January 3, 2019 / 9:55 PM / 20 days ago

Instant view: Stocks slammed, Treasury yields fall, yen surges

(Reuters) - U.S. stocks plunged on Thursday and 2-year U.S. Treasury yields dropped below the Federal Reserve’s policy rate for the first time in more than a decade, delivering a signal the U.S. central bank could begin reversing its tightening regime before long.

A price monitor is seen on the floor at the New York Stock Exchange (NYSE) in New York City, New York, U.S., January 2, 2019. REUTERS/Shannon Stapleton

Catalysts for the action include a rare profit warning from Apple Inc (AAPL.O) and the weakest reading on a key measure of U.S. factory activity in two years.

MARKETS

STOCKS: S&P 500 .SPX closes down 2.48 percent; Nasdaq Composite .IXIC falls 3.04 percent; Dow Jones Industrial Average .DJI tumbles 2.83 percent; Russell 2000 drops 1.85 percent

BONDS: 10-year yields US10YT=RR drop below 2.55 percent at one point (latest 2.555); 2-year yields US2YT=RR drop below 2.40 percent (latest 2.379) versus fed funds effective rate 2.40 percent

CURRENCIES: Dollar index .DXY down by 0.57 percent, led by a 1.13 percent gain in yen JPY=

COMMENTS:

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY:

“Overall, the market is just looking at the data releases and the comments from Apple and from other companies are basically stating the economy is slowing. The question is by how much. That’s what the market has to figure out. Either the market is wrong and it’s too bearish, or perhaps the Federal Reserve is too hawkish.”

“All of this (the economic data and Apple’s revenue warning) suggests that this is a global economic slowdown: not just China, not just Europe. Now the U.S. is moving into that category.”

“The thing about the two-year yield is that it’s most closely aligned with the flow of economic data and what the Fed is going to do. When the two-year yield is up, it’s constructive for equities, because it’s signaling that the economy is doing well, that the market can absorb the Fed moving toward rate normalization.”

“The two-year yield is telling you a different story now. Many strategists and investors will be paying attention to what (Fed Chair Jerome Powell) says tomorrow, whether (he) acknowledges the shift coming from the two-year Treasury note.”

JIM PAULSEN, CHIEF INVESTMENT STRATEGIST, THE LEUTHOLD GROUP IN MINNEAPOLIS:

    “Underneath all of this is, there’s one big thing in the room: Is the economy going to recess or not? That’s really what this is all about.”

    “This is part of what you do after a collapse - you test the lows and see if they hold. We’re still a hundred points above the lows. And we need to come to grips with this economy - whether we decide it’s just a slowdown or it’s a recession. And that’s probably going to take a little while - both of those.”

    “That’s probably going to play out over the next couple of months. The question is now, can we avoid a recession. And if we do, it’s probably a buy.”

SAM STOVALL, CHIEF INVESTMENT STRATEGIST OF CFRA RESEARCH IN NEW YORK:

    “The Apple news was a confirmation of what people had been thinking about regarding China GDP growth because of the trade war.”

    “The Chinese slowdown was expected but today’s softer than expected ISM number took investors by surprise because the U.S. seemed to be the only port in the storm. But now it appears that our economic growth is facing trade related headwinds.”

    “So while most economists are not forecasting a global economic recession, disappointing data seems to be undermining their conviction.”

JUAN PEREZ, SENIOR CURRENCY TRADER AT TEMPUS INC, WASHINGTON:

    “It certainly looks like another ominous sign. Perhaps the Fed will need to reconsider further, but they won’t show it in this quarter. Markets are wild but not everyone is back to full throttle participating in the markets, so this could be subject to change and today has been a particularly somber, dark day.”

TIM GHRISKEY, CHIEF INVESTMENT STRATEGIST AT INVERNESS COUNSEL IN NEW YORK, NEW YORK:

“The futures as of yesterday showed almost a zero percent chance of any increase in 2019. There is fear out there about the economy, the feeling is that this China thing with Apple shows real economic weakness and any company that has sales exposure to China is in jeopardy.”

“This is a market gripped by fear. If we hadn’t had Apple I don’t think we necessarily would be down today. ISM was bad. We are going to see some weak economic data here and the question is are we going into a recession or is this just fear itself - everybody scared of what could happen.”

“Globally things are not in good shape overseas, whether it is Europe or China. A strong dollar doesn’t help, U.S. interest rates don’t help.”

“Right now we are sliding, it is showing in the economic data, it is showing in corporate results with Apple and it doesn’t feel like this is turning any time soon.”

Americas Economics and Markets Desk; +1-646 223-6300

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