Don’t fear the bond yield spike, stocks can rally more, reckons this analyst

Just how much this run-up in implied borrowing costs and sell-off in equities has already factored in a hot June nonfarm payroll report shall be determined as the day unfolds.

But it is fair to say that after a period when equities seemed sanguine about yields trundling higher, the bond market appears to have rediscovered its bite.

“This sudden positive correlation between equities and Treasuries has been somewhat rare, as the entire Treasury selloff since May has coincided with equity rallies, not selloffs,” says Mark Newton, head of technical strategy at Fundstrat.

Thankfully for bond and stock investors, Newton reckons a pullback in yields is imminent.

“The rapid rally in Treasury yields on a recent spike in hawkishness doesn’t look to extend much more, and looks close to reversing back to the downside,” he says, noting it was significant that in Thursday’s action that yields finished well off the day’s highs.

For example, after the U.S. 2-year yield touched a 16-year peak around 5.1% it’s now below 5% again. The 10-year yield still sits just a few basis points below its highs of March.

Newton cites some technical factors to support his thesis that yields likely are closer to breaking down instead of breaking out: “Counter-trend DeMark based exhaustion is now present on
TLT,
-1.41%
[iShares 20 Plus Year Treasury Bond ETF]; Cycles point lower for Treasury yields in the months ahead; Elliott-wave structure suggests that this recent run-up in yields is close to reversing,” he writes in his latest note.

The DeMark is an indicator that is meant to predict short-term price action based on changes in intraday highs and lows. The Elliot-wave tool observes recurring patterns.

In addition, Newton implies the market’s sudden degree of hawkishness — as voiced in expected probabilities of more Fed rate hikes — is somewhat extreme and thus more likely to ease than increase.

Indeed, the chart below from SocGen illustrates how badly positioned some traders may be if the bond market had a cause to turn more dovish.

So, should bond yields pull back from here then what does this mean for stocks? Newton says that insufficient technical damage has occurred to make much of the markets latest weakness, and that big tech stocks are still acting as saviors.

“It remains difficult to have any conviction that this market might be turning down. Looking at Thursday’s session, the minor weakness held almost exactly where it needed to before stabilizing and attempting to push higher into the close,” Newton says.

The S&P 500 will likely “bottom Friday/Monday and turn back up to 4,500.”

Markets

U.S. stock index futures
ES00,
-0.07%,

YM00,
-0.02%,

NQ00,
-0.18%,
are a bit lower as benchmark Treasury yields
TMUBMUSD02Y,
5.011%

TMUBMUSD10Y,
4.064%

TMUBMUSD30Y,
4.014%
move higher. The dollar index
DXY,
-0.17%
is a touch softer, while oil
CL.1,
+0.49%
gains and gold
GC00,
+0.36%
is up.

Try your hand at the Barron’s crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week’s cover story. To see all puzzles, click here.

The buzz

Here’s what economists forecast for the June nonfarm payrolls report due for release at 8:30 a.m. Eastern. A net 240,000 jobs are expected to have been created, down from 339,000 in May. The unemployment rate is seen dipping from 3.7% to 3.6% and the hourly wages growth to remain at 0.3%

Whether it’s in a cage or a court, it seems Elon Musk is determined to have a fight with Meta’s
META,
-0.81%
boss Mark Zuckerberg. The founder of Tesla and owner of Twitter is threatening to sue Zuck’s Meta alleging it stole Twitter’s secrets in order to set-up the rival Threads messaging platform.

U.S. Treasury Secretary Janet Yellen is in China as Washington and Beijing look to manage the economic fallout from their intense geopolitical competition.

Samsung Electronics
005930,
-2.37%

TSM,
-1.56%
has predicted a 96% fall in its second quarter operating profit, its weakest performance in 14 years that suggests weak global demand for tech products and semiconductors.

Investors may soon be able to buy some Birken stock (sorry!) as banks are reported to be working on an IPO valuing the footwear group at $6 billion.

Levi Strauss & Co. shares
LEVI,
+0.78%
are falling nearly 7% in premarket action after the jeans maker lowered its outlook for the year, stressing that the bulk of its inventory problems were behind it, but cited lower-than-expected revenue and margin, as well as FX for the cut.

Shares in Alibaba
BABA,
-0.55%
are up more than 2% after a report that a long-running investigation into Ant Group will end with a penalty of at least 8 billion yuan ($1.1 billion).

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The chart

Is this the Fed’s rate-hike campaign having effect?

“A rush of new U.S. corporate bankruptcies in June added to an already heightened pace of filings this year, reflecting the difficult economic conditions and higher interest rates companies are facing,” says analysts at S&P Global Market Intelligence.

“Total filings for the first half of the year eclipsed those of any other comparable period since 2010, including the rush of filings during the first half of 2020.”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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