The rise in bond yields has become a significant qualm among market players, and has triggered a steep sell-off in Asia.
Traders in Europe are very much picking up on this momentum, and they are more inclined to place short bets on the equity indices rather than going long. Basically, what we have today is a typical risk-off day where equity indices are moving sharply lower, and traders are parking their capital in a haven asset such as gold.
Reading Tea Leaves
The reality is that concerns about rising bond yields and inflation are a little blown out of proportion, and speculators have read the tea leaves wrong. The fact is that more people are getting their vaccine shots, and every day we are getting one step closer to normality. Inflation and growth will check themselves, and central banks aren’t going to kill the growth by taking an aggressive stance on their monetary policy.
As for the US stock indices, the primary issue is the meltdown in the tech stocks. This is the significant difference between the stock indexes like the Dow Jones and S&P 500. The problem is not that sectors like tourism, travel, airlines, energy, or banks are not doing the heavy lifting; of course, they are. The flaw is that the tech stocks’ weighting in the S&P 500 is far greater than anything else. For instance, Apple alone is 10% of the S&P 500, and when Apple stock begins to drop, it drags everything with it.
Therefore, we need to see if tech stocks stop selling-off, which can change the game. For now, the factor which is bothering investors and traders is that the NASDAQ index, also known as the US Tech 100 index, has dropped to its two-month low. When you look at the bullish bets, there are still no buyers. The major qualm is that valuations are entirely out of sync with reality.
For instance, if we look at the Zoom stock, the company produced stellar earning numbers, but the stock is selling off ever since. What traders are debating is that the company’s valuation is entirely out of sync with the actual future demand curve, and hence the stock is too expensive.
In terms of economic data, all eyes will be on the Weekly Jobless Claims data. Of course, the most important economic number for this week will be the US NFP due tomorrow.
However, the US ADP number, which missed the forecast yesterday, and the US Weekly Jobless Claims—the most frequent labour market data-will provide us with some insights concerning the upcoming US NFP reading.
So far, the mood is not sanguine, and traders aren’t expecting a strong number. It is also essential to keep in mind that a poor economic reading set could be a goldilocks scenario for the market as it may assure traders that the Fed isn’t going to leave the town anytime soon.