By Stock futures are indicating that the S&P 500 is at risk of extending yesterday’s 0.8% drop, which marked its biggest loss in six weeks. Investors are becoming increasingly concerned as benchmark bond yields continue to rise and the Federal Reserve expresses a more hawkish tone.
The impact of rising borrowing costs and the sell-off in equities on the June nonfarm payroll report remains to be seen. However, it is safe to say that the bond market has regained its influence, after a period when equities seemed unfazed by increasing yields.
According to Mark Newton, head of technical strategy at Fundstrat, the recent correlation between equities and Treasuries has been unusual. Normally, treasury sell-offs occur alongside equity rallies, not sell-offs. Newton believes that a pullback in yields is on the horizon and that the rapid rally fueled by hawkish sentiment will soon reverse.
Despite reaching a 16-year peak around 5.1%, the U.S. 2-year yield has now dipped below 5% once again. Similarly, the 10-year yield remains just a few basis points below its March highs.
In summary, investors are preparing for a potentially turbulent day as they closely monitor the impact of rising bond yields on equities. There are expectations of a forthcoming correction in yields, providing some relief to bond and stock investors.
Market Analysis: Are Treasury Yields Breaking Down?
Introduction
In a recent note, Newton raises several technical factors to support his thesis that Treasury yields are more likely to break down rather than break out. According to Newton, indicators such as counter-trend DeMark exhaustion, cyclical patterns, and Elliott-Wave structure all suggest a potential reversal in bond yields.
DeMark Indicator and Elliott-Wave Tool
The DeMark indicator is utilized to predict short-term price movements by analyzing changes in intraday highs and lows. Similarly, the Elliott-Wave tool identifies recurring patterns in asset price fluctuations.
Market Hawkishness and Traders’ Vulnerability
Newton also questions the sudden level of market hawkishness, particularly in terms of the expected probabilities of additional rate hikes by the Federal Reserve. He suggests that this extreme sentiment is more likely to ease rather than intensify. Illustrating this point, SocGen’s chart demonstrates the vulnerable position of certain traders if the bond market were to become more dovish.
Impact on Stocks
If bond yields were to retreat, Newton explores the implications for the stock market. He maintains that there hasn’t been sufficient technical damage to warrant significant concerns about the recent market weakness. Additionally, he notes that large technology stocks are still acting as stabilizing factors in the market. Newton emphasizes that there currently isn’t enough evidence to support a market downturn, particularly given Thursday’s session where minor weakness held steady before attempting to rebound towards the end of the day.
Conclusion
Newton predicts that the S&P 500 will likely bottom out on Friday or Monday and then recover to reach 4,500. Despite the uncertainty surrounding Treasury yields, he advises against jumping to conclusions about an imminent market decline.
Markets
U.S. stock index futures are slightly lower as benchmark Treasury yields move higher. The dollar index is a touch softer, while oil gains and gold is up.
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The Buzz
Here’s what economists forecast for the June nonfarm payrolls report due for release at 8:30 a.m. Eastern. A net 240,000 jobs are expected to have been created, down from 339,000 in May. The unemployment rate is seen dipping from 3.7% to 3.6% and the hourly wages growth to remain at 0.3%.
Whether it’s in a cage or a court, it seems Elon Musk is determined to have a fight with Meta’s boss Mark Zuckerberg. The founder of Tesla and owner of Twitter is threatening to sue Zuck’s Meta alleging it stole Twitter’s secrets in order to set up the rival Threads messaging platform.
U.S. Treasury Secretary Janet Yellen is in China as Washington and Beijing look to manage the economic fallout from their intense geopolitical competition.
Samsung Electronics has predicted a 96% fall in its second quarter operating profit, its weakest performance in 14 years that suggests weak global demand for tech products and semiconductors.
Investors may soon be able to buy some Birken stock (sorry!) as banks are reported to be working on an IPO valuing the footwear group at $6 billion.
Levi Strauss & Co. Lowers Outlook, Shares Fall
Levi Strauss & Co. (LEVI, +0.78%) is experiencing a nearly 7% drop in premarket trading following the company’s revised outlook for the year. Despite stating that the majority of its inventory issues are now resolved, Levi Strauss cited lower-than-expected revenue and margin, as well as foreign exchange (FX) factors, as the reasons for the adjustment.
Ant Group Investigation to Conclude with Penalty
Alibaba’s shares (BABA, -0.55%) have risen over 2% in response to a report indicating that the long-running investigation into Ant Group will come to an end with a penalty of at least 8 billion yuan ($1.1 billion).
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The Chart
Is the Fed’s Rate-Hike Campaign Showing Its Effect?
According to analysts at S&P Global Market Intelligence, a surge of new corporate bankruptcies in June has added to the already high rate of filings this year. This trend reflects the challenging economic conditions and rising interest rates faced by companies. Total filings for the first half of the year have surpassed those of any comparable period since 2010, including the spike in filings during the first half of 2020.
Here is a list of the most active stock-market tickers as of 6 a.m. Eastern.
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