Optimism out of the window?

The bond selloff continues. The US 2-year yield on Monday spiked to 4.42% - the highest level since July – before easing, the US 10-year yield hit 4.80% for the first time in more than a year before easing. As such, the bond yields in the US on average returned to their pre-subprime crisis levels and bond world’s heavyweights expect the 10-year yield to reach the 5% mark sooner rather than later. In Europe, the German 10-year yield advanced to the highest levels since summer and the French 10-year yield spiked past 3.45%. In Japan, the Japanese 10-year yield jumped to 1.25% - a level that hasn’t been seen since 2011.

The global bond selloff is fueled by concerns over soaring debt levels leading to political turmoil and uncertainty in developed economies. This is compounded by major central banks' struggles to bring inflation down to their 2% target, amid various economic and political developments that could trigger a reversal in consumer prices worldwide. Consequently, the yields are rising and the expectations of further rate cuts from some major central banks are melting putting equities under pressure. The S&P500 plunged below the 100-DMA yesterday to the level it ended on November 5th just before Donald Trump’s nomination as the next US president. The selloff below the 100-DMA attracted some dip buying and led to a meagre 0.16% gain at the end of the session, but the Trump gains are now fully wiped away. Nasdaq 100 extended losses below the 50-DMA and is aiming to test the 100-DMA to the downside as well. The Dow Jones, however, is better bid near the levels it was trading when Trump got elected, supported by a rally in energy stocks on the back of rising energy prices and a rebound in financial stocks ahead of the upcoming bank earnings announcements. The American mid caps are near the Trump election levels while the small caps are already below. In Europe, the Stoxx 600 dived below its 50-DMA, while the FTSE 100 slid despite a rise in energy and bank stocks.

Are optimistic market bets already out of the window?

For the stock market rally to broaden beyond the tech companies and beyond the US, the yields must come down and let the lower borrowing costs benefit to more cyclical and non-tech pockets of the market. But the yields’ positive direction today puts that forecast at risk. If yields continue to climb and remain high, the rally is unlikely to extend beyond the tech sector, and even within tech, it could falter due to already high valuations. Magnificent 7 companies can not afford bad press at the current levels, but the news on the wire weren’t great yesterday. ‘Information’ reported that Nvidia’s customers face delays in getting their chips and have even cut some orders. The stock fell 2% yesterday. Apple’s iPhone sales dropped 5% globally this year, the Chinese rivals increase their market share, the AI applications are not coming fast enough and the upcoming trade war between the US – and the rest of the world – is not painting a rosy picture for the iPhone maker. Apple shares traded below the 50-DMA for the second day and tipped a toe below the 100-DMA yesterday.

Data sensitivity to rise

Markets’ sensitivity to major economic data will likely rise as policy uncertainties mount and appetite weakens. Due today, the US will release its latest PPI numbers, and the headline PPI may have risen from 3% to 3.4% in December and core PPI is seen rising from 3.4% to 3.7% during the same month. Rising price pressures are not good news for the Federal Reserve (Fed) doves. Stronger-than-expected inflation figures could further accelerate the US treasury selloff and support the US dollar.

The EURUSD remains under a decent selling pressure below the 1.03 mark, while Cable is in a freefall mode on another round of appetite loss in the government’s fiscal plans and amid rising bets for a further selloff. Positions in the options market suggest that some investors are betting that sterling could slip to 1.12 level against the US dollar if Rachel Reeves can’t restore confidence rapidly.

This being said, there is an increasing amount of triggers for the contrarians to join the game, slow and eventually reverse the dollar rally. Hedge funds, for example, have increased their bullish US dollar positions to the highest levels since 2019. Meanwhile, net speculative shorts in the euro appear stretched. Therefore, we could see some major currencies regain field against the dollar. But the data will say the last word for price moves.