- Tech stock rout continues but cyclicals see support
- House expected to approve pandemic aid bill either today or Wednesday
- 3-year T-note auction to yield near 0.39%Â
Tech stock rout continues but cyclicals see support — The Nasdaq 100 index on Monday closed sharply lower by -2.92%, although it managed to stay slightly above last Friday’s 3-1/4 month low. The Nasdaq 100 index on last Friday’s low corrected lower by a total of -12.0% from the mid-February record high. The NYSE FANG+ index has corrected lower by a larger -17.3% from its mid-February record high.
The S&P 500 index has fared much better, falling by a total of only -5.7% from the mid-February record high. The Dow Jones Industrials has done better than all the indexes, posting a new record high yesterday and closing the day up +0.97%.
Yesterday’s moves in the constituents of the Dow Jones Industrials index tell the recent story of weakness in tech stocks versus strength in economic cyclical stocks that will receive a lift from this year’s expected economic recovery. Notable leaders in the Dow on Monday were Disney (+6.27%), Visa (+2.26%), Home Depot (+2.17%). Notable losers in the Dow on Monday were Apple (-4.17%), Microsoft -1.82%, and Intel (-1.47%).
Airline stocks also rallied Monday as the fading pandemic boosts hopes for the return of vacation and business air travel: United Airlines (+6.91%), Southwest Airlines (+6.28%), American Airlines (4.89%), and Alaska Air (+4.68%).
Tech and speculative stocks are taking a hit from (1) the rise in interest rates, (2) the return of valuations to more reasonable levels, and (3) heavy long liquidation pressure.
U.S. stocks were also undercut on Monday by a sharp sell-off in Chinese stocks, which helped take more air out of speculative U.S. stocks. The Shanghai Composite index (SHCOMP) on Monday fell to a 2-1/4 month low and closed the day sharply lower by -2.30%. The Shanghai Composite Index has now corrected lower by a total of -8.3% from its mid-February 5-1/2 year high.
The Chinese stock market has recently seen weakness due to concerns that Chinese authorities will start to tighten up credit as the global economy improves with the fading pandemic. Chinese authorities remain very sensitive to very high Chinese debt levels and are eager to reduce leverage ratios as the global economy recovers.
Also, the Chinese markets were taken aback last Monday when China’s top banking regulator said he is “very worried” about the risk from bubbles in the global financial markets and about China’s property sector. Chinese authorities have already taken some measures to restrict (1) bank lending to the property market, (2) shadow banking activities, and (3) peer-to-peer lending.
Meanwhile, T-note yields on Monday continued to rise as the impending passage of the $1.9 trillion pandemic aid bill reminded market participants that there will be even more debt to finance in the coming months. The Treasury market is already facing the massive sale this week of $120 billion of 3, 10, and 30-year securities.
The 10-year T-note yield on Monday closed +2 bp at 1.59%, just mildly below last Friday’s 1-year high of 1.62%. The 10-year T-note yield has soared by +68 bp this year from the end-2020 level of 0.91%.
House expected to approve pandemic aid bill either today or Wednesday — The House is expected to approve the revised pandemic aid bill passed by the Senate on Saturday either today or Wednesday. The House had initially intended to pass the bill today, but there were some delays in getting the paperwork from the Senate, and the House may be delayed in passing the bill until Wednesday.
Even if the House passes the bill Wednesday, that would still meet the Democrats’ self-imposed deadline of getting final approval of the bill by this Sunday (March 14), when some unemployment benefits expire. President Biden said he will sign the bill as soon as it arrives at his desk.
The $1,400 stimulus checks and the overall $1.9 trillion of spending are expected to give the U.S. economy a strong boost over the next few months. The consensus is that U.S. GDP will show a solid increase of +5.5% this year, overcoming the -3.5% decline seen in 2020.
3-year T-note auction to yield near 0.39% — The Treasury today will sell $58 billion of 3-year T-notes. The Treasury will then continue this week’s $120 billion coupon package by selling $38 bln of 10-year T-notes on Wednesday and $24 bln of 30-year T-bonds on Thursday. The 10-year and 30-year auctions will be the first of two reopenings of the securities, which were first sold in February.
The 3-year T-note yield is currently trading at 0.34%, not far below the upward spike to 0.39% seen on Feb 25. The 3-year T-note yield has moved higher by +23 bp so far this year from the end-2020 close of 0.16%. The 3-year T-note yield has risen as the market brought forward expectations for the Fed’s first rate hike due to the fading pandemic statistics and the new fiscal stimulus measures that will boost the economy.
The 12-auction averages for the 3-year are as follows: 2.40 bid cover ratio, $28 million in non-competitive bids, 3.3 bp tail to the median yield, 15.8 bp tail to the low yield, and 62% taken at the high yield. The 3-year is the least popular coupon security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 52.2% of the last twelve 3-year T-note auctions, which is well below the median of 61.6% for all recent Treasury coupon auctions.
