Stock markets rebound as bond yields hit the heights

Overnight Headlines

*JPM CEO says 2022 could bring more than four Fed rate hikes

*Asian stocks mixed as China locks down second city

*Fed’s Powell vows to prevent inflation becoming “entrenched”

*US, Russia talks yield modest progress amid Ukraine crisis

US equities reversed most of their earlier losses, helping the Nasdaq break a four-day losing streak. The great rotation nearly turned into a grand selloff as US markets traded more than 2% lower. But by the close, the tech-heavy Nasdaq had eked out a gain of 0.05%, the S&P500 closed down 0.14% and the Dow finished with a loss (-0.45%). Healthcare was the main outperforming sector with tech closing 0.1% higher after starting the day heavily in the red. Asian stocks are mixed while futures are modestly lower.

USD gained on Monday as US bond yields hit highs last seen in January 2020. The 10-year Treasury yield posted a top above 1.80% before closing below the 200-week SMA and a long-term 50% Fib level (November 2018-March 2020). The DXY jumped above 96 but was unable to hold its gains. EUR continues to track sideways, but USD/JPY fell 0.3% to 115.23 for a fourth day of declines and at the lowest in a week. AUD and NZD recovered some of their losses.

Market Thoughts –BTD…

The turnaround in US stocks was quite something, after the indices looked to be falling very deeply into the red. Rotation out of tech and into value stocks was eventually reversed and a strong reversal indicator (hammer candle) was posted on the broader S&P500 and to a lesser extent on the Nasdaq.

Is it time to buy the dip? A prominent Wall Street analyst put out a note saying markets can withstand higher yields, as well as Omicron, and the pullback in reaction to the Fed minutes is arguably overdone. Policy tightening is likely to be gradual and is occurring in a strong cyclical recovery.

Earnings season kicks off this week with the big banks reporting on Friday. While the timing of rate hikes has ramped up very recently, many will be looking at the direction of real earnings.

Chart of the Day – Nasdaq’s impressive comeback

The Nasdaq Composite officially broke below its 200-day SMA at 14,688 yesterday. The last time the price traded under this widely watched indicator was back in April 2020. Prices also moved below the 38.2% retracement of the 2021 trading range at 14,754.

But the rebound was quite extraordinary and the close into the green and above both those markers, which now become strong support, is technically positive. The index even closed just above the recent December lows around 14,931. The next Fib level is at 15,311 which is just above the 100-day SMA at 15,274.