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Dow Struggles as Economists Brace For V-Shaped Recovery in Rates

Last Updated September 23, 2020 2:24 PM
Francois Aure
Last Updated September 23, 2020 2:24 PM
  • The Dow Jones fell 0.2% on Monday.
  • New York’s Empire State manufacturing index plummeted to 3.7.
  • Nordea economists believe investors may be underestimating a potential V-shaped recovery in interest rates.

The Dow Jones struggled to start the week as losses mounted in heavyweight stocks, and the Empire State manufacturing index plummeted. Despite no additional stimulus coming anytime soon, Nordea FX is worried that a V-shaped recovery in interest rates will hit risk assets.

Dow Jones Falls After Dire Empire State Manufacturing Report

The Dow Jones was the weakest among the major U.S. indices, as the Nasdaq rose 1% and the S&P 500 climbed 0.4%

Dow Jones, Stock Market
The Dow Jones fell 50 points to start the week. | Source: Yahoo Finance 

Economic data were no help to Dow bulls, as the NY Empire State manufacturing index came in at a miserable 3.7,  against expectations of a bounce to 15.00. Wall Street was too optimistic, as the sharp decline from last month’s reading of 17.2 demonstrated a dramatic moderation in manufacturing output.

With only Donald Trump’s hasty patch-job stimulus, equity bulls are looking for another dose of fiscal support.

Video: No More Stimulus Is Bad News For Poorest Households

With Congress parting ways in deadlock over the next round of fiscal spending, it is easy to forget the staggering amount of money that been injected into the economy to keep the Dow Jones above water.

Nordea See Risk/Reward In Favor of Rising Rates

Given that the U.S. economy outperformed most major economic powers before the pandemic, some economists are speculating about the return of inflation shortly.

Nordea, Stock Market, Dow Jones
Nordea sees potential for a dramatic re-pricing of the macro outlook. | Source: Nordea FX 

Economists at Nordea FX  are among those whispering in the trees, as they believe that the V-shape recovery could be coming to the rate markets:

A potential massive positive repricing of the macro picture as a lagged effect of truckloads of monetary (and now also fiscal) stimulus. What if rates markets started to trade the V-shape? Will everyone and their mother be wrongfooted in the low(er) for loooooooooong positioning? We clearly lean that way from a risk/reward perspective after a summer of curve-flattening.

There is almost no monetary tightening priced into financial markets , and the potential impact on asset prices could be substantial if inflationary pressures emerge.

Video: Social Distancing Could Have An Inflationary Impact

Additional causes of rising costs could be the pandemic protocols themselves. Increased spacing in restaurants, concerts, theme parks, and just about every walk of life may eventually trigger higher prices.

Dow 30 Stocks: Buffett’s Choice Weighs on Financials; Walmart Powers Higher

There was little to be excited about in the Dow 30  Monday, as investors pushed most of the index into the red.

Dow Jones, stock market
The rotation away from growth and tech stocks may have already ended. | Source: Sven Henrich via Twitter 

Dow heavyweights like Boeing (NYSE:BA), Travelers (NYSE:TRV), and American Express (NYSE:AXP) all tumbled more than 2.5% as pressure mounted on their respective industries.

The most heavily weighted Apple stock (NASDAQ:APPL) declined only 0.2%.

Video: Apple Stock Readies For Its Big Split

Unfortunately for owners of financial stocks, Warren Buffett’s high profile decision to cut his holdings seems to be weighing. JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) both took heavy losses, while a decline in Treasury yields also weighed on the pair.

However, it was not all bad news as Walmart (NYSE:WMT) shares powered 2.5% higher ahead of earnings, while Home Depot (NYSE:HD) also enjoyed a similar bounce ahead of its report on Tuesday.