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  • Stocks, which had been trading mostly flat for most of the session, sold off into the close.
  • A stronger USD, a sharp drop in WTI and concerns about tax hikes to fund Biden’s infrastructure package all weighed.

After starting off Tuesday’s session mostly flat/subdued, things turned ugly for US equities in the final hours of US trade. The S&P 500 finished the session about 0.8% lower close to 3910, ever so slightly off 3900 lows. The Dow dropped closer to 1.0% and the Nasdaq 100 saw losses of around 0.5%. Small-Cap stocks suffered the most, with the Russell 2K dropping 3.5% and the CBOE volatility index rose over 2.5 vols at its above 21.50 session highs, proceeding to then close at 20.30.

Sectors

In terms of the GICS sectors; defensive sectors like utilities (+1.5%) and consumer staples (+0.4%) performed well amid the more risk-off market tone and real estate (+0.4%) was supported by the drop in long-term US government bond yields. The rest of the sectors were in the red, with underperformance most acute in the materials (-2.1%), industrials (-1.8%), financials (-1.4%) and energy (-1.4%) sectors, the latter weighed by another sharp drop in crude oil prices (WTI tanked over $4.0 or more than 6.5% on the day).

While not the best-performing stocks on the day, Big Tech did ok, aided by the drop in long-term interest rates. Some market analysts are arguing that now many of these Big Tech/momentum stocks have seen 10-20% corrections over the last few months and the pace at which bond yields are rising appears to be slowing, the outlook for these stocks in the coming weeks might be looking a little more favourable. As long as yields behave (i.e. stop jumping 10bps a day like we have seen on more than one occasion over the past few weeks), things could be looking up for these beleaguered stocks.  

Driving the session

Market commentators chalked Tuesday’s losses up to concerns regarding the cost of the Biden administration’s soon-to-be-unveiled infrastructure investment package (reports tout it could be anywhere between $3-$4T) and the potential tax hikes that might need to be levied to pay for it. Indeed, whilst commentary from US Treasury Secretary Janet Yellen (who spoke before the House Financial Services Committee) was bullish on the outlook for the economic recovery and expects full employment by the end of 2022, she was talking about corporation tax hikes. Some analysts are suggesting this tax hike talk has triggered some concerns that stocks could be trading at elevated levels, hence the price action that was seen on Tuesday.

However, likely the biggest drag on stock market performance on the day was a sharp sell-off in crude oil markets, which was exacerbated as WTI (-6.5% on the session) broke below key areas of support triggering technical selling, and a rally in USD that has seen the DXY gain 70 points and rally back to two-week highs above the 92.00 level.

Elsewhere, Fed speak was also a theme; Fed Chair Jerome Powell completed his first day of testimony before the House Financial Services Committee but stuck to the usual dovish script with regards to the outlook for policy and reiterated his expectation that the coming pick-up in inflation will be short-lived. However, Powell did remark that some asset prices are “a bit high”. Otherwise, out of the other Fed speakers who featured on Tuesday, Robert Kaplan’s remarks were the most notable; he named himself as one of the four Fed members expecting the bank to begin lifting interest rates in 2022. Finally, there were some US data releases, including a soft New Home Sales number (following Monday’s soft existing home sales number), a strong Philly Fed non-manufacturing survey and a strong Richmond Fed business survey, though none shifted the dial much for risk appetite.

The Day Ahead

Looking ahead, the main driver on Wednesday will be the release of US Durable Goods Orders at 12:30GMT and then the release of the preliminary US March Markit PMI survey. Fed members will also be back on the wires, with Powell featuring at his second day of testimony in Congress and NY Fed President John Williams, Mary Daly and Charles Evans also speaking.