The U.S. equity indexes started yesterday’s session where they left off on Friday, which was with the bears in control of trading. The initial selling, which saw the Dow Jones Industrial Average fall more than 200 points early in the day, was a reaction to news that China’s central bank had lowered the reserve requirement for its banks, a move that most investors saw as a sign that the world’s second-largest economy is starting to feel the effects of the ongoing trade war with the United States. However, the market, after the initial shock, was able to stabilize some and then turn in a mixed performance over the remainder of the session. By the closing bell, the Dow 30 was able to retrace its losses and then some, finishing 40 points to the upside. The broader S&P 500 Index was relatively flat, but the NASDAQ once again fell victim to a bad showing from the technology stocks, shedding 53 points.

Despite the partial rally yesterday afternoon, volatility continues to spike, with the S&P 500 Volatility Index (or VIX) moving higher. In addition to the aforementioned economic news from China, the market has been spooked recently by rising bond yields, signs of a tightening U.S. labor market (which could lead to inflation stateside), and some hawkish monetary policy talk from Federal Reserve Chair Jerome Powell. The central bank leader said last week that interest rates are still far from being normalized, which was taken as a sign that the Fed will remain wedded to tightening the monetary reins. That environment is typically not a great backdrop for equities—and the traders responded so during the last three bearish trading session, including today’s mixed affair.

From a sector perspective, there was a mix of up and down arrows. The biggest laggards were again the technology, healthcare, and energy groups. Conversely, we saw some more rotation into higher-yielding sectors. The spike in volatility on Wall Street has had some investors looking for some safer holdings and thus the recent interest in the consumer staples, telecom, and utilities groups. And that appears to be the case once again this morning, as concerns about the international bond and currency markets are rattling investors anew.

The primary focus is once again on China. The major indexes in Asia fell overnight after China briefly let its currency slip past a psychological level (6.9 yuan per dollar). That, along with the recent spike in U.S. and Japan bond yields, which usually set the bar for borrowing costs globally, making it more expensive for international businesses to borrow money, has investors worried about the impact on the global economy. And on point, the International Monetary Fund has lowered its outlook for the global economy for the first time since 2016. The escalating concerns about the international financial markets, including rising yields in Italy, has produced a stretch of selling around the globe and a “flight to safety” in many countries. Thus…

With less than a half hour to go before the start of trading stateside, the U.S. equity futures are indicating another lower opening for the U.S. stock market. The major European bourses also are in the red on the aforementioned concerns about the global financial and currency markets. Against this backdrop, we expect the bears to be emboldened once again and for the recent spike in volatility to persist. Stay tuned.

- William G. Ferguson

 At the time of this article’s writing, the author did not have positions in any of the companies mentioned.