Tuesday, 24 April, 2018

US Stock Market Opens Higher After A Tumultuous Week

US Treasury bond yields spike and the Dow Jones mini-crash How spiking bond yields really could topple stock market rally
| 10 February, 2018, 09:48

As a result, the bumpy ride for stocks could continue for a while. The BoE raised its growth forecasts for Britain due to the strong global recovery. At about 2.83 percent Friday, Treasury 10-year yields are near their highs of the year, having risen from last year's low of 2.01 percent in early September.

Higher yields tend to hurt equities because they increase borrowing costs for companies and ultimately consumers.

Scott Redler, partner with T3Live.com, said the market sell off accelerated when the S&P 500 broke its 50-day moving average at about 2,715.

"I think there's going to be an interplay between equities and rates probably for the next several months, until we get greater clarity on how the overall growth outlook is going to be and if the Fed is thinking about shifting the reaction function", said Mark Cabana, head of USA short rates at Bank of America Merrill Lynch.

The bipartisan spending bill, expected to pass Congress, called for a higher-than-expected spending cap of $300 billion.

The bond market is ready to turn up the heat even more on the stock market.

Next week, coming off one of the most volatile stretches in years, two important readings on USA inflation could help determine whether the stock market begins to settle or if another bout of volatility is in store.

Selling over the past couple of sessions ran the benchmark 10-year yield up to 2.85%, it highest since January 2014. The strength of the global economy and corporate earnings are still providing support for stocks.

"We're in a vicious cycle here".


"It's not going to be a two-day phenomenon", he added. "The larger auctions in the coming quarters will tell the story", said David Ader, chief market strategist for Informa Intelligence, in a note. Wall Street has been expecting three rate hikes at most.

"It's as correlated as it's ever been to anything", said Hogan. "A lot of people are groping around trying to find the cause of the equity sell-off and most people are pointing to expectations for higher bond yields", said Michael Schumacher, director of rate strategy at Wells Fargo. The yield started the year at about 2.43 percent. So, what asset classes are worth investing in right now? A PE ratio of 24.53 for BSE Sensex on Friday suggested that investor were willingness to pay Rs 24.53 for every Re 1 of Sensex earning. A low 3 percent is a target that just seems to be a magnet now. "It's the pace", Hogan said. Outside of the financial crisis, they have moved in opposing directions.

5-year -10.3 bps @ 2.486%.

"The answer to this will reset the level of risk premia, or risk tolerance for other asset prices", Caron said in a note.

The 3 percent level is important because it's a big round number that stock strategists have pointed to as a zone that would make stocks uncomfortable. "Almost 50% of companies within the S&P 500 have reported results, with around 80% of those beating revenue expectations, which is the highest percentage since at least the third quarter of 2008".

"The dust hasn't settled yet, and I think both buyers and sellers are trying to figure out what this market really wants to do", said Jonathan Corpina, senior managing partner for Meridian Equity Partners in NY. That would make 3 percent the next stop.

The Schwab U.S. Dividend Equity ETF (SCHD.K), one of the biggest exchange traded funds providing exposure to dividend "aristocrats" - stocks which have 25-year histories of annual dividend raises - is up about 9 percent, outperforming the broader market slightly.

"We're going to have another race to the bottom" if stocks stabilize, Brenner said.

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