Wednesday, 25 April 2018

US stocks fall but analysts see no collapse from higher Treasury yields

Markets were mixed on Tuesday.

The Nikkei 225 rose 0.9 percent while the STOXX Europe 600 was flat.

However, US stocks plunged. The Dow Jones Industrial Average fell 1.7 percent, the S&P 500 fell 1.3 percent and the Nasdaq Composite fell 1.7 percent.

Stock markets were shaken by a rise in the US 10-year Treasury yield. The latter briefly touched 3 percent before falling back.

However, analysts generally do not seem too concerned.

“Will U.S. 10-year Treasurys yielding 3% bring about an immediate collapse in equity markets? The answer from today was an unequivocal no,” said Jasper Lawler, head of research at London Capital Group.

“10-year yields at 3% or even 3.5% is not that terrible since it’s a reflection of growing economy,” said Maris Ogg, president at Tower Bridge Advisors.

“Crossing 3% on the 10-year is something that will certainly raise concerns, but at this stage of the cycle, higher yields aren’t antithetical to rising stock prices,” said Bruce McCain, chief investment strategist at Key Private Bank.

Less confident is Andrew Lapthorne, head of global quantitative research at Société Générale.

Lapthorne said that US corporate debt is at a high level, so rising bond yields could diminish the pace of buybacks as “most companies simply cannot afford them”.

Lapthorne also said that “as bond yields head higher, the valuation headwind on expensive quality stocks overwhelms the cyclical EPS growth required to push value factors forward”.

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