Source: Finance Association

On Monday, the Dow unusually recorded six consecutive losses, the S&P 500 index ushered in the biggest two-day decline since the Bank of Silicon Valley crisis, and the 2-year US Treasury yield once again reached the 5% mark as expectations of interest rate cuts continued to subside...

Are you surprised by the latest “Stock and Debt Double Kill” drama staged on Wall Street?

But in fact, in the opinion of many traders, this scene is probably not unfamiliar!

In fact, every 2-year US Treasury yield has risen to the 5% mark over the past few years, which is not a good thing for the S&P 500 index. As shown in the chart below, behind the two waves of decline in US stocks in the first and third quarters of last year, they all happened after the 2-year US Treasury yield “broke 5,” and it's no exaggeration to even praise this as the “curse” facing the US stock market...

Now, it is clear that an unsettling situation has reappeared.

Judging from overnight market news, it is clear that US stocks are facing quite a few negative points. The market continues to pay close attention to the increasingly tense geopolitical situation in the Middle East. Israel has stated that it will fight back against Iran's attacks, which has caused many risky assets to go viral. Meanwhile, Tesla CEO Musk announced in an email to all employees on Monday that he would lay off more than 10% of global employees, which also hit a series of tech giants. Tesla closed down 5.6% on the same day to an 11-month low, leading the decline of the “Big Seven” in US stocks.

However, if we talk about negative news that overnight can hit the US stock market and bond market at the same time, it is probably none other than US retail sales data known as “horror data.” Judging from the market's trend reaction, this “horror data” is really “so good that it's creepy”...

According to data released by the US Department of Commerce on Monday, the monthly retail sales rate in the US recorded 0.7% in March, far exceeding market expectations of 0.3%, and also recorded a new high since September last year. Perhaps more importantly, the previous month's data also experienced a sharp improvement — the monthly retail sales rate for February was revised from 0.6% to 0.9%. This indicates that the unexpected decline of 1.1% in January was not so much a trend as an anomaly.

The strong performance of retail data confirms the resilience of US consumer demand, which may support strong US economic growth in the first quarter. However, after this set of data was released, the instantaneous market situation in the US financial market overnight was actually very direct: US bond yields and the US dollar jumped hand in hand. In fact, this also laid the trigger for the sharp decline of the day for the US stock market, which only opened an hour after the data was released.

According to market data, the yield on 10-year treasury bonds once rose as high as 14 basis points to 4.66% overnight, the highest level since mid-November last year. By the close, US bond yields of various maturities were still generally high. Among them, 2-year US Treasury yields rose 1.8 basis points to 4.929%, 5-year US Treasury yields rose 5.8 basis points to 4.625%, 10-year US Treasury yields rose 7.8 basis points to 4.607%, and 30-year US Treasury yields rose 8.5 basis points to 4.72%.

Tracy Chen, portfolio manager at Brandywine Global Investment Management, said, “If the next US economic data is as strong as retail sales, the Fed may not be able to cut interest rates this year.”

Chen also pointed out that it is significant that the 10-year treasury yield recently surpassed 4.5%, laying the foundation for further moving to the top of the new trading range of 4.75%.

Charlier Ripley, senior investment strategist at Allianz Investment Management, said: “The market's rhetoric has gradually changed: 'With the economy being so strong, how can the Federal Reserve actually cut interest rates? '”

According to the latest pricing in the interest rate futures market, traders currently only expect the Federal Reserve to cut interest rates by 44 basis points (less than 2 times) by the end of December, far less than the 160 basis points (6-7 interest rate cuts) expected at the beginning of the year. According to CME's Fed Watch tool, the market currently expects the first rate cut to be delayed until September.

As US bond yields soared, the dollar's interest rate spread advantage over other non-US currencies widened, and the US dollar index rose even stronger overnight. The Bloomberg dollar index surged to its highest level since November 13 last year on Monday, the index's biggest four-day increase since early February 2023...

Meanwhile, US stock bulls are apparently “unable to resist” under the attack of multiple negative points. As shown in the chart below, the S&P 500 index has accumulated a cumulative decline of 2.64% over the past two trading days, the biggest two-day decline since the beginning of March 2023 (Silicon Valley crisis).

The S&P 500 index finally closed down 5,100 points on Monday, falling to its lowest level in nearly two months. Eleven major sectors all closed lower, with the interest-rate sensitive real estate sector and utilities sector falling the most. The Nasdaq 100 index, which is dominated by technology stocks, also fell more than 1.5%. Both indices have broken the 50-day moving average — which some chart analysts see as a bearish signal.

Corresponsibly, the Wall Street “Panic Index” VIX Index hit its highest since this year on Monday.

Craig Johnson, chief market technical analyst at Piper Sandler, said, “The stock market has begun to break away from the upward trend and pull back. Interest rates are expected to remain high for a longer period of time. As earnings season begins, people are leaning towards a more cautious strategy.”

Chris Larkin, head of trading at Morgan Stanley E*Trade, stated, “If the S&P 500 index is to avoid the first three-week decline since September last year, investors will need to overcome concerns about delaying interest rate cuts due to inflationary stickiness. In the short term, this may depend on the tone set by the first full trading week of the earnings season, and geopolitical tension in the Middle East remains an uncertain factor.”

Chris Zaccarelli, chief investment officer of the Independent Advisors Alliance, is also clearly being extra careful about the current state of the market. He said, “The panacea of strong corporate profits and lower interest rates has boosted the market, but these two things seem increasingly at odds with each other, so we will be cautious in the short term.”

editor/tolk