LIVE MARKETS Rising rates fueling tech sector volatility

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RISING RATES FUELING TECH SECTOR VOLATILITY (1210 EST/1710 GMT)

Nicholas Colas, co-founder of DataTrek Research, is taking a look at rising interest rates and their affect on tech stock valuations.

Colas notes that common wisdom, and basic finance, says that when rates go up, stocks with "a long tail of future expected earnings will tend to decline."

However, he also says that a market historian might come up with a different answer. For example, Colas says that from July 2016 to October 2018, the U.S. 10-year Treasury yield went from 1.4% to 3.2%. However, the Nasdaq Composite (.IXIC) advanced 48% during that two-year period as U.S. “Big Tech” hit its stride.

Therefore, as Colas sees it, rising rates "don’t necessarily help or hurt valuations," but they "definitely increase" tech sector volatility.

Here is a chart of ratio of NASDAQ 100 expected volatility (.VXN) to S&P 500 expected volatility (.VIX) with the U.S. 10-Year Treasury yield overlayed:

Colas notes that NASDAQ 100 expected volatility is the same as that for the S&P 500 "much more often than you would think."

However, he also outpoints that from 2002 to 2016, lower yields helped reduce Nasdaq volatility to levels similar to the S&P 500. From 2017 to 2019, higher yields ushered in higher Nasdaq volatility. More recently, with yields rising again, Nasdaq volatility is up.

Colas has two takeaways:

First off, as long as the 10-year Treasury yield continues to climb, expect U.S. tech stocks to show incremental volatility relative to the S&P 500.

Secondly, once the 10-year Treasury yield does stabilize, U.S. tech stock volatility vs the broader market should start to decline.

"For many investors, that will be a welcomed change and should encourage capital flows back into tech names. We don’t think we’re there yet, but like all market cycles this shift will eventually have its day."

(Terence Gabriel)

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BOFA SEES 10% UPSIDE TO EUROPEAN BANK EARNINGS (1111 EST/1611 GMT)

European banks are tanking amid market jitters of a possible Russian invasion of Ukraine, but for BofA Securities the current rate outlook means there's another 10% upside to the sector's earnings.

"As rates-driven earnings upgrades are capital-free, this has translated quickly into €20bn more shareholder payouts for 2022E alone", said analysts at the U.S. investment bank, which have upgraded bank earnings three times since rate expectations began to move in September.

With central banks set to start a mammoth tightening, BofA is eyeing central bank balance sheet reductions of $800 billion a year from next month, down from the $10 trillion expansion over the last few years.

"Expansion by design compressed long bond yields. Normalisation should enable banks to realise the benefits of duration, absent for years,” they added.

With virtually all STOXX 600 constituents flashing red and the overall index down 2%, banks (.SX7P) are coming out worst with a 3.1% drop. The slide marks a reversal from last week when they gained 3.9%, outperforming the STOXX index by more than double.

(Lucy Raitano)

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EUROPEAN EARNINGS: 2022 UPGRADES COMING? (1015 EST/1515 GMT)

Tensions over Ukraine and rate jitters are the No.1 worry for equity investors these days and that has clearly made it hard for markets to fully enjoy the good news coming from the earnings season, especially on the Old Continent.

But once (and if) the dust settles, prices may start to better reflect the strong corporate profitability numbers.

In Europe, where four out of ten companies have already reported, growth remains strong at 74% and the breadth of beats at 65% remains at historical highs, according to Bernstein.

"These are strong numbers and along with the exceptional numbers reported in Q1 and Q2 of this year are among the highest in our post 2012 quarterly earnings season dataset," said strategists at the U.S. investment house.

"The bar on full year earnings growth remains very low by historical standards with analysts forecasting only 6.5% growth for 2022, leaving plenty of room for upside to estimates," they also said, adding that "Further upgrades to earnings should provide additional fundamental support for European equities."

(Danilo Masoni)

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MIGHT U.S. STOCKS LAPSE INTO LIMBO? (0956 EST/1456 GMT)

U.S. stock indexes are mixed in early trade on Monday amid concerns about higher interest rates, while comments from a Russian official eased worries about a possible invasion on Ukraine.

So far, the Nasdaq (.IXIC) is posting a gain, while small caps (.RUT), FANGs (.NYFANG), transports (.DJT) and chips (.SOX) are among outperformers. The S&P 500 (.SPX) is around flat, while banks (.SPXBK), and the DJI (.DJI) are down.

Regarding expectations for action early in the week, Mike O'Rourke, chief market strategist at JonesTrading, wrote in a note on Sunday that after Friday's sharp weakness, and in the absence of a weekend Russian invasion of the Ukraine, one would typically expect an immediate bid to the market.

However, he adds that with reports that the Biden Administration is saying the invasion could happen "as early as Tuesday" it is likely to leave investors in a state of limbo.

O'Rourke also wrote that "If Wednesday comes and there is no change in Ukraine's status in one way or the other, one has to ask if the Biden Administration becomes the 'boy who cried wolf.'"

Here is where markets stand in early trade:

(Terence Gabriel)

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NASDAQ 100 FUTURES BOUNCE, BUT STILL BATTERED (0900 EST/1400 GMT)

U.S. equity index futures have bounced off their overnight lows. This despite rising geopolitical tensions between Russia and the West which pose a double whammy for investors already worried about aggressive policy tightening by the Federal Reserve to combat surging inflation.

Indeed, CME Nasdaq 100 futures fell as low as 14,031 in overnight trade on Monday, putting them down around 1.5% from Friday's close, and more than 16% from their November 22 intraday peak. However, they now stand around 14,200, or just slightly red on the day:

Of note, so far the futures are holding support at their January 27 close of 13,986.75. This ahead of the January 24 intraday low at 13,706.

Meanwhile, traders are watching closely the behavior of momentum oscillators. Of concern, since diverging into the November peak, the daily RSI has been unable to muster enough strength to move back above the 70.00 overbought threshold. Doing so could signal the futures have regained sufficient thrust to sustain a greater recovery.

That said, in the event of equal or lower NQcv1 lows vs the late-January close, traders would also watch to see if the RSI can form a higher trough vs its late-January low, which was its most oversold reading since late-February 2020.

In that event, a bullish convergence could suggest the futures were especially ripe for a more significant low to form.

Additional support is at the May 2021 low of 12,896.50 and the 38.2% Fibonacci retracement of the entire March 2020-November 2021 advance at 12.873.57.

Since the futures broke sharply lower in early January, the descending 30-day moving average, now just over 15,000, has been capping strength. read more

(Terence Gabriel)

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