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Nasdaq futures fall 1.5% as rising bond yields trigger traders to flee know-how shares

US stock futures were lower Tuesday, with Nasdaq futures taking the biggest blow as rising bond yields put pressure on technology stocks.

Futures on the Nasdaq 100 index fell 1.5%. S&P 500 futures lost 0.8% while Dow Jones Industrial Average futures lost about 135 points, or 0.4%.

The US 10-year Treasury yield continued to surge on Tuesday, rising as high as 1.545% overnight as investors bet the Fed would keep its promise to curb its emergency bond purchases as inflation rose. The 10-year yield has turned dramatically to its highest level since June since the Fed signaled last week that it would "soon" scale back its $ 120 billion monthly bond purchases.

The 10-year rate was 1.29% once last week and even 1.13% in August. The 30-year Treasury yield was also moving, topping the 2% mark.

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Tech stocks fell in early trading as a rapid rise in interest rates makes their future cash flows less valuable and, in turn, makes popular stocks appear overvalued. Higher interest rates also hamper tech companies' ability to finance their growth and buy back stocks.

"When you see declines like this in futures, it is usually a multi-billion dollar fund that you think is driving a three to four percent decline in technology," CNBC's Jim Cramer wrote on Twitter. "So give it some space."

The shares of Facebook, Amazon, Apple, Netflix, and Alphabet all lost more than 1% in pre-trading. Big chip stocks like Nvidia and AMD lost 2%. Tesla lost 1.6% in the premarket.

The decline in technology weighed on sentiment in the markets, even though there were strengths. Energy stocks like Exxon rose early in trading as WTI crude topped $ 76 a barrel.

"Rather than end the equity rally, we expect the rise in returns to favor cyclical sectors like finance and energy over growth sectors like technology, which will weigh more heavily on the present value of future cash flows through higher interest rates," said Mark Häfele, chief investment officer at UBS Global Wealth Management.

The mood also weighed on a household showdown in Washington. Senate Republicans on Monday blocked a House of Representatives bill that would have funded the government into December, and suspended the debt ceiling until December 2022. Congress must approve government funding by Friday to avoid a shutdown and must raise the debt ceiling soon to avoid unprecedented US funding originally.

Equities saw an uneven session on Monday amid the hike in rates.

The Dow Jones Industrial Average gained 71 points on Monday and the small-cap Russell 2000 gained 1.5%. However, the S&P 500 lost 0.3%. The Nasdaq Composite was the relative underperformer, down 0.5% as the decline in bond prices put pressure on growth stocks like Microsoft and Amazon.

"The stock market is increasingly indicating that the US economy has entered another reopening cycle," said Jim Paulsen, chief investment strategist of the Leuthold Group.

"A Covid-led economic recovery could exacerbate supply chain problems and ultimately rekindle inflation concerns. For now, however, it has forced investors to reassess whether they have too much growth and technology and not enough economically sensitive investments . " Paulsen adds.

Traders will be following the testimony of Federal Reserve Chairman Jerome Powell before the Senate Banking Committee on Tuesday. In prepared remarks, the central bank governor said that inflation could last longer than expected.

"Inflation is up and likely to remain so for the months ahead before it eases," Powell said. “As the economy continues to open up and spending recovers, we see upward pressure on prices, particularly due to supply constraints in some sectors. These effects have been bigger and longer-lasting than expected, but they will subside, and with it inflation. "Is likely to slide back towards our longer-term 2 percent target."

The central bank said last week that it was ready to begin "tapering" – the process of slowly withdrawing the stimulus it provided during the pandemic. The Fed left rates unchanged, but may be planning one rate hike in 2022, followed by three each in 2023 and 2024.

Thursday marks the last trading day of September and the third quarter. The Dow is down 1.4% for the month and the S&P 500 is down 1.8%. The Nasdaq Composite lost 1.9% in September.

The Covid-19 Delta variant, the Federal Reserve's tapering plan and inflation have worried investors. However, despite the weakness in September, the Dow is still up nearly 14%. The S&P 500 and the Nasdaq are also significantly higher.

– with reports from CNBC's Patti Domm.

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