Nasdaq Changes Course Amid Rising Yields

Marius Paun | London, UK | Senior dealer | Friday, 19th March 2021

Nasdaq started the week on the advance as the $1.9 trillion Covid relief package was signed into law last week and immediately checks started to go out. In total, the pandemic stimulus funds amount to a jaw-dropping $6 trillion so far, which is on top of trillions more ratified by the Federal Reserves as part of its monetary policy. No wonder that many analysts anticipate a spectacular recovery as more and more businesses reopen. The unprecedented pent-up demand will undoubtedly meet an unprecedented level of monetary stimulus amid virus cases dropping fast and vaccinations picking up across the whole US.  

On Wednesday, we had the FOMC monetary policy meeting and, as largely expected, the Fed left the interest rates unchanged. After being in the red most of the morning session, Nasdaq reversed course and moved higher on Fed’s comments during the Press Conference. The rates are expected to be kept unchanged, near-zero through 2023. However, already 7 of 18 Fed members have suggested rates might start going up in 2022 or 2023 which represented an increase from 5 officials saying that at the previous meeting.

Regarding inflation, the Fed wants to see it get to 2% and even more ‘on track to moderately exceed 2% for some time. Fed Chair Jerome Powell expects inflation to tick up later in the year but considers it ‘transitory’. He was more concerned with the lack of inflation over the last few years than rising inflation. In addition, the Fed said they’ll do everything in their power to support the economy. The growth outlook was raised from 4.2% to 6.5% which would represent the fastest GDP growth rate in 33 years.

It’s fair to say the Fed gave a very bullish verdict on the economic recovery and at the same time stayed dovish on the monetary policy. Nonetheless, the elephant in the room was undoubtedly the bond yields going up and even more concerning, going up fast. It was the reason why many analysts perhaps paid closer attention to the Fed’s comments to see if they spot any hints of action on that front. Unsuccessfully, as Powell held his ground, but the US 10 -year Treasury yields rose to 1.754% the next day on Thursday sending Nasdaq 3% down for the session. The last time US 10-year yields were this high was in January 2020.

The financial media went as far as mentioning a tug of war between the bond vigilantes and the Fed. Bond traders continue to price in stronger/ faster inflation and they think the Fed will have no alternative but to raise rates sooner. It’s like them saying we don’t trust you remaining dovish through 2023. Is the saying ‘don’t fight the Fed’ about to be tested? It remains to be seen.

Interestingly, the US 10-year was above 1.9% before the pandemic and for the last decade was by and large between 1.5% and a bit over 3% with Nasdaq and the tech stocks, in particular, embarking on a spectacular rally. So the two were not always on opposite sides.

The chart shows the long-term trend has turned to the downside after reaching a high of 13,908 on February 16. The price is now below the short-term and long-term moving averages and both are pointing downwards.

The 50% Fibonacci retracement at 12,290 acted as good support last week. The price bounced off to 13,300 but now it appears bears are trying to re-establish control. The first hurdle is at 12,700 followed by 12,460. If that is successful, a retest at 12,290 will most likely be on the cards. A drop below that level will confirm the short to medium bearish trend remains intact.

On the other hand, the buyers will want to push the price quickly above resistance at 12,910 and 13,100 to give them enough confidence to challenge 13,300 level. A cross above that mark will signal the short-term recovery still has legs and why not try to reach a fresh all-time high.