Rising yields send jitters through tech stocks

SINGAPORE – Volatility buffeted stocks last week as yield curves continued to trend higher. This was despite assurances from the US Federal Reserve that it will keep interest rates unchanged for the next two years.

On Wall Street, the benchmark Dow Jones index lost 0.46 per cent for the week to close at 32,627.97 points last Friday as bank stocks came under pressure after the Fed refused to extend temporary relief from capital-requirements rules for them.

But the bluechip index is still up 3.6 per cent for the month, and 6.6 per cent since the beginning of the year. And it is up 70 per cent over the past year.

The broader S&P closed flattish at 3,913.10 points. But the big play was on the tech-heavy Nasdaq, which ended a volatile week with a 104.63 points cumulative loss for the five sessions to end at 13,215.24 points last Friday.

All this comes amid indications that US economic growth will pick up strongly and unemployment will fall this year. And yes, there will be some inflation.

But interest rates will remain unchanged for the next two years.

In a nutshell, that was the message from the US Federal Reserve last week as its Federal Open Market Committee or FOMC left its benchmark rate unchanged in the range of 0 to 0.25 per cent and said it would continue its US$120 billion (S$161 billion) monthly bond purchases.

“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 per cent,” the FOMC said in its post-meeting statement.

That statement saw the Dow shooting to a new record high mid-week.

But with the 10-year Treasury yield rising past the 1.7 per cent mark by the latter part of the week, another wave of jitters hit the market.

In Singapore, the Straits Times index appeared to have largely ignored Wall Street to chalk up a gain of 39.32 for the week to end last Friday’s session at 3,134.54 points, boosted by banks and bluechips.

Together, DBS, OCBC and UOB have been recipients of more than $1 billion of net institutional inflows so far this year.

Meanwhile, the most traded technology and technology-linked stocks such as AEM Holdings, Venture Corporation, Mapletree Industrial Trust, Keppel DC Reit and NetLink NBN Trust have all seen net institutional outflows.

Going into this week, local technology and manufacturing stocks could be in focus with February industrial production data to be released on Friday.

Consensus estimates are for a year-on-year gain and month-on-month decline from January. The sub-indices will also provide useful gauges on the economic state of the broader economy.

On the broader equities market front, the question now is whether markets will now test Fed chairman Powell’s response on 10 year yields.

When pressed for commentary last week on the 10 year yields by CNBC senior economics reporter Steve Liesman, Mr Powell reiterated the current stance that monetary policy remains appropriate, while noting the Fed can change policy “in a number of different dimensions, should we deem that that’s appropriate, but for now, the policy stance is appropriate”.

But he also added that “the FOMC would be concerned by disorderly conditions in markets or by a persistent tightening of financial conditions that threaten the achievement of our goals”.

Meanwhile, for the moment, higher yields are mostly impacting equity markets through selected sectors. Specifically, they are helping the bottom line of the banks, and thus driving the rotation into this sector at the expense of the next biggest sector, technology.

Meanwhile, the current global financial conditions remain highly accommodative for the financial sector in general, and stocks in particular. The Federal Reserve Balance Sheet has now grown to US$7.7 trillion, while the European Central Bank Balance Sheet now stands at €7.1 trillion.

Volatility aside, the medium term uptrend for stocks appears to be intact.