Equities finished lower Tuesday, with the S&P 500 lower by 2 percent and the Dow shedding more than 500 points, as investor sentiment turned more cautious amid a jump in interest rates and news from Washington signaling that Democrats will need to address the debt ceiling without Republican support.

Energy was the lone sector to finish higher today, while the technology sector was a notable underperformer, reflecting the implications of higher rates along with the recent lift in commodity prices

Oil prices gave up early gains to finish slightly lower on the day, but reached $75 per barrel for the first time since July.

The price of crude oil was down $0.72 at $74.73 and the spot price of gold was down $19 to $1,732.80. 

Interest rates have begun to exert more influence over the equity markets in recent days, with 10-year Treasury yields topping 1.5 percent, the highest level in three months. 

Ongoing inflation pressures are playing a role, but the Fed’s recent acknowledgement that it will commence bond tapering in the coming months appears to be the more acute driver of higher rates this week.

The impact was most notable in the NASDAQ today, which fell more than 2 percent, as higher rates pose a particular headwind to growth investments and technology stocks. 

It remains to be seen if interest rates will experience a sustained lift similar to March and April this year, but overall we think the broader backdrop of the economic expansion, sticky inflation and reduced Fed stimulus is more supportive than suppressive for rates as we advance.

Political uncertainty is raising the anxiety level for the markets, as the partisan divide will require some last-minute budget maneuvers to avoid a government shutdown.

With the Senate unable to pass a bill that combined the debt-ceiling increase with government funding, it appears these programs will be split into separate proposals. 

We suspect an infrastructure bill will receive the greatest amount of bipartisan support, while the $3.5 trillion budget proposal by the Democrats is facing strong Republican opposition. 

Political positioning could delay the debt-ceiling increase to the point where a government shutdown would occur, though history suggests any such outcome would be short-lived. 

Ultimately, we think the debt ceiling will be raised, but broader budget programs and legislation may be hung up on negotiations for a while longer. 

 

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