- Nasdaq rally pauses as momentum cools after sharp 30% surge from April lows.
- Bond yield spikes in Japan and US could trigger another carry trade unwind.
- Equities face pressure as rising yields and policy uncertainty unsettle global risk sentiment.
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Following the drop on Wednesday, US index futures managed to bounce back a little in the first half of Thursday’s session. But with the Japanese bond market sell-off continuing, pushing yields on the 30-year debt to record levels, coupled with a beleaguered debt market in the US, where yields are continuing to press higher ahead of President Donald Trump’s tax and spending bill vote at the Senate, there is a sense of unnerve among traders and investors alike.
When bond markets move, usually this spills trouble for all sorts of risk assets, and equities are no different. For now, though, the losses on Wall Street have been rather mild, but there is the potential for another episode of the yen-funded carry trade unwind, which, as we saw last summer, was quite disruptive for the global equity markets. Buckle up.
Rising Yields Could Shake the Carry Trade
While the rising US bond yields are potential headwinds for the stock market itself, you also have a worrying debt situation in Japan. In the US, the 30-year yield has broken the 5.00% level and is now approaching the October 2023 high of 5.178%, which was a multi-year high.
In Japan, meanwhile, the equivalent yield has soared to a staggering 3.197% – the highest on record. That may not sound much by Western standards, but for a country long synonymous with ultra-low rates, it’s a seismic shift. With inflation finally baring its teeth and the Bank of Japan slowly tiptoeing toward policy normalisation, the once-lucrative yen carry trade – borrow yen at zero and plough it into anything yielding more – could be coming undone again as we saw last summer.
Nasdaq 100 Technical Analysis
The Nasdaq 100 and other US indices have been pausing for a breather this week after an incredible rally from the April lows in the last 6 or so weeks. During this period, the Nasdaq rallied a solid 30% before declining a little this week. Unsurprisingly, the sharp move higher pushed the daily RSI and other momentum indicators from “oversold” levels to “overbought” in a relatively short period of time.
These oscillators now need time to unwind, which is precisely what’s been happening so far in the week. At this stage, one can regard this as a mere pause rather than a trend reversal, even if, in hindsight, this turns out to be the top. For now, we have to go with what is in front of us.
The index clearly looks bullish, having reclaimed its moving averages and created a few interim high highs and higher lows. While the December peak has not been tagged yet, we have seen European markets break to new all-time highs along with Bitcoin. So, we could see renewed momentum come through to drive the Nasdaq to a new all-time high in the not-too-distant future, too.
But the pause and yesterday’s bearish engulfing candle pattern suggest more weakness could be in store for the Nasdaq in as far as the short-term outlook is concerned.
Key Levels To Watch On The Nasdaq 100 Future
Below we have a daily chart of the Nasdaq 100 futures, highlighting some key levels.
While some support is coming in around 21,100 level, there is a bigger level of potential support seen around the green shaded area between 20,275 to 20,535. This area was previously a strong resistance zone and is where the 200-day moving average meets the 21-day exponential. Below that region, you have the psychologically important 20,000 level.
In terms of resistance, Tuesday’s low at just below the 21,300 level is the first line of defence now for the bears. Above here, 21,500 is the net key zone. Should the Nasdaq bulls push through these levels, then this could pave the way for a melt up to 22,000 and then a revisit of the all-time high at 22,425.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.