Yields are on the march and showing no signs of stopping. The US 10-year has reached its highest level since November 2007, and the re-steepening of the yield curve (where long-dated yields rise faster than short-dated ones) should be a cause for concern.
We’ve had an inversion (where short-end yields are higher than long-dated ones) and now a steepening. This is a tell: inversions followed by a steepening usually mean the proverbial is about to hit the fan, and the stock market tends to bottom 6 months after the first rate cut. There is a lot of complacency about the soft landing, and I believe the risks of a mistake are now very high.
Despite marching yields, stock markets in Europe opened broadly higher on Tuesday with the positive handover from Wall Street and a generally more upbeat Asian session. A softer dollar may be helping things a bit. The FTSE 100 rose 0.3 per cent, whilst the Dax and Cac both added 1 per cent in early trading. In New York, tech stocks and chipmakers did well in the wake of the Nvidia (US:NVDA) pop and the Arm listing update.
Crude oil softened, giving up gains yesterday. Gold was firmer, recovering to $1,900 on the back of a weaker greenback. The Brics summit kicks off today – with talk of a gold-backed currency to disrupt the dollar which would be interesting! Hermione Taylor has more on that here.
But back to yields, which will be the biggest factor to drive markets in the short term. Higher US Treasury yields failed to lift the dollar out of its slide but this may just be a temporary pullback. The 10-year hit a fresh 16-year high at 4.336 per cent overnight while yields on 10-year inflation-protected Tips topped 2 per cent to the highest since 2009. Japan’s 10-year rate also hit a 9-year high as pressure bubbles up across the bond market. Markets clearly looking at Japan’s core inflation reading, which was hotter than expected at 3.3 per cent vs the forecast 2.9 per cent, and above the previous month’s 3 per cent.
We should also consider Japan’s changes to its yield control policy – that is the first step towards normalisation that could cause all kinds of problems for global capital markets. The sell-off in bonds and stocks is almost certainly linked to this move a few weeks ago, but the fundamentals are present in the US economy. Then factor in the new issuance following the debt ceiling agreement and you have conditions for complacency to give way to fear.
For now, the market is happy buying – Nvidia leapt more than 8 per cent to help the Nasdaq snap a four-day losing streak despite rates moving up. The company reports tomorrow and you get the sense that a lot is hanging on it delivering blistering numbers and a very strong outlook. Imagine buying shares at 244x trailing earnings – you have to be feeling lucky. But the gains helped the Nasdaq rally 1.56 per cent, whilst the S&P 500 added 0.69 per cent.
Elsewhere, game maker Ubisoft (FR:UBI) rallied 6 per cent as Microsoft said takeover target Activision would sell its non-European streaming rights to the French firm. Meanwhile, Arm has published its Nasdaq listing prospectus, with a valuation of around $60-$70bn. More on that here.
