Nasdaq Extends Slide, Bond Yields Spike On Fed Taper Fears

The Nasdaq and other major stock indices are trading deep in the red on Wednesday. This follows a sharp move higher by Treasury bond yields and the US Dollar this morning in response to red-hot inflation data. Notably, higher-than-expected readings for both headline and core CPI have stoked investor concerns that the Federal Reserve may have to bring forward its taper timeline.

Even FOMC Vice-Chair Richard Clarida noted how he was surprised by the strength of today’s CPI report. Fears of sticky inflation were not felt in today’s solid ten-year Treasury auction results, however, as yields at 1.68% attracted buyers. That alleviated upward pressure on yields and helped Nasdaq price action erase some downside.

NDX – NASDAQ PRICE CHART: DAILY TIME FRAME (21 OCTOBER 2020 TO 12 MAY 2021)

Nasdaq Price Chart Forecast

Chart by @RichDvorakFX created using TradingView

The Nasdaq is currently trading around the psychologically significant 13,000-price level. Failure to maintain altitude here, which could follow yesterday’s rejection of the 50-day simple moving average, has potential to steer the Nasdaq a bit lower toward the ascending trendline that connects the 02 November and 05 March swing lows. This potential area of technical support is also underpinned by the 61.8% Fibonacci retracement of the Nasdaq’s year-to-date trading range. Although, it is worth noting the Nasdaq is arguably looking a bit overextended here.

This is judging by the relative strength index nearing ‘oversold’ territory and Nasdaq price action trading outside its bottom two-standard deviation Bollinger Band. That said, it is likely that the Fed will look through short-term spikes in inflation, pegging them as transitory price increases due to supply constraints and anchoring long-term inflation expectations around 2%. This also likely means that the Fed will stay patiently dovish until ‘substantial further progress’ is made toward reaching its other mandate – full employment. Nevertheless, I would have ten-year Treasury yields near the top of my radar for a potential bellwether to where the Nasdaq heads next due to the recently strong inverse relationship between the Nasdaq and Treasury bond yields.

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