversees about $40 billion as chief investment officer of CIBC Atlantic Trust Private Wealth Management.
“The notion that China is pulling back on buying Treasuries raises a bunch of questions. If it is just diversifying its holdings, that isn’t a big deal. But if China is positioning itself ahead of a policy issue that could heat up, it could be. If this is the start of a tit-for-tat over trade relations, that’s a much more fundamental problem.”
The prospect of higher trade protectionism in the U.S. has been routinely cited as a major potential headwind this year. UBS Asset Management named trade uncertainty one of its three major risks of 2018, while Richard Turnill, BlackRock’s global chief investment strategist, called it “a risk that could shake up global growth and earnings prospects — and call into question our economic outlook.”
Read more:Forget North Korea, this is the biggest political risk facing stocks in 2018
Outside of the trade issue, Donabedian said he remained optimistic about equities. “Record levels are justified given we have a solid economy and corporate earnings. Our view is markets won’t see a straight ride up, but the bull market will be sustained in 2018.”
What data were in focus?
In the latest economic data, cost of goods imported into the U.S. rose slightly in December and finished the year with a 3% increase — the biggest gain in six years.
Which stocks were in focus?
Shares of Eastman Kodak Co.KODK, +9.52% soared 57%, building on a 119% surge from Tuesday when the image-technology company said it is launching a cryptocurrency and would begin a “major blockchain initiative.” The stock has more than tripled thus far this week.
United Continental Holdings Inc.UAL, +2.55% rose 6.7% after the airline late Tuesday said its December traffic rose 2.7% year-over-year.
Apple Inc. sharesAAPL, +1.03% pared losses to close mostly unchanged as the tech giant faced new questions from the U.S. and France over its battery-related performance issues on iPhones.
Signet Jewelers Ltd.SIG, +3.11% sank 6.9%. The jewelry retailer said same-store sales in the holiday period fell 5.3%.
Whirlpool Corp.WHR, +2.20% fell 1.3% after it disclosed it will incur about $80 million in charges as result of a restructuring of its Embraco compressor business, which is expected to cut about 500 jobs.
Domino’s Pizza Inc.DPZ, +0.62% dropped 3.2% after the fast-food chain late Tuesday said President and Chief Executive J. Patrick Doyle will leave the company on June 30.
Target Corp.TGT, +3.78% was upgraded to positive from neutral at Susquehanna Financial Group. Shares rose 2.3%.
How did other markets fare?
Stocks in Asia closed mixed, with Japan’s Nikkei 225 index NIK, -0.24% ending 0.3% lower.
In Europe, stocks closed mostly lower, as the Stoxx 600 index SXXP, +0.31% declined from its highest close since August 2015.
Oil prices rose after the U.S. Energy Information Administration reported that domestic crude supplies fell by 4.9 million barrels for the week ended Jan. 5, a bigger drop than had been expected.
Gold futures GCG8, +1.19% gained and the ICE dollar index DXY, -1.08% dropped as the greenback tanked against the yen. The dollar bought ¥111.41, down from ¥112.65 late Tuesday in New York.
Read:Swedish krone shoots higher after Riksbank hints at rate hikes in 2018
In cryptocurrencies, the bitcoin spot price BTCUSD, +5.69% fell 0.6% to $14,458, while bitcoin futures BTCF8, +2.91% lost 2% to $14,455.
—Sara Sjolin contributed to this article
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