Bond Yields Rise as Big Tech Weighs on Stocks

The equity markets experienced a decline fueled by renewed weakness in large-cap tech stocks, while market participants navigated through a range of mixed economic data in search of insights into the Federal Reserve's policy direction. Simultaneously, bond yields registered an increase.

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Amid a relatively subdued trading session, the S&P 500 underwent a retreat, with trading volume approximately 20% below the preceding month's average. The Nasdaq 100 demonstrated underperformance in comparison to major equity benchmarks and appeared to be heading towards its second consecutive week of losses — the lengthiest declining streak witnessed in this year. A notable downturn in prominent corporations like Tesla Inc. and Nvidia Corp. significantly influenced the Nasdaq's performance. However, energy shares managed to advance in tandem with a rise in oil prices.

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Matt Maley, Chief Market Strategist at Miller Tabak + Co., expressed his observation that the stock market's momentum has indeed diminished. As the market approaches the traditionally volatile September/October period, Maley noted a reduction in the strength of market participants who typically engage in "buying the dip." Although he doesn't anticipate an immediate serious market downturn, he acknowledged that the odds of a correction in the near future have increased.

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Friday's economic reports had minimal impact on the prevailing expectations that the Federal Reserve will halt its rate hikes next month and abstain from proclaiming victory over inflation. A reading from the University of Michigan indicated that Americans expect a 3.3% increase in prices over the upcoming year, down from the 3.4% projected in July. Moreover, projections for cost escalation over the next five to ten years shifted to 2.9%, contrasting with the 3% of the previous month. Additional data highlighted a rise in the producer price index during July, mainly attributed to upswings in specific service categories.

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Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets, noted a weaker performance in Treasuries following a slightly positive surprise revealed by the PPI report. Given the data from the University of Michigan, he expects limited challenges to the current prevailing trend. However, he also acknowledged the inherent choppiness in the US rates market on mid-summer Friday afternoons, urging a cautious approach towards any market movements prior to the weekend.

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A notable trend was highlighted in the Treasury market, as investors seeking higher yields flocked to cash and bonds, potentially leading to a record year of inflows. Data from EPFR Global indicated that cash funds drew in $20.5 billion, while bonds garnered an inflow of $6.9 billion in the week leading up to August 9. In contrast, US stocks experienced their first outflow in three weeks, amounting to $1.6 billion.

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Despite an alarming drop in a key market indicator that historically holds significant weight, there is a historical pattern indicating that the seemingly bearish signal might indeed result in further market gains. The equity risk premium, which reflects the disparity between the earnings yield of the S&P 500 and the prevailing yield on 10-year Treasury notes, recently reached its lowest level since 2004. However, historical trends suggest that this reduction may not necessarily signify bearish sentiment, but rather a sign of overvaluation in stocks relative to bonds.

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In other market developments, the pound appreciated in tandem with rising UK bond yields, buoyed by data showcasing the British economy's robust quarterly growth, marking its strongest performance in over a year. This surprising display of resilience is likely to intensify pressure on the Bank of England to implement further rate hikes.

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