US equity markets weaken on rising bond yields

US Bond yields spook equities

by 5paisa Research Team Last Updated: 2022-04-12T16:12:08+05:30

The US markets fell on Monday night after two forces played against the equity market. First, was the extended lockdown in Shanghai announced by the Chinese government to restrict the spread of the COVID virus.

China has been fairly paranoid about zero-targets since it became the fountainhead of the virus. Secondly, the 10-year bond yields in the US touched a 4-year high level of 2.78%, a level seen last in the year 2018.

The spike in treasury yields is hardly surprising. In the minutes of the Mar-22 FOMC meet, published in early April, the Fed was quite categorical that it would hike rates by another 200 bps before the end of 2022.

It also promised to hike rates in each of the remaining 6 FOMC meetings in 2022, with at least 2 occasions of 50 bps each. The expectation is that the May FOMC meet may see a 50 bps rate hike and that is what the yields are indicating.

However, it is not just about the rate hike that the US markets are panicking about. The Fed has also promised to provide a double whammy. That means; in May-22, the Fed will not only hike the Fed rates by 50 basis points but also start unwinding the $9 trillion bond book at the rate of $95 billion of bond unwinding per month. This is also expected to start from May, providing a hit to cost of funds and also to the availability of liquidity in markets.

The impact was felt across the US markets on Monday. For instance, the Dow was down by 413 points (-1.19%, NASDAQ was down by 299 points (-2.18%) and the broad based S&P 500 was also down by 76 points (-1.69%).
 

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In the US markets overall, the rate hikes and the dollar strengthening are most likely to hit the technology stocks, which reflects the hard fall in the NASDAQ. At the time, the growth impact will also hit the materials and industrials.

The immediate concerns is also on the China front. China has extended a massive city-wide lockdown, across the commercial and financial capital of Shanghai.

This virtually locks down about 26 million people with much larger repercussions for demand as well as a possible worsening of the ongoing supply chain disruptions for automakers. Globally, many auto companies that rely on China for inputs have been forced to halt production for now.

There are some voices of comfort coming from the world largest fund manager, Blackrock Inc, which manages over $11 trillion in terms of AUM (largely institutional and passive).

Blackrock is of the view that the Fed won't raise interest rates as much as the market believes since the inflation is likely to start turning lower sooner rather than later. That could be music to the ears of risk assets; especially for emerging market equities like India.

The good news is that oil prices continue to taper amidst hopes of higher supply and despite the ongoing Russian stand-off, the price of Brent has settled below the $100/bbl mark. On Monday, Brent fell by 3.61% while WTI crude fell by 3.92%. However, gold continued to rally to $1,966/oz indicating that risk off buying in the precious metals was still rampant.


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