U.S. Stocks Wobble on Technology Weakness

By Jon Sindreu Features Dow Jones Newswires

Investors on Thursday added to bets that central banks are now closer to tightening policy, but remained optimistic about stocks withstanding higher interest rates.

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Around the European noon, futures pointed to a 0.1% opening gain for the S&P 500.

The Stoxx Europe 600 was down 0.4%, but the banking sector--often a proxy for expectations of higher growth--was up 1.6%. The FTSE 100 rose 0.2%.

In Asia, Japan's Nikkei Stock Average, Hong Kong's Hang Seng and Australia's S&P/ASX 200 closed up 0.5%, 1% and 1.1% respectively.

Bank shares got a further bump from the Federal Reserve's decision Wednesday to allow all major U.S. financial institutions to ramp up dividend payouts and share buybacks. Futures on shares of Citigroup Inc., Morgan Stanley and Bank of America Corp. were all up more than 2%.

Expectations of higher interest rates in Europe and the U.K. bolstered the euro and the pound, which were both up roughly 0.3% against the U.S. dollar. The WSJ Dollar Index, which measures the dollar against a basket of currencies, fell 0.1% and is below where it was before Donald Trump's election on Nov. 8.

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Yields on 10-year German and British bond yields rose to 0.415% and 1.207% respectively, compared with the previous day's closes of 0.363% and 1.15%. Bond yields move opposite to prices.

A raft of statements Wednesday by policy makers at the European Central Bank, the Bank of England and the Bank of Canada, however, convinced many that the progressive end of monetary stimulus is coming nearer. While ECB officials later left investors with mixed signals, Thursday's moves in bonds and currencies confirmed that investors now expect interest rates to be higher in the near future.

They have "concluded that the ECB must have intended to push investors closer toward normalization rather than further from it," said Stephen Gallo, European head of foreign-exchange strategy at BMO Financial Group. "From my perspective, this is true even when we account for the attempt by ECB sources yesterday to dilute some of the hawkishness."

Investors are broadly positive on economic growth across developed economies, but subdued inflation poses questions about how much policy makers can nudge up borrowing costs. Some analysts warned that money managers may have read too much into Wednesday's statements.

"The market sort of got carried away, there was very little new information in it," said Willem Verhagen, a senior economist at NN Investment Partners. "When we are in the territory of unconventional monetary policy, expectations of what the central bank will do in the future have no anchor."

The key test for investors is whether economic data and corporate profits come in strong enough to justify borrowing costs going up, analysts said. While optimism from central bankers can give stocks a boost, higher rates can also make them look less attractive.

"What's surprising is that equities continue to take it so well," said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis, who believes it is now time to cash in some of the gains made this year in European equities.

"Markets have benefited enormously from the very loose monetary policy, it would be logical to assume that if this stops you'll have an impact on markets," he added.

Yet, the positive reaction of the market also fuels hopes that stocks have further to go.

Tim Graf, a senior strategist at State Street, said that interest rates around the world "are still pretty negative" once inflation is taken into account, which "is good for risky assets.

President Donald Trump's pledge to cut taxes for corporations could also bolster earnings, analysts said.

"We think most investors don't want to miss out on a bull market," said Myra Natter, wealth adviser at Titus Wealth Management. "If we see that the tax cuts are moving along and people see they are being implemented, this will continue being an upward bias in the market."

Crude-oil prices rose Thursday despite data showing an increase in U.S. stockpiles. The front-month futures for Brent crude, the international benchmark, gained 0.7% to trade at $47.88 a barrel.

Gold, a traditional haven, was down 0.2%.

Kenan Machado contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

U.S. stock indexes wobbled Thursday as technology shares resumed a recent spurt of weakness.

The Dow Jones Industrial Average fell 108 points, or 0.5%, to 21349, erasing its gains for the week. The S&P 500 lost 0.7% and the Nasdaq Composite fell 1.5%, dragged lower by sliding technology stocks.

Major indexes have risen to fresh highs in the first half of the year, bolstered by strong corporate earnings and a rally in tech shares, which have been the best-performing sector in the S&P 500 this year.

Yet many investors say they are more cautious about the path for stocks the rest of the year. Recent economic data, especially for inflation, has been middling, stock valuations are trading at higher-than-average levels and hopes for policy changes like tax cuts and fiscal stimulus to supercharge earnings have dwindled since Election Day. In recent weeks, central banks around the world have also increasingly suggested that they will push for a normalization in monetary policy -- pushing yields on government bonds higher.

"At some point, we're going to see a flushing out of the weak hands," said Tom Stringfellow, president of Frost Investment Advisors, who added that he expects more volatility in the second half of the year.

Stock losses were broad Thursday, with all but two of the S&P 500's 11 sectors posting declines in early trade. Technology shares fell 1.9% in the S&P 500, with Google parent Alphabet, Microsoft and chip maker NVIDIA losing more than 2% each.

Financial shares outperformed the broader market, benefiting from a recent rise in Treasury yields, as well as the Federal Reserve's decision Wednesday to allow all major U.S. financial institutions to ramp up dividend payouts and share buybacks.

Shares of Citigroup, Bank of America and Wells Fargo & Co. were all up more than 2%, while the yield on the 10-year U.S. Treasury note rose to 2.272%, according to Tradeweb, from 2.223% Wednesday. Higher rates boost banks' net-interest margins, a key measure of lending profitability.

Elsewhere, expectations of higher interest rates in Europe and the U.K. bolstered the euro and the pound, which were both up roughly 0.5% against the U.S. dollar.

The Stoxx Europe 600 was down 1.3%, with broad losses across sectors offsetting gains in bank shares.

A raft of statements Wednesday by policy makers at the European Central Bank, the Bank of England and the Bank of Canada has convinced many investors that the progressive end of monetary stimulus is coming nearer.

The key test is whether economic data and corporate profits come in strong enough to justify borrowing costs going up, analysts said. While optimism from central bankers can give stocks a boost, higher rates can also make them look less attractive.

"What's surprising is that equities continue to take it so well," said Philippe Gijsels, chief strategy officer at BNP Paribas Fortis. "Markets have benefited enormously from the very loose monetary policy. It would be logical to assume that if this stops you'll have an impact on markets."

Earlier, Japan's Nikkei Stock Average edged up 0.4%, while Hong Kong's Hang Seng and Australia's S&P/ASX 200 added 1.1% each.

Write to Jon Sindreu at jon.sindreu@wsj.com and Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

June 29, 2017 12:08 ET (16:08 GMT)