Nasdaq: Rising Oil and Elevated Bond Yields Continue to Pose Risk Despite Rebound

• US stocks face renewed pressure as moves above $90 toward $95, while elevated bond yields and a stronger add to the risks for equities.
• Rising Treasury yields and the prospect of a September Fed hike are particularly challenging for expensive, long-duration sectors such as technology.
• futures remain technically weak below 29,250, with the falling wedge pointing to 28,700, 28,230 and 28,000 as key downside levels.

US indices managed modest gains yesterday, but the backdrop remains far from convincing. With many of the same risks still in play, it is difficult to become too optimistic about the near-term direction of equities. The escalation between US and Iranian forces has pushed WTI above $90 a barrel and towards $95, reviving concerns about a renewed inflationary shock. At the same time, bond yields remain elevated. That combination is not conducive to a strong appetite for risk.

US Stocks Face a Tougher Road Ahead as Yields and Oil Climb

Risk appetite has taken a hit this week, with global equities, , bonds and all coming under pressure before yesterday’s tentative recovery. The clear beneficiaries have been oil and US Treasury yields, both responding to the worsening geopolitical backdrop. For equity investors, the problem is that several risks are now reinforcing one another. Higher oil prices threaten to reignite inflation, while the market is increasingly pricing a more hawkish Federal Reserve despite relatively soft economic data. At the same time, a stronger yen is raising concerns about an unwinding of yen-funded carry trades, potentially creating another source of forced selling across risk assets.

Rising Yields Are Starting to Bite

Fed Chair Kevin Warsh’s hawkish Jackson Hole speech has put a September firmly back on the table, even if subsequent data have been underwhelming. The repricing has been reflected in global bond markets, with yields moving higher across the curve.

In the US, the has risen to a fresh 19-month high, while the has also broken above recent peaks. Japan’s 30-year yield, meanwhile, briefly climbed above 4.18% — a record — before easing back.

The accompanying rebound in the yen suggests markets may finally be taking more seriously the prospect of tighter Bank of Japan policy. A 50-basis-point hike at the upcoming meeting, particularly if accompanied by a signal that further increases are coming, could revive fears over an unwinding of the carry trade.

More broadly, the continued rise in yields is beginning to test policymakers’ tolerance for higher borrowing costs. It was only two weeks ago that the US Treasury announced measures intended to support the bond market, yet yields have continued to climb. With US government debt now above $40tn, a sustained move in the 10-year yield towards 5% would carry significant fiscal consequences.

For equities, higher yields also increase the opportunity cost of holding stocks, with expensive, long-duration sectors such as technology particularly vulnerable.

Can the Data Change the Fed Narrative?

The next question is whether incoming US data can alter expectations ahead of the September 16 FOMC meeting. Markets have one more payrolls report, due on Friday, and another release next week, alongside several secondary indicators.

But with the Fed Chair having adopted such a hawkish tone at Jackson Hole, investors may be increasingly inclined to believe that a September hike is coming regardless of whether the data provide a strong justification.

Nasdaq 100 Technical Analysis

were flat, while the S&P 500 was a touch higher at the time of writing. The tech-heavy index has recently broken back below the 21-day exponential average and now holding below 29,250 pivotal level inside what appears to be a falling wedge pattern. So, technically, the longer-term trend is still not bearish, but recent price action has not been bullish either. In this environment, trading from level to level makes more sense than holding for a swing. Anyway, from here, if the selling pressure grows, the index could drop towards the support trend of the wedge pattern around 28,700 next. Below that 28,230 is the next key support, followed by 28,000.

For now, oil and bond markets are likely to provide the clearest signals. Further gains in either could put additional pressure on equities. A sustained rise in crude would be particularly problematic, as it would revive inflation concerns and increase the risk of tighter monetary policy not just in the US, but across the developed world.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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