The Nasdaq careened towards correction territory Thursday, as Jerome Powell failed to assuage a market that desperately wanted clarity following last week’s bond rout.
That Powell didn’t manage to hit the right notes was both predictable and surprising at the same time.
He isn’t a great communicator, or at least not vis-à-vis markets. And yet, it was abundantly clear what markets wanted to hear. To the extent Powell’s webinar with the Wall Street Journal represented a rhetorical challenge, it wasn’t a particularly daunting test. Simply acknowledging that the Fed’s toolbox includes the option to “twist” and a nod to the unresolved SLR question would have probably sufficed. Alas.
Read more: ‘Feel The Market’ Next Time, Jay
Yields moved higher on Powell’s sin(s) of omission, and that caused more problems for tech.
Globally, tech shares may be teetering on the brink of a bear market, and the Fed Chair didn’t do them any favors on Thursday. The Nasdaq 100 fell near correction territory and the FANG+ gauge is similarly beset. If it’s a dip you’re looking to buy, this probably counts as a “legit” swoon.
Investors’ Classical conditioning (i.e., their Pavlovian tendencies) may kick in, especially with the memory of Monday’s dramatic bounce still fresh. But this is a falling knife. With the reopening narrative, rising oil prices, an accelerated vaccine push, and fresh stimulus all arguing for higher yields, secular growth and bond proxies are a perilous proposition.
Cathie Wood’s flagship fund is now down nearly 25% from its peak last month. Your wings are melting, Icarus.
“This Nasdaq / ‘Secular Growth’ / Expensive Stock pain has now dragged SPX into ‘negative gamma & delta’ territory with it [but] it’s the extreme magnitudes of the current QQQ greeks which make this market so fragile,” Nomura’s Charlie McElligott said Thursday.
Energy shares, meanwhile, managed to gain on an otherwise abysmal day for the broader US market. OPEC+ surprised with a decision to refrain from adding too many barrels to the equation at what the Saudis still clearly believe is a delicate juncture.
But this is a market that lives and dies by the high-fliers, which means that on days when the Nasdaq is bleeding out, there’s no real “offset,” so to speak. And because the proximate cause of the pain is higher yields, bonds aren’t your hedge. So, “diversification desperation” it is.
10-year yields were higher by ~6bps and hit 1.554% at the highs. Goldman raised its year-end forecast to 1.90%, up 40bps from 1.50%.
“A retracement from record high equity valuations isn’t a negative thing for monetary policymakers, as it releases air from potential asset bubbles,” BMO’s Ian Lyngen and Ben Jeffery said Thursday afternoon.
“One thing is certain, the traditional correlation between stocks and bonds has been set aside for the time being,” they added, noting that while “higher yields were interpreted by equity investors as a ‘positive sign’ for the economic outlook” during the early days of the bond selloff, “the transition to a paradigm in which discount factors outweigh recovery optimism will give policymakers pause.”
Powell’s passive faux pas managed to catalyze a sharp spike in the dollar Thursday, which is just about the last thing you want. The Bloomberg dollar index rose to its highest since December 1.
This dynamic is becoming unsustainable. Until recently, it was wholly plausible (indeed, it was rational) to argue that higher yields reflected economic optimism and that financial conditions weren’t threatened by the backup. At this point, though, with the dollar rising, real yields up 42bps in 2021, and stocks looking increasingly nauseous, it’s becoming more difficult to make that case.
Now, all eyes turn to Friday’s jobs report and the stimulus debate in the Senate.