U.S. stocks kicked off the week on the downside, with a surge in global bond yields, another rise in oil prices, and deeper concerns over the fate of the astonishing tech rally heading into the back half of the month.
The broader move in bonds, which lifted 10-year U.S. Treasury yields to as high at 4.631% in overnight trading and took 30-year paper to 5.159%, near the highest levels since 2007, was the more concerning aspect of the market's recent repricing, and suggests a decoupling from global oil prices that could test the tech rally over the coming weeks.
Benchmark 10-year notes last traded at 4.597%, still the highest in more than a year, after adding more than 20 basis points last week following hotter-than-expected inflation readings and another move higher in global crude prices.
"The swift rise in bond yields, if sustained, could threaten the tech sector's leadership in the stock market, especially at a time when things have been frothy," said Richard Reyle, chief investment officer at Questar Capital Partners.
"The vertical move upward in tech is not sustainable and while earnings have been very impressive, that strength is already priced in," he added. "Sell in May and go away may be the right trade at this time."
Tech unquestionably has powered the bulk of U.S. stock gains since the start of the second quarter, with an index of the Magnificent Seven mega-cap giants rising 22.6% and the PHLX semiconductor index powering to a staggering 52.7% advance over the same time period.
The action Friday, however, started to raise some broader questions about the strength of the broader tech rally heading into the release of Nvidia's first-quarter earnings report on Wednesday.
The S&P 500 tumbled 1.24% on Friday, a day after the benchmark's relative strength index, a measure of market momentum, topped 78 point.
"Since 2003, there have only been six prior times when S&P 500 lost more than 1% immediately following an RSI of 75+," noted Jonathan Krinksy, managing director and chief market technician at BTIG.
"Average returns are negative on every timeframe from 5-40 days," he added. "Five of the six occurrences saw at least a -7% peak-to-trough decline over the ensuing weeks with the one exception ('23) trading sideways."
Krinksy remains worried that a higher trading range for 30-year bond yields could "finally be a headwind for even the tech/AI names that have remained immune thus far."
Bonds aren't getting any support from oil prices on Monday, either, with Brent crude contracts for July delivery rising 0.95% to $110.30 a barrel as the war between the U.S. and Iran enters its 80th day and prospects of a lasting truce look further away than they did two weeks ago.
In fact, contracts for Brent crude delivery in six months' time were rising 0.9% to $91.79 a barrel, suggesting higher crude prices are likely to remain a fixture for the global economy well into the final months of the year.
"The oil market continues to reprice ongoing supply disruptions, with last week's Trump-Xi talks yielding no tangible progress in the Middle East," said Warren Patterson, head of commodities strategy at ING.
"There had been hope (possibly misplaced) that China could use its influence over Tehran to break the deadlock between the U.S. and Iran," he added. "If anything, re-escalation risks are increasing, with a drone strike on the UAE's only nuclear power plant over the weekend."
That is likely to trigger a rethink of both the broader interest rate market, which is now pricing in a 50% chance of an interest-rate hike by the by the end of the year, and the dynamics that have underpinned the soaring tech rally over the second quarter.
"While global equity markets have recently done a stunning job of posting a comeback from weak sentiment triggered by the war in Iran, spiking global yields nonetheless dramatically raise the risk of 'risk-off' across markets," said John Hardy, global head of macro strategy at Saxo Bank.
"Still, at some point, we should be on the lookout for policy initiatives to ease the pressure on bond markets," he added.
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