Nasdaq 100 Outlook: Bond Yields Stoke Wall Street Risk

Wall Street sentiment has deteriorated as rising bond yields, higher oil prices and geopolitical concerns collide with stretched equity valuations. With the 30-year Treasury yield reaching its highest since 2007 and Nasdaq futures traders ramping up bearish exposure, the Nasdaq 100 faces a potentially important test around 29,000.

 

 

 

Nasdaq 100 Faces Bond Yield Pressure as Wall Street Sentiment Wobbles

Wall Street Risk Appetite Deteriorates

Risk sentiment has deteriorated across global equity markets this week, with rising bond yields, higher oil prices and renewed geopolitical concerns weighing on investor appetite. The sell-off has been particularly pronounced across technology and semiconductor stocks, with Wall Street weakness spilling into Asia and reinforcing the negative lead for US indices. With equities coming off record highs, the combination of tighter financial conditions and stretched valuations leaves the Nasdaq 100, S&P 500 and Dow Jones vulnerable to further volatility.

 

30-Year Treasury Yield Hits Highest Since 2007

US bond markets are adding to the risk-off tone, with the 30-year Treasury yield surging above 5.3% to its highest since 2007. Heavy government borrowing, resilient growth and renewed inflation concerns from higher oil prices are among the drivers, while expectations that the Fed may need to keep rates higher are adding pressure. That matters for Wall Street because higher long-term yields raise borrowing costs and weigh on equity valuations, particularly for growth stocks. Today’s FOMC minutes could therefore attract extra attention for any hawkish signals that reinforce the rise in yields, although the sell-off at the long end extends well beyond Fed policy alone.

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US bond markets are adding to the risk-off tone, with the 30-year Treasury yield surging above 5.3% to its highest since 2007. Heavy government borrowing, resilient growth and renewed inflation concerns from higher oil prices are among the drivers, while expectations that the Fed may need to keep rates higher are adding pressure. Today’s FOMC minutes could therefore attract extra attention for any hawkish signals that reinforce the rise in yields, although the sell-off at the long end extends well beyond Fed policy alone.

 

 

 

VIX Positioning Points to Complacent Wall Street Traders

While the 30-year yield is edging lower and back beneath 5.3% for now, it remains a clear line in the sand for Wall Street sentiment. There is no guarantee yields won’t rip higher again and keep sentiment on the ropes, but for now US futures are trying to regain their footing. Perhaps a cheeky bounce could be on the cards, although it is also worth keeping in mind the levels of complacency among futures traders.

For starters, traders remain heavily net-short VIX futures. While they tend to be net-short most of the time, there has been little interest in bullish VIX exposure, suggesting S&P 500 and volatility traders are expecting an easy, calm summer and may therefore be underprepared for a volatility spike.

Source: CME, CFTC (COT), LSEG

 

 

Nasdaq Futures Traders Are Less Complacent

Nasdaq futures traders seem a little more prepared for downside. Net-short exposure among large speculators surged to its highest level since 2020, with gross shorts also reaching a six-year high. Asset managers increased their short exposure to a 16-month high, while net-long exposure peaked in May. By this measure, futures traders appear to have a particularly gloomy outlook for the tech sector, which, if correct, could also spell trouble for the Nikkei 225 and KOSPI 100 in Asia.

Source: ICE, TradingView

 

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Nasdaq 100 Futures (NQ) Technical Analysis

The daily chart shows that a lower high formed on Monday with a small shooting star reversal candle. The Nasdaq barely traded back above 30k for long before momentum turned swiftly lower. We’re heading into the European session waiting to see whether bears will try to drive prices below 29k or the potential support zone just above it.

If the 30-year bond yield continues to retreat, perhaps the Nasdaq can enjoy a brief reprieve. However, given the bearish exposure among Nasdaq futures traders and complacency in the VIX market, I am on guard for a potential break below 29k and a move down to at least 28,800 near the monthly pivot point. A break beneath that could see Nasdaq bears target 28k near the June low and prior weekly VPOC.

For the Nasdaq to rally from here, we likely need to see the long end of the yield curve roll over. I am just not sure what would trigger that right now.

Source: CME, TradignView

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge