U.S. Stock Futures React to Rising Bond Yields and China's Economic Turmoil

Market Overview

The U.S. stock futures on Friday were trading near the lowest closing value in about two months, as investors react to rising bond yields and China's economic turmoil. Here's a breakdown of the current market situation:

Dow Jones Industrial Average Futures YM00:

• Fell 18 points, or 0.1%, to 34,518.

S&P 500 Futures ES00:

• Dropped 3 points, or 0.1%, to 4,382.

Nasdaq 100 Futures NQ00:

• Decreased 25 points, or 0.2%, to 14,754.

On Thursday, the Dow Jones Industrial Average (DJIA) fell 291 points, or 0.84%, to 34,475. The S&P 500 (SPX) declined 34 points, or 0.77%, to 4,370, and the Nasdaq Composite (COMP) dropped 158 points, or 1.17%, to 13,317. The S&P 500 has dropped for 10 of the last 13 trading days and ended Thursday at its lowest value since June 26.

Market Factors

Deteriorating Value of Longer-Duration Government Bonds

The big story in markets is the deteriorating value of longer-duration government bonds. The 10-year yield (BX:TMUBMUSD10Y) is near its highest level since 2008, and the 30-year yield (BX:TMUBMUSD30Y) is at its highest level in more than a decade.

According to Louis Navellier, chairman and founder of Navellier & Associates, higher long rates are due to a combination of factors:

• Increased issuance by the U.S. Treasury.
• Lack of buying by the Fed, who had been the major buyer of all auctions during QE and are now letting their massive portfolio roll off as it matures.
• Reluctance of traditional buyers of fixed income to settle for lower yields of longer maturities when they can find higher yields in shorter, less volatile maturities.

China's Economic Turmoil

Market attention is also focused on China, following Evergrande's bankruptcy protection filing in U.S. courts. The People's Bank of China has stepped in to help stabilize the beleaguered currency.

Potential Volatility due to Options Contracts Expiration

The expiration of key options contracts may add volatility to the market. Nomura strategist Charlie McElligott suggests that if the S&P 500 were to decline to the 4,320 level, it could result in increased market volatility.

Outlook

There is no economic data set for release ahead of next week's gathering of Federal Reserve officials in Jackson Hole, Wyo. This event will be closely watched by investors as they seek insights into the future direction of monetary policy.