U.S. Stock Futures Extend Sell-off as 10-year Treasury Yields Rise to Near 4% Ahead of Fed Minutes

U.S. stock indexes faced a second consecutive decline on Wednesday, extending the sell-off particularly in high-flying technology stocks. Concerns about the rapid ascent of the recent rally and anticipation of the Federal Reserve's December policy meeting minutes contributed to investor caution.

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The S&P 500 dropped by 30 points, or 0.6%, reaching 4,712. The Dow Jones Industrial Average fell by 219 points, or 0.6%, to 37,502, while the Nasdaq Composite eased by 126 points, or 0.9%, landing at 14,640. In the preceding session, the Dow industrials showed a marginal rise of less than 0.1% to 37,715, the S&P 500 declined by 0.6% to 4,743, and the Nasdaq Composite experienced a notable 1.6% slump, concluding at 14,766.

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Market movements on Wednesday reflected a cautious investor sentiment as they analyzed the reasons behind the challenging start to the new year for many of the notable winners in 2023. Nigel Green, CEO of the deVere Group, highlighted the oscillation in market sentiment amid global tensions and urged investors to remain vigilant in the face of uncertainty.

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The Nasdaq Composite, heavily weighted with technology stocks, had a remarkable 43% surge in the previous year, particularly in the last two months, fueled by investor optimism about the Federal Reserve's potential swift rate cuts in 2024 due to easing inflation. The rally was further driven by expectations that companies like Microsoft and Nvidia would benefit from increased adoption of artificial intelligence (AI).

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However, the first trading day of the year witnessed a 1.6% decline in the Nasdaq Composite, its most significant drop in over two months, and a 0.6% fall in the broader S&P 500. The causes behind this pullback, Nasdaq's fourth worst start to a year, were still under debate. Barclays' downgrade of Apple, the market's largest constituent, from neutral to underweight added to concerns about stretched big-tech valuations and an overbought market following a nine-week winning streak.

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Geopolitical tensions, particularly fears of naval conflict in the Red Sea and the assassination of a senior Hamas leader in Lebanon, continued to weigh on market sentiment. Additionally, investors remained cautious about the upward trend in Treasury yields, which rose to 3.998% for the 10-year note, up from around 3.80% the previous week.

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The increase in yields reflects growing skepticism about the likelihood of near-term interest rate cuts by the Federal Reserve, according to Henry Allen, an analyst at Deutsche Bank. Richmond Federal Reserve President Tom Barkin emphasized that the timing and pace of interest rate changes in 2024 would depend on economic data.

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In economic updates, job openings in the U.S. declined to a 32-month low of 8.8 million in November, signaling a fading hiring boom in response to higher interest rates. The December ISM manufacturing report revealed a 14th consecutive month of contraction in U.S. economic activity in the manufacturing sector, with the manufacturing PMI rising to 47.4 but still indicating a shrinking economy as any number below 50% reflects contraction.