Rising US yields weighs on growth stocks & Yen close to 20-year low

Against the trend of other financial places, the French benchmark ended the day slightly up after a volatile day, following the first round of the French presidential election where Macron and Le Pen have been selected to the second round of elections, with the final choice being on April 24.

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American markets finished the trading session lower with a combination of slowing growth, growing inflation, higher yields, and overall tighter financial conditions, which has especially weighed on growth stocks such as the tech sector.

Some key data from Monday’s trading session:

US Treasury yields reached multi-year highs

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10-year US yields rose to 2.784% for the first time since January 2019, as traders bet on 9 more quarter-point interest rate hikes by the end of the year. If these forecasts were to happen, 2022 would have seen the fastest policy tightening cycle since 1994, according to Bloomberg.

With aggressive monetary policy tightening in the US to fight growing inflation, borrowing costs are becoming more expensive, which will certainly impact growth prospects in the near future.

Fears of lower future growth have been seen in the recent inversion of the yield curve, which occurs when short-term government bonds are more expensive than long-dated debt. As an inverted yield curve is often a consequence of investors losing faith in the economy, especially in the short-term, it often happens prior to economic recession.

Rising long term interest rates weighs on growth stocks

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Tighter financial conditions have weakened growth stocks like the tech and luxury sectors, as well as other sectors with high valuations that are based on future earnings expectations, as they do well when money is cheap, but perform less well when money is more expensive.

The way analysts and investors value stocks using the so-called "discounted cash flow" method is one of the reasons why rising interest rates highly affect growth stocks. This valuation method involves calculating the present value of future cash flow/earnings, which takes into account the discount rate that can be the main interest rate. Thus, the higher the interest rate, the lower the current value of future earnings.

Yen near 20-year low

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The Japanese currency is close to its lowest level in 20 years against its American counterpart at around 0.007976, as the Bank Of Japan continues to  support its economy with an accommodative monetary policy, while the Federal Reserve is strongly tightening the American monetary policy.

Since the beginning of 2022, the yen has lost a bit more than 8% against the greenback and is also losing ground against the euro, around 4%.

While the yen is usually a currency that traders turn to in times of high uncertainty and market volatility, the currency hasn't played its safe-haven role with the Russia/Ukraine war and the consequent risk aversion sentiment.

The divergence of monetary policies between the US and Japan is widening, and has propelled the USD to a fresh 2-year high yesterday (the Dollar index briefly went above the 100-mark) with rising expectations of further and quicker Fed Funds hikes.

What should you focus on this week?

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On Tuesday

 

  • German ZEW Economic Sentiment
  • US CPI
  • Member Brainard Speaks (FED)

On Wednesday

 

  • New Zealand Rate decision (RBNZ)
  • UK CPI
  • US PPI
  • Canada Rate decision (BOC)

On Thursday

 

  • Australian employment change / unemployment rate
  • Europe Rate decision (ECB)
  • US Retail sales
  • US Unemployment claims
  • Prelim UoM consumer sentiment

On Friday

  • Empire state manufacturing index
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