Stocks Fall Further on Treasury Yield Rally

Summary of content for the week of  Feb 26:

1. Week 8 major indexes performance;

2. Week 8 US sector indexes performance;

3.Major indexes weekly charts of support and resistance levels;

4. Major Indexes monthly performance for Feb

U.S

U.S three major indexes fell sharply for the week ended Feb 26, in response to a steep rise in longer-term Treasury interest rates. SPX recorded its biggest weekly decline in a month, Nasdaq suffered its worst drop since October, both indexes had 2nd week down in a row, while DJI index also ended its 1st week down. 

While the Nasdaq index has risen over 100% since Mar low, SPX also added 80% in the same period, there are profit-taking pressures on equities and also another major factor as all eyes on treasury interest rate rally for the last few days. Below are the main reasons why the Treasury interest rate rallied and stocks fell:

1. 10-year Treasury rate has risen to about the same level as S&P 500(SPX) dividend yield. It hit the highest 1.614% on Thursday whereas the SPX dividend yield is at 1.48%. Treasury yield is often viewed as the risk-free rate, so when investors buy the risk-free 10-year treasury can get a higher/same return as the risk asset SPX, they will prefer to sell the stocks and buy the Treasury which is more attractive. 

2. But why treasury yield rises in the first place? This is related to the U.S government fiscal stimulus plan.

U.S treasury yields have been on the rise for the last two months on EXPECTATIONS of increased issuance of Treasuries to finance a massive stimulus package and prospects of a recovery as the world's largest economy emerges from the pandemic.

The cause and effect cycle goes like this: Government to have fiscal stimulus plan-->Need more money-->Sell more treasuries in bond market-->Treasuries price drop-->Treasury yield rise(bond prices and yields move in opposite directions.)-->Mortgage-related(MBS) selling on Treasuries 

-->Treasury price drop further--> Treasury yields rise further.

So how could it be possibly stopped? The central banks around the world are taking action or considering taking action by buying up the excess supply of bonds to support bond prices. Australian central bank was reported on the front line bought A$5 billion of bonds Thursday.

Stock Rotation amid rising yield. Value stocks such as cyclical stocks and pandemic badly hit stocks performed better than growth stocks such as technology stocks. Most of these tech stocks are unprofitable therefore rising long-term yield will have a bigger discount on their future earnings, so they appear more "expensive" now. Energy(XLE) and Financials(XLF) are the two top-performing SPX sectors for the week, whereas Technology(XLK) and Consumer Discretionary(XLY) are lagging. Refer to below SPX sector indexes weekly performance table.

Technically, all three indexes DJI, COMP and SPX weekly uptrend are well intact. and the U.S House just passed the US$1.9 trillion aid bill on Friday and send it to Senate for a vote. Any good news out in the coming week should provide chances for markets to rebound. Hopefully.

China/HK

China stocks fell in tandem with the global sell-off. SSE index shed 5.1% and HSI plunged 5.4%, was the worst index in my Inde weekly performance table above. Profit-taking in high flying stocks related to Semicon, electric cars, and automaking. Both SSE and HSI indexes weekly uptrend are still intact.

Singapore

STI was the best performing and the only index that recorded a positive return this week, with 2.4% gains. As there is a lack of tech stocks but more heavyweight value stocks in the STI index, such as the three banks. i.e DBS, OCBC and UOB. STI index is expected to continue to perform well going forward with an immediate target of 3100, as the pandemic under control and economic recovery.