Stocks Plummet Amid Rising Rates Which Could Lower Future Corporate Profits

Several markets reversed course on Tuesday for various reasons. Some said the blame could be placed on investors worried about rising interest rates. Some said it was negative comments from a conference call from Caterpillar, a bellwether stock.

Others put the blame on technical factors related to overbought and oversold conditions tied to recent unexpected changes in trend. The bottom-line is volatility remains at elevated levels and is likely to remain there as long as there is instability due to the rapid rise of U.S. Treasury yields.

U.S. Treasury Markets

The most widely watched interest rate in the world hit a key psychological level on Tuesday. The yield on the 10-year U.S. Treasury note, the one that helps set rates for mortgages, auto loans and other personal loans, reached 3% for the first time since 2014.

For individuals, that means day-to-day borrowing costs are going up. For corporations, it means rising operation costs which could eat into profits. It’s also a sign of rising inflation. Both higher rates and rising inflation could eventually hurt the economy.

The prospect for lower corporate profits reared its ugly head on Wall Street on Tuesday, fueling a massive reversal to the downside.

U.S. Equity Markets

The major U.S. stock indexes posted huge losses on Tuesday, giving up earlier gains, as investors reacted to the 10-year yield hitting 3 percent and comments on a conference call from major Dow-component Caterpillar that hinted economic growth may slow later in the year.

Stocks rose early in the session after Caterpillar reported earnings and revenue that beat expectations. But the bellwether stock reversed course and turned lower after CFO Bradley Halverson said during a conference call that the company’s outlook assumed that the first quarter would be “the high watermark for the year.”

Gold

Gold prices rebounded from earlier losses on Tuesday as the dollar pulled back from a four-month high and demand for higher risk assets fell. The move in gold came as a surprise as it took place even as the benchmark 10-year U.S. Treasury yield broke through 3 percent for the first time in more than four years.

Crude Oil

U.S. West Texas Intermediate and international-favorite Brent crude oil closed lower on Tuesday after giving up all of its earlier gains. The rally in WTI crude oil stopped just short of last week’s high at $69.55 before the sellers came into the market. Brent, however, posted a new multi-year high before forming a potentially bearish technical closing price reversal top.

There were no major shifts in the fundamentals on Tuesday with traders blaming some of the loss on profit-taking related to the steep drop in U.S. equity prices. Some traders also raised concerns over rising U.S. fuel inventories and production.

Natural Gas

Natural gas spiked higher on Tuesday, putting it in a position to challenge last week’s high. Traders said short-covering and position-squaring ahead of the May futures contract’s expiration on Thursday may have helped generate some of the volatility.

Although June is the most active futures contract, May natural gas futures are the front-month contract. It surged to its highest price since the April contract expiry on March 27. The price action indicates tightness in the cash market caused by the rare drawdowns in storage during the month of April.