The stock market has been witnessing a massive chasm between the Nasdaq and 10-year yield since the market peaked. While the Nasdaq has been impacted by the increase in interest rates, the correlation has been disrupted due to the euphoria surrounding artificial intelligence and the surge in mega-cap companies. This situation is unsustainable, and the present value of long-duration businesses must reflect the ongoing rise in discount rates.
Meanwhile, the banking industry is facing serious headwinds due to the challenging conditions they are currently experiencing. Credit tightness has broad economic implications, especially for small and medium-sized businesses. Banks continue to badly lag as the Federal Reserve’s decision takes center stage. For instance, Citizens Financial group’s deposits have fallen over the last 12 months, and tightening lending standards have reduced the demand in the commercial and industrial space.
Off a 10-year low, the May NFIB small business optimism survey rose slightly as plans to hire and compensation components both increased. However, small business owners are concerned about future business conditions as the rates for short maturity loans continue to rise.
Shifting to China, the government is considering a broad package of stimulus measures due to the pressure to boost the world’s second-largest economy. The stimulus proposals drafted by multiple government agencies appear designed to support areas such as real estate and domestic demand. However, it is unclear how this stimulus package will work considering the Chinese government is also trying to tame the outsized debt levels.
Overall, the markets’ response is mixed, with European markets remaining unchanged and China’s offshore yuan dropping on the rate cut. Job growth in the UK in the three months ending April surpassed expectations, resulting in rising gilt yields to a 15-year high. As investors brace for a major takedown in the global economy and markets, they need to remain cautious as there are no free markets anymore, just interventions.
