S&P 500 Probes 4,100 as Investors Monitor Geopolitical Risks, Rise in US Bond Yields

Key Points

• US indices largely chopped within recent ranges on Tuesday with focus on US/China tensions and rise in US bond yields.
• The S&P 500 was last trading lower by a modest 0.3% and was still above the 4,100 level.
• Earnings had a mixed impact, with Caterpillar sliding while Uber and Pinterest surged.

Wall Street Chops With Focus on Geopolitics & Bond Market Moves

It was another choppy day of trade on Wall Street, with the major indices falling slightly versus Monday’s close. But the indices still remain relatively close to the multi-week highs printed at the end of last week, despite a sharp bounce in US bond yields and geopolitical jitters.

The S&P 500 was last trading down about 0.4% near the 4,100 level, having come close to printed multi-week highs in the 4,150 area earlier in the session. The Nasdaq 100 index, meanwhile, was last trading flat in the mid-12,900s, while the Dow was down about 1.0% just under 32,500.

Investors were worried on Tuesday about an escalation in economic tensions between the US and China, the world’s first and second largest economies, after US House Speaker Nancy Pelosi landed in Taiwan, despite China threatening consequences for such an action. Defense companies including Raytheon, Lockheed Martin and Northrop Grumman all rose as traders upped their perceived risk of a war in the South China sea.

Meanwhile, US bond yields saw a sudden bounce across the curve on Tuesday. US 2-year yields rose 20bps to back near 3.1% and 10-year yields rose 17 bps to the 2.75% area. Analysts couldn’t pin the rally in US yields on any one theme in particular. Some said it was a relief rally after Pelosi landed in Taiwan without a military conflict being triggered.

Others said that it could have been due to chatter amongst prominent macro analysts on Tuesday about how bond markets are underpricing inflation risks and underestimating the Fed’s resolve to tighten. Others said it could be due to the risk that worsening US/China economic tensions result in structurally higher inflationary pressures. Either way, it didn’t leave a significant dent sentiment on Wall Street sentiment.

Mixed Earnings: CAT Sinks, UBER & PINS Surge

The Dow’s underperformance was partially triggered by a sharp drop in Caterpillar’s share price, after the company’s Q2 earnings release showed that it missed revenue expectations and its margins also took a hit. The company, which is often looked at as a bellwether of global economic conditions by investors, warned that it could face an even larger drop in demand for its construction vehicles amid the ongoing slowdown in China’s property sector.

Elsewhere, earnings were a little more upbeat. Uber and Pinterest saw both of their share prices surge after the former’s Q2 earnings report showed it making a quarterly profit for the first time ever and after activist investor firm Elliot Investment Management became the largest shareholder of the latter.

In terms of the S&P 500 GICS sectors, energy and utilities were the outperformers, gaining a modest 0.3% and 0.5% respectively. Communications services, consumer discretionary and health care were all broadly flat. The rest dipped between 0.4-0.8%.