With bond yields continuing to climb investors continue to worry about overvalued growth stocks.
The theme in the market is investors selling overvalued tech stock and buying stocks that will benefit from the economic recovery. Considering the progress of Vaccines, coupled with all the stimulus and extremely accommodative monetary policy, there is no surprise that investors are jumping out of stay-at-home stocks. Overnight though most sectors saw some selling except energy.
This is because investors were expecting the FED to have a stronger stance in yield control. We need to remember though that bonds going up in a steady way is actually good for the equities market medium term. Money should flow out of bonds back into equities at a time where future inflation is expected. At this stage though it is causing fear and people are feeling uncomfortable by the move in bonds.
When the mood shifts back we expect strong upward momentum in equities in particular the value space to outperform.
Generally, the 10-year bond which is classified as a risk-free asset will likely stay above the perceived rate of inflation. People who own assets like this need to at least gain a return at or above yearly inflation or they lose money.
Therefore bonds will likely continue to correct until yields reach a level that investors see value. For example a rate above future inflation expectations.
The XJO is expected to open flat despite another sell off in the U.S last night. Their futures sit mildly in the green, which at this stage suggest the falls have ceased for the time being as we head into the weekend.
The yield curve issue is a local issue as well as a U.S one. Our own RBA reduced QE from earlier in the week and left out purchasing 3-year bonds under its policy to control yield curve. Long term concerns about inflation and interest rates will continue to cause issue in the short term.
Regardless, the market is trading near support and the uptrend line, and the AUD fell again last night. These factors should help keep our market buoyed. This is fairly typical as often we don’t seem to rally as hard as the U.S but we also don’t share in as much of the falls.
US shares closed lower again overnight despite comments from Fed Chair Jerome Powell that the Fed would continue to do what is necessary to keep the US economic recovery on track. Some were hopeful that Mr Powell would announce additional measures overnight to address the rising bond yields, though he did reaffirm that the Fed is not particularly concerned with inflation at present.
Despite the selling overnight, economic data continued to be largely positive, with jobless claims, factory orders, and labour productivity all coming in better than expected. Also of benefit for some was a decision by OPEC to extend their production curbs, which led to Oil & Gas stocks being the only major sector to close higher overnight. Technology stocks and Basic Materials were the biggest losers overnight, while every other sector also closed lower to some degree.