A Fed hike-led spike in US bond yields likely to turn stocks choppy
By Milan Vaishnav, CMT
The Nifty50 has halted its upward move near one of the major pattern area resistance zones between 8,950 and 8,990 levels. We do not dispute that the domestic market has been demonstrating a good amount of underlying strength and any positive trigger will take it to a fresh 52-week high.
We also do not discount the fact that any favourable outcome in the UP elections in the coming days will give a great sentimental boost on the currently buoyant market.
Despite this, we cannot overlook certain factors that can have damaging and adverse effects on emerging markets, in general, and the Nifty50, in particular. Yes, we are talking about US bond yields.
Technically, bond yields and equities share an inverse relationship. When we saw a spike in US Treasury 10-year bond yields from 1.70 per cent to 2.60 per cent in the last quarter of 2016, its damaging impact on domestic equities was evident. The present technical structure of bond yields is enough to raise an alarm.
After marking the high of 2.60 per cent in December 2016, it has been moving sideways in a narrow band. It has formed a flag-like continuation pattern and has tendencies to move up. The probability of an impending interest rate hike in the US has gone up by more than 80 per cent.
Following this, we have also seen minor strengthening of the US dollar as well, which may lead the yields to strengthen further. In these circumstances, if the UST10Y yields move up above 2.51 and higher, the domestic equity market might have to brace itself for some turbulence despite the buoyant undercurrents.
(Milan Vaishnav, CMT, is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)
The Nifty50 has halted its upward move near one of the major pattern area resistance zones between 8,950 and 8,990 levels. We do not dispute that the domestic market has been demonstrating a good amount of underlying strength and any positive trigger will take it to a fresh 52-week high.
We also do not discount the fact that any favourable outcome in the UP elections in the coming days will give a great sentimental boost on the currently buoyant market.
Despite this, we cannot overlook certain factors that can have damaging and adverse effects on emerging markets, in general, and the Nifty50, in particular. Yes, we are talking about US bond yields.
Technically, bond yields and equities share an inverse relationship. When we saw a spike in US Treasury 10-year bond yields from 1.70 per cent to 2.60 per cent in the last quarter of 2016, its damaging impact on domestic equities was evident. The present technical structure of bond yields is enough to raise an alarm.
After marking the high of 2.60 per cent in December 2016, it has been moving sideways in a narrow band. It has formed a flag-like continuation pattern and has tendencies to move up. The probability of an impending interest rate hike in the US has gone up by more than 80 per cent.
Following this, we have also seen minor strengthening of the US dollar as well, which may lead the yields to strengthen further. In these circumstances, if the UST10Y yields move up above 2.51 and higher, the domestic equity market might have to brace itself for some turbulence despite the buoyant undercurrents.
(Milan Vaishnav, CMT, is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)
