LIVE MARKETS Tread carefully with the Nasdaq

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  • Major U.S. indexes bounce; chips outperform, banks red
  • Tech leads major S&P 500 sector gainers; financials sole loser
  • Euro STOXX 600 index rises ~0.7%
  • Dollar dips; gold, crude, bitcoin up
  • U.S. 10-Year Treasury yield falls to ~1.85%

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TREAD CAREFULLY WITH THE NASDAQ (0940 EST/1440 GMT)

Fears of rising interest rates are triggering a selloff in global stocks, but the Nasdaq could be at greater risk due to its stronger retail participation, says Jefferies.

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The shape of the U.S. yield curve prices equities in two different ways, the New York-based brokerage explains: The long-end is a gauge on valuation, and equities are long-duration assets.

Any changes to short-term rates influence speculative behavior, since it changes the cost of purchasing assets through the carry-trade, margin-financing, repo rates, and so on. The movement in short-rates, then, can also dictate a firm's ability to raise money, as capital markets can be fickle when rates start to move up too quickly.

Interestingly, Jefferies notes similarities between now and the 2000-1 period, when a faster Fed tightening cycle was under-appreciated after ‘Y2K’ fears proved unfounded. “True, the constituents are very much different as are the business models, but the degree of margin financing and heightened risk appetite is similar.”

Moreover, the first four or so months of 2021 saw a wide divergence in the performance between S&P 500 companies depending on their FCF yield as U.S. yields pivoted upwards, analysts added. "Indeed, high PE stocks were equally hurt."

The bottom line, Jefferies says, is that gyrations in the treasury market will influence the high PE, low FCF yield stocks the most. They expect the 10-Year Treasury, which earlier on Wednesday reached 1.90%, to settle ~2.4% by the end of 2022.

“The sell-off of 2-year treasury yield notes is an excellent lead indicator of rate tightening cycles which then means higher margin financing costs. The consistency of earnings growth in the FAANG+M ought to mean that they provide an ‘adequate’ hedge to Nasdaq. Remain long S&P 500, tread carefully with Nasdaq,” the analysts write.

(Anisha Sircar)

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NASDAQ 100: CAN THIS VIXEN COOPERATE? (0900 EST/1400 GMT)

The Nasdaq 100 index (.NDX) ended Tuesday down a little more than 8% from its November 19 record close.

Meanwhile, despite the Nasdaq 100's recent drubbing, the CBOE Nasdaq 100 Volatility index (.VXN) has yet to surpass its December 3rd high:

NDXVXN01192022B

The VXN spiked to a high of 36.64 on December 3. Since then, and despite lower NDX lows on either an intraday or closing basis, the VXN has been making lower highs. It ended Tuesday at 29.36.

Of note, since early 2020, the six biggest NDX declines from record-high territory ultimately saw lows accompanied by a lower VXN high on a multi-week/multi-month basis.

This as the spikes in the implied volatility measure were either their most intense earlier on in the declines, or were less severe vs the most recent period of instability.

Therefore, traders will be watching Nasdaq 100 volatility closely vs its 36.64 early-December high. A calming VXN can coincide with an unfolding NDX recovery attempt.

That said, a VXN thrust above 36.64 will cause this pattern to reset, suggesting the potential for much greater NDX weakness. read more

(Terence Gabriel)

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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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