By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: Feb. 26, 2021

Feb 26, 2021 | 12:21 PM

Big Picture

Technlogy Stocks Under Pressure as Bond Yields Climb

The Nasdaq Composite fell sharply on Monday, as rising bond yields and optimism for a further economic rebound weighed on key technology names, which some investors now see as overvalued. By Monday’s close, the Nasdaq had plunged 341 points, while the Dow added 27 and the S&P shed 30. In Canada, the TSX recorded a modest 32-point gain as the energy and materials sectors rallied. Gold was up roughly 1.5% to a near one-week high, as expectations over U.S. President Biden’s proposed $1.9-trillion stimulus package triggered inflation concerns. Oil also saw healthy gains Monday, reaching $61.49 a barrel, its highest level since January 2020.

It was a wild session on Tuesday as tech stocks bounced back late in the day after Fed Chair Jerome Powell’s assurances that low rates would remain in place for “some time.” Prior to Powell’s comments, the Nasdaq was down as much as 4% before recouping most of its losses. By Tuesday’s close, the Nasdaq and TSX had dropped 68 and 87 points, respectively, while the Dow and S&P recorded minor gains.

The Dow hit a new record Wednesday after Powell reaffirmed his support for low interest rates and the bank’s ongoing asset-purchase policies. The Dow surged 425 points, while the Nasdaq regained 133 points, and the S&P added 44. It was also a strong performance for the TSX, which jumped 154 points, closing just 10 points shy of a new record high.

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There were red numbers all around Thursday, however, as the technology selloff spread to other market sectors. Rising bond yields continued to put pressure on riskier assets, as U.S. 10-Year Treasury yields climbed past 1.5%. By Thursday’s close, the Nasdaq had lost more than 3.5%, plunging 478 points, while the Dow and S&P dropped 560 and 96 points, respectively. In Canada, the TSX fell 1.4%, surrendering 261 points.

Rough Week for Technology Sector

For the four trading days covered in this report, the Dow lost 92 points to close at 31,402, the S&P 500 shed 78 points to settle at 3,829, while the technology-heavy Nasdaq plunged 755 points to close at 13,119. In Canada, the TSX lost 161 points to end at 18,223.

Strategy

Global bond sell-off sparks debate about driving forces of the move and how central bank policymakers should respond

Central bankers around the world, with a few exceptions, have downplayed the recent moves in global bond yields in recent public remarks, characterizing the move as complimentary to an improving outlook and not a point of concern.

Yesterday, after a poorly received 7-year U.S. bond auction, the yield on the 10-year note gapped up to more than 1.6% before settling back into the day’s range. Still, yields were up across the curve, with the belly notably underperforming. In our view, macro drivers were not the cause of the move yesterday. Instead, we think the movement observed reflects the market starting to question the credibility of the U.S. Federal Reserve, and other central banks, to keep rates low for the period they have previously committed to.

With economies reopening and promising vaccine roll-outs underway, there is an element of front-running the Fed’s tapering at play as well. This is most evident by the move in short-dated bonds. If the increase in yields was contained to the long end, there likely would not be as much fuss. But the short end also selling off suggests to us the market expects the Fed to unwind its stimulus and raise rates earlier than expected.

We do not think levels at the long end of the curve are disconnected with fundamentals, particularly given the expectation for 5%-6% GDP growth this year. Yields should respond positively to rising growth expectations, but the concern remains about the speed of the move and the run-up in term premium.

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