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This is where the 10-year yield is a ‘clear problem’ for stocks, Goldman says

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., April 29, 2024. 

Brendan Mcdermid | Reuters

The volatility in the bond market has had equity investors on their toes for months, but at what point will rising yields spoil stocks’ 2024 rally?

The answer is 5% on the 10-year Treasury yield, according to Goldman Sachs. In a new 19-page paper using market data since the 1980s, the Wall Street firm said when that threshold is reached, the correlation between bond yields and stocks turns negative.

“While there is no ‘magic number’, historically bond yields at around 5% is when higher yields become a clear problem for equities — that is the point where the correlation with bond yields is no longer decisively positive,” wrote a team of Goldman strategists led by Peter Oppenheimer, chief global equity strategist.

The benchmark 10-year yield jumped 5 basis points Tuesday to 4.67% after data showed employee compensation costs jumped more than expected to start the year. It marked yet another danger sign about persistent inflation, which the market thinks will keep the Federal Reserve on hold until later this year before it starts to consider cutting rates.

Goldman said investors are currently in the “optimism phase” of the cycle, where confidence — and complacency — grow, pushing valuations higher.

“Equity valuations are higher and the cycle is more mature so equity markets are very sensitive to moves in bond yields,” Goldman said. “They underperform with yields moving higher around news of overheating and higher inflation, while they outperform when the market prices Central Banks to cut interest rates.”

The 10-year Treasury yield, a key barometer for mortgage rates, auto loans and credit cards, has risen almost 80 basis points this year as the market adjusts to a higher-for-longer rate regime. The current rate on the Federal Reserve’s fed funds for overnight lending is 5.25%-5.50%.

After starting the year forecasting at least six reductions in interest rates, the market is now pricing in a 75% chance of just one rate cut, according to the CME Group’s widely followed FedWatch tracker that derives its probabilities from where 30-day fed funds futures are trading. The central bank’s rate-setting Federal Open Market Committee began its two-day meeting Tuesday.

Warren Buffett has long stressed the impact of interest rates on all investments, saying higher rates exert a huge gravitational pull on asset values, lowering the present value of any future earnings.

Rising yields dent the appeal of risk assets as shorter-dated Treasury bills and longer-dated Treasury notes offer solid yields and a risk-free alternative to stocks.

— CNBC’s Michael Bloom contributed reporting.

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These are 3 big things we’re watching in the stock market this week

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A security guard works outside the New York Stock Exchange (NYSE) before the Federal Reserve announcement in New York City, U.S., September 18, 2024. 

Andrew Kelly | Reuters

The stock market bounce last week showed once again just how dependent Wall Street has become on the whims of the White House.

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These U.S. consumer stocks face higher China risks

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Apple iPhone assembly in India won’t cushion China tariffs: Moffett

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Street's biggest Apple bear says a production move to India is unrealistic

Leading analyst Craig Moffett suggests any plans to move U.S. iPhone assembly to India is unrealistic.

Moffett, ranked as a top analyst multiple times by Institutional Investor, sent a memo to clients on Friday after the Financial Times reported Apple was aiming to shift production toward India from China by the end of next year.

He’s questioning how a move could bring down costs tied to tariffs because the iPhone components would still be made in China.

“You have a tremendous menu of problems created by tariffs, and moving to India doesn’t solve all the problems. Now granted, it helps to some degree,” the MoffettNathanson partner and senior managing director told CNBC’s “Fast Money” on Friday. “I would question how that’s going to work.”

Moffett contends it’s not so easy to diversify to India — telling clients Apple’s supply chain would still be anchored in China and would likely face resistance.

“The bottom line is a global trade war is a two-front battle, impacting costs and sales. Moving assembly to India might (and we emphasize might) help with the former. The latter may ultimately be the bigger issue,” he wrote to clients.

Moffett cut his Apple price target on Monday to $141 from $184 a share. It implies a 33% drop from Friday’s close. The price target is also the Street low, according to FactSet.

“I don’t think of myself as the biggest Apple bear,” he said. “I think quite highly of Apple. My concern about Apple has been the valuation more than the company.”

Moffett has had a “sell” rating on Apple since Jan. 7. Since then, the company’s shares are down about 14%.

“None of this is because Apple is a bad company. They still have a great balance sheet [and] a great consumer franchise,” he said. “It’s just the reality of there are no good answers when you are a product company, and your products are going to be significantly tariffed, and you’re heading into a market that is likely to have at least some deceleration in consumer demand because of the macro economy.”

Moffett notes Apple also isn’t getting help from its carriers to cushion the blow of tariffs.

“You also have the demand destruction that’s created by potentially higher prices. Remember, you had AT&T, Verizon and T. Mobile all this week come out and say we’re not going to underwrite the additional cost of tariff [on] handsets,” he added. “The consumer is going to have to pay for that. So, you’re going to have some demand destruction that’s going to show up in even longer holding periods and slower upgrade rates — all of which probably trims estimates next year’s consensus.”

According to Moffett, the backlash against Apple in China over U.S. tariffs will also hurt iPhone sales.

“It’s a very real problem,” Moffett said. “Volumes are really going to the Huaweis and the Vivos and the local competitors in China rather than to Apple.”

Apple stock is coming off a winning week — up more than 6%. It comes ahead of the iPhone maker’s quarterly earnings report due next Thursday after the market close.

To get more personalized investment strategies, join us for our next “Fast Money” Live event on Thursday, June 5, at the Nasdaq in Times Square.

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