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Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Margaret Yang, CFA, Strategist

DOW JONES, NIKKEI 225, ASX 200 INDEX OUTLOOK:

  • Dow Jones, S&P 500 and Nasdaq 100 closed -0.58%, -0.04%, and -0.31% respectively
  • Stocks pulled back after Jerome Powell said the Fed is prepared to hike rates by 50bps at its next meeting
  • 10-year Treasury yields climbed to 2.29%, the highest level since May 2019

Dow Jones, Powell, Crude Oil, Treasury Yields, Asia-Pacific at the Open:

Wall Street equities pulled back mildly on Monday, pausing a four-day rally. Fed Chair Jerome Powell said that the central bank is prepared to raise interest rates by 50bps at its next meeting if necessary, weighing on market sentiment. The probability of a 50bps hike at the May meeting has risen to 63.9% from 43.9% a day ago, according to CME’s FedWatch tool. This suggests that the Fed is willing to take a more aggressive approach to tighten monetary policy to tackle inflation, which is propelled by the Ukraine war and tight market conditions.

Crude oil prices rallied nearly 7% overnight as the ongoing Ukraine crisis threatened Russian supply amid intensified sanctions. Several EU countries believed that the European Union should impose more severe sanctions on Russia, including banning imports of its oil. This is unlikely to be happen in the near term however, as Germany said these imports are crucial to the EU’s energy security. Separately, oil prices were also driven by an attack on energy facilities in Saudi Arabia.

Market sentiment was weighed by the prospects for stagflation – an undesirable outcome of slow economic growth and high inflation. The prices of crude oil, natural gas, grain and metals have surged over recent weeks, adding to inflationary pressure around the globe. This may rein in consumer spending and squeeze corporates’ profit margins by adding to wage pressures and input raw material costs.

The 10-year Treasury yield surged 14bps to 2.295% - the highest level since May 2019. It is worth noting that parts of the yield curve – 3-year and 10-year, 20-year and 30-year, are modestly inverted (chart below). This is commonly viewed as an early sign of economic slowdown and even a recession.

US Treasury Yield Curve vs. 1 Week Ago

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Source: Bloomberg, DailyFX

Stocks in Hong Kong face a challenging session as Chinese tech ADRs suffered heavy losses overnight on US exchanges. Stocks in mainland and Hong Kong paused an astonishing rally seen last week as investors awaited more concrete measures to be carried out by policymakers to be convinced that the rally is sustainable. Tencent (-7.14%), Alibaba (-4.35%), JD.COM (-5.67%) and NIO (-2.88%) were among the hardest hit.

Asia-Pacific markets look set to open mixed amid cautious sentiment. Futures in Japan, Hong Kong, Australia, Taiwan, Malaysia, India and Indonesia are in the green, whereas those in mainland China, South Korea, Singapore and Thailand are in the red.

Looking back to Monday’s close, 6 out of 9 Dow Jones sectors ended lower, with 53.3% of the index’s constituents closing in the red. Consumer discretionary (-2.25%), industrials (-0.74%) and financials (-0.73%) were among the worst performers, whereas energy (+1.80%), materials (+1.52%) and healthcare (+0.26%) outperformed.

Dow Jones Sector Performance 21-03-2022

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Source: Bloomberg, DailyFX

Dow Jones IndexTechnical Analysis

The Dow Jones Industrial Average formed an “AB=CD” pattern, which is perceived as a bullish trend-reversal indicator. Prices are challenging 34,720 (38.2% Fibonacci extension) for immediate resistance, breaching which will expose the next resistance level of 35,140. The MACD indicator formed a bullish crossover and trended higher, underpinning upward momentum.

Dow Jones IndexDaily Chart

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Chart created with TradingView

Nikkei 225 Index Technical Analysis:

The Nikkei 225 index has likely breached above the ceiling of a “Descending Channel” as highlighted on the chart below. A successful attempt may intensify near-term buying pressure and open the door for further gains. An immediate resistance level can be found at around 26,670 – the 100% Fibonacci extension. A long bullish candle formed on Thursday signaled strong upward momentum and may pave the way for further gains. The MACD indicator formed a bullish crossover beneath the neutral midpoint, suggesting that bullish momentum is building.

Nikkei 225 Index – Daily Chart

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Chart created with TradingView

ASX 200 Index Technical Analysis:

The ASX 200 index is breached above a key resistance level of 7,290 and thus opened the door for further upside potential. The next resistance level can be found at around 7,435 – the 78.6% Fibonacci retracement. The MACD indicator pierced through the neutral midpoint and trended higher, suggesting that bullish momentum is dominating.

ASX 200 IndexDaily Chart

Dow Jones Falls on Surging Treasury Yields, Nikkei 225 May Trade Higher

Chart created with TradingView

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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