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CBOE Interest Rate 10-Year (TNX.I) & NASDAQ Composite Index (NASD.I)

It’s feeling like we are getting to the end of the first chapter of the story of 2024 for equity markets. Earnings season ends today with the last of the big Canadian banks reporting results. It’s also Leap Day and the last day of the month. Equity markets around the world rallied at the end of last week, boosted by positive NVIDIA* earnings and an interest rate cut in China. This news sent US indices to new all-time highs late last week but into the week, the cheering has subsided with indices levelling off Monday/Tuesday and then starting to backslide yesterday.

Over the full week, the vast majority of equity markets are essentially flat with returns between -2.0% and +2.0%. The strongest countries have been Germany and the United States, while the weakest countries have been Mexico and South Africa. The market response to the latest earnings reports has been quite mixed. Early Canadian Bank earnings trading saw both gains and declines of 3%. While NVIDIA* rallied 15% on its earnings report, cybersecurity company Palo Alto Networks, and electric vehicle producer Rivian both plunged more than 25% the day following their latest results.

Adding to the sense that all the news is in, the strongest relative strength gainer over the last week in the SIA NASDAQ 100 Index Report is GE Healthcare, a stock that had underperformed and languished near the bottom of the red zone for a year suddenly shot up into the green zone. This move along with large spikes by cryptocurrencies suggests that much of the market may be fully valued leaving traders little choice but to chase volatility and plays at the margins.

The arrival of March brings a fresh round of economic reports starting tomorrow with Manufacturing PMI, then continuing next week with Service PMI on Tuesday, ADP Payrolls on Wednesday, and building toward Nonfarm Payrolls, Canada jobs, and wage inflation on Friday. Central bank meetings resume this week as well, headlined by the Bank of Canada on Wednesday and the European Central Bank meeting on Thursday. Central banks and treasury yields are covered in more detail below.

There is a smattering of earnings reports next week, including US clothing retailers, a few tech names on both sides of the border, and some Canadian resource companies. Headliners include Constellation Software* and Tourmaline Oil on Wednesday, followed by Broadcom*, Oracle, Costco, and The Gap next Thursday.

In this edition of Equity Leaders Weekly, we look at treasury yields and preview this month’s central bank meetings as well as what the NASDAQ running into resistance is telling us about risk appetite.

*Shares of NVIDIA, Broadcom, and Constellation Software are held in portfolios managed by SIA Wealth Management.

CBOE Interest Rate 10-Year (TNX.I)

The US 10-year Treasury Note Yield (TNX.I) has been trending upward since the fall of 2020, reflecting higher inflation and tighter monetary policy. While the inverse relationship between traded interest rates and bond prices is well known, shorter-term swings have also had an impact on equity market sentiment.

For example, breakout rallies by TNX.I in March-May and then September of 2022, along with October of 2023, put significant headwinds in front of equities and coincided with significant market pullbacks. In contrast, the fall 2022 decline in TNX.I coincided with a bear market bottom and the recent pullback in November-December of 2023 ignited the current equity market rally phase.

TNX.I dropped off sharply in late 2023 from near 5.00% toward 3.80% on speculation that central banks were done raising interest rates and were about to pivot and start cutting rates early this year. Markets turned out to be half right. Even this week, the Reserve Bank of New Zealand, the most hawkish of the developed country central banks this cycle, downshifted from hawkish (more rate hikes to come) to neutral (pausing).

Since the beginning of this year, officials from the Federal Reserve Board and other central banks have been trying to walk back any suggestions of rate cuts, taking a “higher for longer” party line. This week, investors may look to the Bank of Canada and European Central Bank’s decisions and statements for indications of whether central banks are staying the course or if anyone is preparing to break ranks and go more dovish, which at this point would be any hint toward a rate cut prior to June. These decisions and next Friday’s wage inflation may help to set the stage for the big Fed decision and dot plot forecasts due on March 20th.

Back in January, the pullback in TNX.I was contained by previous support near 3.80%. Since then, in tandem with less dovish and more neutral central bank rhetoric, TNX.I has been on the rise, recently breaking out over 4.25% to confirm a Double Top breakout and the start of a new upswing. Upside resistance may appear near 4.80% and then the November peak near 5.00%. Initial downside support remains in place near 3.80%.

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