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High rates are breaking something new in markets

Traders work on the floor of the New York Stock Exchange during afternoon trading on July 18, 2023 in New York City.

Michael M. Santiago | Getty Images News | Getty Images

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

What you need to know today

Dramatic drops
Major U.S. indexes sank at least 1% Tuesday, pushing the Dow Jones Industrial Average into the red for the year. The 10-year Treasury yield hit 4.8% earlier in the day, a 16-year high. Asia-Pacific markets followed Wall Street lower Wednesday. Both Japan’s Nikkei 225 and South Korea’s Kospi lost around 2%.

There were 9.61 million job openings in August, well above the estimate of 8.8 million and 700,000 more than July’s figure. However, hires rose just 35,000 from July to touch 5.857 million last month. And the number of quits, a measure of confidence in finding a new job after leaving a previous position, was little changed at 3.6 million.

Land of rising investment
Foreign investment in Japan’s real estate market rose by 45% in the first half of 2023 compared with the same period last year, said CBRE, a commercial real estate company. Interest was buoyed by Japan’s ultra-loose monetary policy and the weak Japanese yen (which briefly fell to 150 to the U.S. dollar Tuesday). Singapore’s the biggest investor, followed by the U.S. and Canada, according to Knight Frank.

House Speaker, muted
Eight hardline conservative Republicans joined all Democrats to oust Republican Kevin McCarthy as speaker in a “motion to vacate” introduced by Republican Matt Gaetz. That’s the first time in U.S. history the House has dethroned its leader in a no-confidence vote. Patrick McHenry, a close McCarthy ally, will assume the role of speaker temporarily; McCarthy said he won’t be running again.

[PRO] A better play than tech
India’s economic growth is expected to be one of the fastest in the coming decades. Investors looking to cash in on the country’s stock market, however, should look beyond its technology sector because it’s exposed to global headwinds, said Citi. Instead, the bank thinks this sector will benefit from strong domestic growth and perform better than tech.

The bottom line

Something is breaking in financial markets, writes CNBC’s Jeff Cox. Unlike in March, when regional banks started toppling, it isn’t any particular asset class that’s cracking this time. Rather, it’s the narrative of low interest rates in the long term — one that’s become familiar after the 2008 Great Financial Crisis — that’s falling apart.

After markets digested the stronger-than-expected JOLTS report from the U.S. Labor Department — which showed the jobs market wasn’t as slack as conventional wisdom dictated — Treasury yields jumped. The 2-year yield, indicative of where markets think interest rates will settle, is currently at 5.154%, compared with last Friday’s close of 5.048%. Indeed, the chance that the Federal Reserve will hike rates at its November meeting by another quarter percentage point rose to 28.1% Wednesday, compared with 16.4% last week, according to the CME FedWatch tool.

Stocks were slammed by rising yields and the expectation of more hikes. The Dow Jones Industrial Average had its worst day since March. Its drop of 1.29% wiped out its year-to-date gains, and it’s now 0.4% lower for the year. The S&P 500 slid 1.37% and the Nasdaq Composite slumped 1.87%, weighed down by losses in technology stocks like Nvidia and Microsoft.

Investors fear the worst isn’t over. The Cboe Volatility Index, which measures where traders think stocks will be over the next 30 days, is at its the highest since late May, signaling volatility ahead. (However, at 19.6 currently, it’s still slightly below the long-run average.)

“US Equity markets are likely in a bottoming process,” Fundstrat head of technical strategy Mark Newton wrote, “and I feel that time-wise, lows could likely be in place sometime this week.” But if rates continue rising, it’s not just long-held beliefs that will be broken. Stocks could test new bottoms even further into the year.

“They can’t hike another basis point,” Larry McDonald, founder of The Bear Traps Report, said of the central bank. “It’s just too much pain. This type of action is bringing out the pain, and the Fed is now more aware of the bodies that are buried.”

— CNBC’s Jeff Cox contributed to this report.

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