Investor Alert

Need to Know

July 29, 2021, 9:44 a.m. EDT

Here’s why the 10-year yield is so low, and the summer event that could change it, from Bank of America

By Barbara Kollmeyer

Stock futures are a mixed bag headed into Thursday’s session, with Amazon.com’s results in the spotlight for later. There also also has been some damage-control moves by Chinese officials after a series of regulatory blows sent investors in technology and other shares from the country running for cover.

Investors are also considering over the outcome of the Federal Reserve meeting, which left the status quo in place for interest rates and asset buys. That’s as some, like Deutsche Bank strategist Jim Reid and his team, “see the beginning of an initial nod toward a tapering of asset purchases at some point.”

Another burning question for investors right now, why are 10-year (XTUP:BX:TMUBMUSD10Y) rates so low? Our call of the day comes from Bank of America strategists who think they’ve cracked it.

“Clients point to strong growth – currently tracking 4.1% for 3Q – and CPI inflation running above 5%. But we think the rates market is focused on 2023 and beyond, and are increasingly questioning the ability of the Fed to deliver a substantial hiking cycle,” wrote lead strategist Ralph Axel and the team.

Traders don’t see the Fed repeating the 2015-2018 hiking cycle, which brought the policy rate band to 2.25%-2.50% in December 2018, and a peak 10 year rate of 3.2% in November 2018, said the strategists.

For equity investors, the yield is important as lower levels help to boost tech stocks in particular as they make borrowing easier for those types of companies. If rates start going up, some could fear it will draw money out of the stock market as investors seek better returns.

Bank of America doesn’t see a sharp rise in rates such as was seen in the first quarter — driven by positive vaccine surprises and fiscal stimulus — but they see scope for modestly higher rates in the next six to 12 months. “We have not changed our forecast for 10y rates at 1.9% by year-end, but downside risks to our forecast have increased,” he said.

Axel said they are keeping a keen eye on next week’s payroll reports that is said will help “set the tone for the rest of the summer.”

“If jobs are strong and inflation becomes more widespread across the CPI basket, and the Fed does not react hawkishly to strong data, we think there is scope for higher rates as long as disruptions due to COVID-19 remain well contained. These are the fundamental ingredients we will need to regain confidence in our 1.9% call for 10y rates,” they said.

A weak jobs report next week, though would fuel worries of “moving past peak growth, peak inflation, peak stimulus and perhaps even peak interest rates.”

Waiting for Amazon while China tries to put out four-alarm investment fire

Speaking of the economy, second-quarter gross domestic product rose 6.5%, falling short of expectations for 8.5% growth, but first-quarter data was also lifted. Jobless claims fell in the latest week after hitting a two-week high. Pending home sales data is coming later.

Shares of electric truck maker Nikola (NAS:NKLA) are tumbling after founder Trevor Milton was indicted for making false claims to investors.

China Internet stocks got a lift after the China Securities and Regulatory Commission’s met with top investment bankers late Wednesday and reportedly said it would try to consider market impact in future when introducing new policies. Those officials also reportedly said China will still allow companies to list in the U.S. The Hang Seng (HONG:HK:HSI) surged more than 3% and China’s CSI 300 (CHINA:XX:000300) close to 2%.

The Wall Street Journal is reporting that ride-hailing giant Didi Global  may go private to keep China authorities happy and placate hard-hit investors. Didi has now denied those reports and shares are paring some sharp earlier gains. In the same sector, Uber (NYS:UBER) shares are falling after a report SoftBank (TKS:JP:9984) may sell a third of its stake .

Social-media giant Facebook blew past estimates , but warned of slowing growth in the second half of year and shares are down. Ford (NYS:F) reported a surprise profit and “signs of improvement” in chip supplies.

More big-name earnings are ahead, with Amazon.com (NAS:AMZN) reporting after the close, and expectations of a possible slowdown in e-commerce spending .

Shares of Nokia (NYS:NOK) (HEL:FI:NOKIA) are surging after the Finnish mobile equipment maker posted a forecast-beating profit rise and lifted guidance.

No-fee trading app provider Robinhood (NAS:HOOD) makes its Nasdaq debut Thursday. Shares are priced at the low end of the range — $38 — but shed no tears as that still values the company at $26.74 billion.

Read: Here’s what you need to know about Robinhood’s debut

The markets

U.S. stocks (DOW:DJIA) (S&P:SPX) (NASDAQ:COMP) are rising as trading begins and investors mull economic data and earnings. Gold (NYM:GC00) is surging post Fed. Fresh data shows investment in the metal tumbled in the first half of the year. Bitcoin (COINDESK:BTCUSD) is holding above $40,000.

Random reads

Civilization about to collapse? Head to New Zealand or Iceland , though the billionaires may have beaten you to it.

A German woman had the country’s second-biggest ever winning lottery ticket in her bag — for weeks .

A legend is gone, and for us 80s kids, it hurts.


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