Wall Street: Financial market reacts to rising yields and upcoming bond auctions

August begins on a cautious note

With the party hats and streamers barely packed away after a memorable July, the market faced a darker shadow during the first week of August. The lifting of the US debt ceiling in May brought optimism for a soft landing, causing US yields and stock indices to rise in tandem.

Last week, US 30-year bond yields surged by 35 basis points, leading to concerns in the equity markets. The rapid rise in yields has caused disruptions across various assets, highlighting the importance of monitoring such movements.

Factors contributing to the unease

The unexpected rise in yields was partly due to the US Treasury's decision to increase the sizes of upcoming auctions, catching the market by surprise. Other factors contributing to the bond market's unease include spillover effects from the Bank of Japan's meeting, robust economic data, the Fitch downgrade of the US credit rating, and reduced liquidity in August.

Hence there will be keen interest to gauge the level of demand for this week's quarterly auctions of US 10-year notes and 30-year bonds as well as Thursday night's US inflation report for July.

July's inflation report expectations

Last month, headline CPI in the US slowed to 3%, the lowest level in two years, from 4.0% in May, primarily due to declining energy prices. Meanwhile, core CPI, which excludes volatile items like food and energy, eased to 4.8% from 5.3% in May but remains above the Federal Reserve's target.

For this month's report, US headline and core CPI are both expected to rise by 0.2%. This would result in the headline rate edging higher to 3.3% year-on-year, while core inflation is expected to remain steady at 4.8%.

While inflation has likely peaked, core inflation remains sticky, and the Fed will want to see more confirmation in the coming months that downside progress is continuing to be made before it ends its rate-tightening cycle.

US CPI chart

S&P 500 technical analysis

Last week, the S&P 500 experienced a pullback from its peak at 4,634 and found support at 4,500, which aligns with previous highs in June (4,493) and July (4,498). If the pullback continues and breaks below the 4,500 support level, the next significant support comes in at 4,400 to 4,368.

Currently, we are adopting a neutral stance and anticipating a further deepening of the pullback towards the 4,400 to 4,368 support range. Our strategy involves monitoring for signs of stabilization in that region, with the intention of considering long positions towards the end of September.

S&P 500 daily chart

Nasdaq technical analysis

Last week, the Nasdaq experienced a deeper pullback after breaking below the support level at 15,475, which was previously a high point in June. Although the pullback has been gradual, we expect the decline to continue towards the support region between 15,200 and 14,850.

Once it reaches that support zone, we will closely monitor for signs of stabilization and a potential entry point, especially if it aligns with the end of September and precedes the historically more bullish last quarter of the year.

The goal is to identify an opportune time to consider buying back into the market.

Nasdaq daily chart

Dow Jones technical analysis

Following thirteen consecutive higher closes, the Dow Jones experienced a marginal new high before starting a pullback last week. The decline from the new high at 35,645 resulted in a loss of momentum candle, signaling a potential for a deeper correction.

In case of further declines, support is likely to be found around the 34,500/250 levels, which were former highs. To suggest that the correction is over and the uptrend has resumed, a break above last week's high of 35,645 is needed.

Dow Jones daily chart

• _{TradingView: the figures stated are as of August 7, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}