Nasdaq off lows but pressure remains • Nasdaq rebounds but bond markets continue to signal “risk off”
• Stronger US data further boost hawkish Fed bets
• More rate hikes and longer contractionary monetary policy should be bad for stocks
The Nasdaq bounced off its earlier lows along with the global market after the US cash open. But with bond yields breaking further higher, there is a risk we could see renewed weakness in US markets later.
More strength in US data sends yields even higher
Today we had stronger showing from the housing market, with jobless claims falling unexpectedly to 190K from 192K, versus a rise to 196K expected. On top of this, Unit Labour Costs were revised higher to 3.2% for the fourth quarter from 1.1%, confirming that wage inflation is on the rise. This comes after the ISM PMI’s prices index jumped nearly 7 points to 51.3 from 44.5 last, as we found out on Wednesday. Previously, the Fed’s favourite measure of inflation – the Core PCE Price Index – printed higher than anticipated on Friday. That – as well as some other above-forecast economic indicators we have seen of late – all helped to raise market’s expectations about US interest rates.
As a result, US 10-year Treasury yields crossed 4.00% on Wednesday for the first time since November. They have gone a bit further higher today, reaching a high so far of 4.08%, as incoming data is continuing to provide more reason for the Fed to be cautious than declare victory on its fight against inflation.
Rising bond yields will make some stocks less attractive, especially those with high valuations and/or low dividend yields.
So, it remains to be seen whether this bounce will hold.
Nasdaq rebounds off lows to test 200 MA
In fact, the Nasdaq was testing a key level of potential resistance at the time of writing, around 11900. As well as prior support, the 200-day average also comes into play here. The bears will want to defend this level if they want to see lower levels. The bulls must reclaim this level on a daily closing basis to provide a positive technical signal for would-be buyers.
If resistance holds, then the immediate target would be the liquidity below today’s earlier low at 11810, where stops from people who bought the dip would undoubtedly be resting. Below that level, the 50% retracement level of the entire up move from the October low will come into focus.
Meanwhile, if the bulls manage to show up and push the market back well above the 200-dya average and resistance at 11900 on a daily closing basis, then this could ignite follow-up technical buying towards 12000 initially, ahead of 12100 and then 12200 next.
All told, the risks remain skewed to the downside, and we favour looking for rebounds to get faded into resistance than fading into the dips.
