Nasdaq Tanks On Rising U.S. Yields, ARKK Appears To Confirm Double Top Pattern

The U.S. equity market slumped on Tuesday, hit by risk-averse mood after September consumer confidence fell to the lowest level since February, and lawmakers in Washington continued to struggle to reach a deal to lift the debt ceiling. Concurrently, the swift increase in U.S. Treasury yields also weighed on sentiment, putting pressure on rate-sensitive stocks such as technology.

At the market close, the S&P 500 tumbled 2% to 4352 while the Nasdaq 100 plummeted 2.9% to 14770, suffering its worst day since March. Meanwhile, ARKK, an ETF characterized by disruptive growth investment, plunged 4.2% to 112.14, breaking a key technical support and validating a double top formation.

When bond yields rise, companies’ future earnings are worth less in the present after discounting them at a higher rate. This can be detrimental to technology and growth stocks with exorbitant valuations and longer-duration cash flows. At the same time, rising yields make bond investments more attractive, discouraging assets with a riskier profile.

For context and to add some color to the situation, yields have risen rapidly since last week after the Federal Reserve indicated that it may be appropriate to start tapering asset purchases soon and signaled, via its dot-plot, that the bank could raise the federal funds rate as soon as 2022. With the FOMC getting ready to unwind its crisis-era stimulus in the face of elevated inflationary pressures, the 10-year yield has climbed from a low of 1.29% before the September policy meeting to a high of 1.56% today, a significant increase over a very short period of time.

Although current rates across the Treasury curve remain low by historical standards, the speed of the upside move witnessed recently is worrying and nerve-wracking, as it may accelerate forced hedging and some rebalancing activity. In any case, if the trend does not slow, undesirable portfolio adjustments and rotation out of pricey and high-flying stocks could weigh on the tech sector heading into the fourth quarter. Needless to say, a higher rate regime could hurt the Nasdaq 100 and, of course, the ARKK ETF in the near-term.

1 2
View single page >> |

Disclaimer: See the full disclosure for DailyFX here.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.