In the early Friday action, yields on the ten-year treasury rose and the Nasdaq 100 futures contract fell.
This has been the pattern for the past month. After a very close relationship since the pandemic began, inflation-adjusted yields continued to climb, but the Nasdaq 100 suffered. This makes sense given the rich valuation that technology stocks enjoy – if safe bonds offer more than crumbs than returns, it’s an alternative to investing in stocks.
Analysts are therefore now modeling just how far technologies can fall if yields on bonds continue to rise. Joe Kalish, global macro strategist at Ned Davis Research, says the Nasdaq 100 could drop 20% from its peak if the 10-year treasury reaches 2%. (The index is already 6% lower than its high.)
Kalish’s calculation depends on other relationships being stable. He says earnings returns and estimated returns for corporate bonds have been moving in tandem since 2014. A 2% treasury for ten years is likely to result in returns on Baa-related bonds – the lowest investment grade rating – reaching 4.5%, which is a 20% drop in the Nasdaq 100% to keep the ratio consistent.
Strategists of the French bank Societe Generale tend to agree. They looked at the theoretical impact of an increase in bond yields and different price-to-equity ratios. As the Nasdaq Composite trades 31.5 times earnings, the chart shows its impact, according to FactSet data.
However, it is most important that Kalish stays on equities, even with the risks. He looked at another measure of valuation and used the Census Bureau data on cash flow margins. “As cash flow has improved since the early 1990s and the cost of capital has fallen with interest rates, the economic margin has risen,” he writes. At present, the margin is above its five-year average. In the United States, the firm recommends small capital versus large capital and value above growth.
The buzz
The $ 1,400 stimulus checks from the $ 1.9 billion relief package signed by President Joe Biden could arrive as early as this weekend. Biden set a target on May 1 for all adults to receive vaccinations.
Novavax NVAX,
will be in the spotlight after biotechnology said a completed late-stage clinical study showed that the vaccine candidate was 96.4% effective against ‘mild, moderate and severe disease caused by the original COVID-19 strain . ‘ Thailand has delayed rollout of AstraZeneca AZN,
vaccine, which joins Scandinavian countries including Denmark, due to blood clot disorders. It is understood that Italy will impose a closure over the Easter weekend, according to reports from the wire service with reference to a draft decision.
China plans ways to tame e-commerce giant Alibaba BABA,
according to The Wall Street Journal. China has also fined 12 technology companies, including Baidu BIDU,
and Tencent 700,
for alleged violation of antitrust.
Electronic signature company DocuSign DOCU,
delivered a better revenue and earnings expectation in the most recent quarter and delivered a better outlook on the benchmarks.
Producer price and consumer sentiment data highlight the economic calendar.
The markets
The yield on the ten-year treasury TMUBMUSD10Y,
rose to 1.61% – surprising analysts given the successful auction of securities of that expiration date earlier in the week.
Equity futures contract ES00,
especially on the Nasdaq 100 NQ00,
gesak. Gold futures GC00,
dropped by about $ 20 per ounce.
Random reading
There’s a bull market in twins – with a third birth rate since the 1980s.
Scientists want to send 6.7 million sperm samples to the Moon as a global insurance policy.
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