Market Update: U.S. Stocks in Meltdown as Bond Yields Set Multiyear Highs; J.P. Morgan Predicts Prolonged Trade War

Stock traders hit the panic button on Thursday, sending U.S. equities into a downward spiral after bond yields set new multiyear highs. Meanwhile, one of Wall Street’s biggest banks has warned that a trade war with China is now the baseline forecast moving forward.

Stocks Plummet

All of Wall Street’s major indexes declined on Thursday in what amounted to the worst loss since late June. After back-to-back gains, the Dow Jones Industrial Average plunged 200.94 points, or 0.8%, to 26,627.45. It was down nearly 400 points earlier in the day.


The broader S&P 500 Index declined 0.8% to 2,901.61, with nine of 11 primary sectors finishing lower. The Nasdaq Composite Index sold off 1.8% to close at 7,879.51.

While most sectors finished lower, information technology and the newly formed communication services were the biggest decliners.

The CBOE Volatility Index, also known as the VIX, surged as much as 32% on Thursday to 15.33, its highest since early July. It would later settle at 14.22 for a gain of 22.5%. VIX typically rises when the S&P 500 Index falls.

Bond Yields Extend Climb

Investors are offloading U.S. Treasuries at a faster pace amid signs of an improving economy, which has led to a sharp increase in bond yields. The yield on the benchmark 10-year U.S. Treasury note peaked at 3.202% on Thursday, the highest since 2011. Short-term government bond yields also rose, with the two-year yield reaching its highest in a decade. Yields and bond prices move in inverse fashion.

Riding a tailwind of pro-growth optimism, corporate tax cuts and rising wages, the U.S. economy hasn’t looked this strong since before the financial crisis. For investors, this means the Federal Reserve is likely to adopt an assertive rate-hike path well into next year as inflationary pressures continue to build.

The Fed lifted its benchmark interest rate at its most recent policy meeting in February. Markets are pricing in an additional rate hike in December, bringing the number of yearly adjustments to four.

Trade War Now the Baseline Estimate: J.P. Morgan

J.P. Morgan Chase & Co is less optimistic that the United States and China will be able to avert a full-blown trade war. The mega bank on Wednesday lowered its outlook on Chinese equities to neutral from overweight after predicting a bigger slowdown for the world’s second largest economy next year.

“A full-blown trade war becomes our new base case scenario for 2019,” J.P. Morgan analyst Pedro Martins Junior said in a note to clients, as quoted by CNBC. “There is no clear sign of mitigating confrontation between China and the US in the near term.”

Trade talks between China and the U.S. broke down last month after President Trump moved ahead with a new round of tariffs targeting $200 billion of Chinese goods. Talks haven’t progressed any further, according to White House economic advisor Larry Kudlow. J.P. Morgan believes the tariffs could slash Chinese GDP by 1 percentage point.

Featured image courtesy of Shutterstock.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi