October 28, 2022
Cross markets provide support for equities, which are higher and near best levels with the S&P 500 on track for a 3% weekly gain. Tech is the upside standout after better than feared earnings from AAPL, while Consumer Discretionary underperforms after AMZN results disappoint. Utilities, Communication Services (TMUS) and Staples also outperform, while Energy and Materials lag. Treasury yields are higher with curve flattening on spillover from Eurozone yields after hotter regional inflation data. The US Dollar Index is higher with the dollar firmer vs. yen post-BOJ meeting. This has Gold down -1.40%, while WTI crude gives back -1.3% of its weekly advance.
SPX: The Q4 recovery from deep oversold territory faces its first difficult technical test on the approach to 3900. Several popular CTA buy triggers sit just above 3900 with a breakout likely leading to a momentum rally to the 4000-4025 range. The near-term potential to break above 3900 remains dependent on terminal rate expectations moving lower. Terminal rate expectations are higher on rising Eurozone bond yields, so further upside today seems unlikely. Next Friday’s Jobs Report and the October CPI print on November 10 are the most significant near-term catalysts for terminal rate expectations and the S&P 500. Terminal rates are up 12bp to 4.86% with levels below 4.75% likely required to sustain a break above 3900.
Other cross market: We started writing about risks to Tech stocks when real yields bottomed in September 2021. Real yields and Tech multiples are highly negatively correlated with Tech multiples peaking in the late summer of ’21 as 10-year real yields reached -119bp. Ten-year real yields broke above the 200-day moving average at -89bp on September 23, 2021, with a failed retest of lows in early November making the need to rotate out of Tech more obvious and urgent. Ten-year real yields have gone from -117bp on 11/9/21 to +150bps today and the NASDAQ 100 (NDX) has underperformed the SPX by ~13 percentage points over that period. There’s a time and a place for everything and Tech stocks will return to favor when real yields break below +82bps with significant outperformance at levels below +24bp.