The rapid spread of coronavirus and a partially inverted yield curve aren't enough to spoil the stock market's relief rally on Tuesday.
Futures on the Dow and broader U.S. stock market rose through the overnight session on Tuesday, signaling a continuation of the enormous relief rally that began at the start of the week.
The overnight gains came even as China struggled to contain the coronavirus, which now has over 20,600 confirmed cases [John Hopkins]. The novel disease is spooking investors and stoking heavy volatility in the bond market.
Futures on all three major U.S. indexes were higher in overnight trading. Dow Jones futures surged 165 points, or 0.6%, to 28,526.00.
S&P 500 futures advanced 0.5% to 3,262.50. The Nasdaq 100 mini contracts rose 0.6% to 9,170.75.
Stocks in mainland China also rallied after an extremely volatile start to the week. The Shanghai Shenzhen CSI 300 Index rose 1.3% on Tuesday after plunging by as much as 9.1% on Monday.
The onset of coronavirus triggered a massive exodus from the U.S. stock market at the end of January as investors sought refuge in government bonds. As Treasury yields plunged, a key part of the yield curve inverted for the first time since last summer.
Namely, the 10-year Treasury yield last week fell four basis points to 1.546%, putting it below the three-month Treasury yield [CNBC]. For bond investors, an inverted yield curve is a warning sign that recession may be lurking.
The benchmark 10-year Treasury yield fell further on Monday to 1.52%, the lowest since early September. The September bottom was the lowest that yields had fallen since 2016.
Bond yields are plunging because demand for government bonds is increasing over the spread of coronavirus and its potential impact on the global economy. Since lower yields affect how much interest lenders can charge, the financial sector is especially vulnerable.
Mark Newton of Newton Advisors recently told CNBC that yields “should have an effect on what happens with financials.” [CNBC]
There tends to be a pretty good correlation with what yields and the yield curve do with what the financial space does so given it is almost 13% of the S&P, that could represent a pretty significant headwind.
Financials are the second-largest sector in the S&P 500. As of Monday’s close, they were worth a combined $7.28 trillion [Fidelity]. If this sector goes under, the broader U.S. stock market could risk a major correction.
Eight of 11 S&P 500 sectors are considered overvalued, making the risk of correction all the more greater.