US equities tumbled as the bond sell-off extended further overnight. The US10-yr yields are up a whopping up 17bps to 1.54% highest since February 2020.
With discussions amongst the Democrats pointing to as much as US$3 trillion in infrastructure spending and the pandemic continues to normalize, bond traders wasted little time pricing in a hyper-stimulated and inflated return to normalcy.
This triggered a massive sectoral dispersion with Technology stocks under the hammer given growing valuation concerns. Tech stocks are susceptible to rising yields because their value rests most heavily on future earnings, which get discounted more negatively when bond yields go up.
Markets ignored financial stability favouring inflation hedging and are getting quicker to cast a critical eye on central bank guidance. The Street was speedy to fade yesterday’s buy-the-dip with US bond yields moving through tech sectors like a wrecking ball.
And with traders constructing analogues to the 2013 ‘taper tantrum’, which saw global asset prices and currencies tank just in anticipation of a tapering of the Fed’s asset purchases, of course, this has made investors wary.
Just how stealthy the early stages of this taper tantrum can remain have yet to be seen.
Tech investors continue to run the gauntlet of higher yields and less compelling valuations, with the bond market signal screaming at investors to trim some overweight tech.
Since early 2018, a rise in the long bond yield has sent risk tremors through the stock market on four occasions: February 2018, October 2018, April 2019 and January 2020; during all four events, the turning point was the narrowing of earnings yield premium on tech stocks due to rising the 10-year US yields.
Pressingly as US bond yields continue to march higher, this continues to suggest the heavily weighted tech sector could be on the cusp of a very unpleasant near-term valuation test.
With real yields having bottomed and in the process of moving higher, 2013 may be the most likely analogue for markets at the moment, though it doesn’t fit perfectly as we in the midst of a never-before-seen type of economic recovery.
In any case, one thing seems clear: with more stimulus to come and the pandemic continuing to normalize, the market may not wait this time for the Fed’s signal to price the eventual pullback in monetary accommodation.
Economic data will need to carry the reflation load.
US Federal Reserve Chair Powell has maxed out his dovish messaging, so there is little in messaging he can say short of action that will be interpreted as dovish.
But just as worryingly, real yields have now become a source of volatility for risk rather than a source of support. The next leg of reflation will have to be carried more and more by a continued recovery in economic growth, as fiscal and monetary stimulus is increasingly reflected in the price – and all the while, this will bring the Fed closer to acknowledging that policy normalisation will at least need to be discussed.
All eyes on OPEC’s next meeting
Stronger US dollar, especially against Asia EM and higher bond yields, lead to the selling of long-duration assets. And given the massive overweight of “long duration, infinite growth tech” at the index level, stocks are capitulating.
And the domino effect is starting to hit commodities like oil triggered by a correction in the reflation trade due to higher US yields that are becoming a significant source of market volatility.
Next week’s OPEC+ meeting has more potential to be damaging than a positive catalyst given the optimism now priced into oil and the likelihood the group takes steps that could prompt a round of profit-taking.
Still, any correction is likely to be short-lived given evidence of an ongoing demand rebound and the likelihood that oil markets remain tight this year.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi