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Dow ends brutal session with 3.2% loss, Nasdaq -4.1%

11 October 2018

Rising bond yields have been drawing investors out of the stock market, and the best-performing stocks over the past year took some of the biggest losses on Wednesday.

The Dow Jones Industrial Average gave up 831.83 points, or 3.1 per cent, to 25,598.74. The tech-heavy NASDAQ index also traded sharply lower, closing at 7,422.05, down 315.97 points or 4.1 percent.

"A sustained rise in rates is probably reflective of improving economic conditions, so that in and of itself isn't necessarily a bad thing for stocks", said Willie Delwiche, investment strategist at Baird in Milwaukee. Berkshire Hathaway dipped 4.7 per cent to US$213.10 and reinsurer Everest Re slid 5.1 per cent to US$217.73.

AMD (NASDAQ:AMD) suffered an especially brutal day today with a drop of over 8 percent.

Technology and internet-based companies are known for their high profit margins, and many have reported explosive growth in recent years, with corresponding gains in their stock prices. Higher rates increase borrowing costs, pinching corporate profits.

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Adams, of Bloomberg Intelligence, said investors have concerns about their future profitability, too. In the month before the S&P 500's correction in February, the 10-year yield rose 31 basis points, to 2.77 per cent, making it an even bigger relative move since the yield at the time was at a lower starting point.

The biggest driver for the market over the last week has been interest rates, which began spurting higher after several encouraging reports on the economy.

Meanwhile struggling retailer Sears was in focus as the Wall Street Journal reported that it was preparing to file for bankruptcy. "As stocks go down, tech goes down more than the stock market", she said. The stock fell 15 per cent to 50 cents.

That all played into a market that is increasingly anxious about global growth after warnings from the International Monetary Fund this week and a rise in Treasury yields to a more than 7-year high above 3 percent that signals a tightening of available capital globally. A move of more than two deviations, or 40 basis points now, leads to negative S&P 500 returns, Goldman says.

The S&P 500 index sank 94.66 points, or 3.3 percent, to 2,785.68. Over the years, Sears has closed hundreds of stores and sold several famous brands.

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Oil prices were lower, with the USA benchmark West Texas Intermediate losing nearly $2 to trade at just over $73 United States a barrel. Heating oil fell 1.2 per cent to $2.39 a gallon.

CVS dipped 0.1% to $79.40 and Aetna added 0.5% to $204.64.

For example, a yield rise in a month of one standard deviation or less, which would be 20 basis points now, is manageable for stocks, Goldman said in a note last week.

The CAC 40 in France dropped 2.1 per cent, Germany's DAX lost 2.2 per cent and the FTSE 100 in London fell 1.3 per cent.

Shares in upscale jewellery retailer Tiffany & Co and perfume maker Estee Lauder both fell 7 percent after a warning from French luxury goods firm LVMH about softening demand in China.

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CURRENCIES: The dollar held steady at 113.05 Japanese yen. The British pound rose to $1.3197 from $1.3146.