Fear and Loathing as Treasury Yields Firm, Stocks Fall 

We’re in one of those strong dollars + firmer Treasury yields = weaker stocks, higher VIX paradigm. Basic resources, autos and financials led the declines early doors in Europe on Tuesday as the major indices fell sharply in the wake of a rough session on Wall Street.  

Considerations about escalation in the Middle East are meeting with concerns about when the Fed might start cutting rates, which has sent the dollar to a 5-month high. China’s GDP expansion in the first quarter beat forecasts, but retail sales and industrial production were softer than expected.   

As for the Middle East, there are always geopolitical concerns — this is the noise. Geopolitics never stopped the S&P 500 index from making another record high. But for traders the geopolitics combined with some fresh macro uncertainty about what the central banks are going to do next, it means more volatility in the near term. 

A Skittish Market 

The FTSE 100 dropped more than 1.3% as it came off for a second day after hitting the 8k level. It dipped 0.38% on Monday as oil prices softened. That came after more wobbles on Wall Street saw the S&P 500 decline 1.2% and the Dow almost erase its entire year-to-date (YTD) gains to close at 37,735, having been close to 40k at the start of the month, despite some blowout results from Goldman Sachs.  

The Nasdaq Composite declined 1.8% but like the broader market is still around +6% YTD. Tesla was down more than 5% and the rest of the Mag 7 were all down by around 2% or so. TSLA now –35% YTD – time to shoot Chico?  

U.S. Consumer Still Strong 

Treasury yields and the U.S. dollar rallied to fresh YTD highs as US retail sales beat expectations. The 10-year Treasury yield trades above 4.63%, with the 2-year knocking on 5% again. These are levels last seen in November when the “higher for longer” message was cutting through to markets before the ‘Powell Pivot’ in mid-December.  

Gold prices also snapped back smartly despite the 10-year Treasury Inflation-Protected Security (TIPS) hitting 2.20%. 

Morgan Stanley’s Mike Wilson notes he has been highlighting the “4.35-4.40% on the 10-year UST Treasury yield as a key level for stock valuations, and last week it was breached decisively to the upside.... multiples may now face headwinds if rates rise further.”  
 

No Cutting Corners for the Federal Reserve 

New York Fed President John Williams said rate cuts will likely start this year, though Mary Daly, president of the San Francisco Fed, there is no urgency to cut: 

 “The worst thing we can do right now is act urgently when urgency isn’t necessary.”  

Fed chair Powell and Bank of England governor Bailey are due to speak later. This offers The Fed chair in particular the chance to offer some clear signalling about the FOMC’s reaction function in the wake of the repricing in Treasury markets since the hot inflation data last week and yesterday’s retail sales numbers. 

Elsewhere in the Markets — Volatility Returns 

Guess who’s back — volatility makes a return on the S&P 500 with VIXX spiking hard in the last couple of days. A general sense of “fear” and trading off the news which is always going to create downside and volatility – the slow creep higher doesn’t happen in these conditions. 

Sterling hit a fresh 5-month low this morning as UK jobs data was mixed – unemployment rose, but wage growth remains strong. This fixes the sense that the Bank of England should be cutting soon but cautiously — but positive real earnings growth should be a reason to be cheerful (as long as inflation remains under control).