Stocks drop as yeilds rise

Finally, it crossed the line. For the first time since January 2014, the US 10-year Treasury yield briefly rose above the key 3% level before dipping lower again. Yields in Europe also rose, which kept the EUR/USD supported after its recent sharp declines. But the stock market reacted negatively to the rising yields. Market participants are once again showing signs of concern about the prospects of higher interest rates weighing on economic growth. This is despite the release of mostly positive company earnings results from the US.

With stock indices still at lofty levels, and with yields rising, things could turn ugly quick. But should investors really worry about higher yields? Well, in normal circumstance probably not. But given that it was the low and falling yields that supported the stock markets in the first place, overvalued equities should come under pressure should yields remain high. So far, the 3% yield on the 10-year debt has acted as a bit of resistance. But if we close above it today or in the coming days then that should encourage further selling in the bond markets in the days to come. And if bonds fall further then so too should equities, one would think, especially since stocks are still overvalued.

Form a technical perspective, the S&P 500 future (ES) looks quite bearish. It has potentially created another lower high last week around the technically-important 61.8% Fibonacci level (point C on the chart). Today’s failed attempt to hold above Monday’s high suggests the breakout bullish traders are again trapped – perhaps somewhat similar to the previous occasion on 12-13 March when the index tried to break above the previous high (point A) and there was no follow-through.

Going forward, one needs to watch support at 2660 closely now. If this level were to break down decisively then there is not much in the way of support until the 200-day average at 2607. Below this moving average we have pools of liquidity i.e. cluster of sell stop orders beneath the previous two lows at 2552 and 2529, respectively. These orders may attract the market towards it in the coming days and weeks, which could eventually see the index drop to the AB=CD target of around 2465/7, which is also where the long-term 38.2% Fibonacci level converges.

At this stage, only a break back above the most recent high at 2718 (i.e. point C) would invalidate the short-term bearish outlook. Even then, the longer term outlook would remain murky for as long as the index remains below the previous high at 2807 (i.e. point A). In other words, until it creates a clear higher high.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.