Nasdaq 100 Could Outperform the Dow Jones as Treasury Yield Curve Flattens: Q3 High Buying and selling Alternatives

Nasdaq 100 / Dow Jones Unfold– Third Quarter Basic Forecast

• The Nasdaq 100 index is heading in direction of all-time highs at the beginning of Q3
• A flattening Treasury yield curve makes the tech-heavy index extra interesting
• The Dow Jones could also be extra weak to a speedy rise in near-term charges

See the favourite trades from every DailyFX Analyst for the third quarter. Obtain our new 3Q high buying and selling alternatives information from the DailyFX Free Buying and selling Guides!

The Nasdaq 100 index is heading in direction of all-time highs at the beginning of Q3, pushed by earnings optimism as financial progress rebounds sharply from the depths of the Covid-19 pandemic. The Federal Reserve revised up this 12 months’s US GDP progress price forecast to 7.0% on the June assembly, underscoring sturdy momentum whereas elevating issues about inflation. The June FOMC assembly might function an inflection level for the central financial institution’s financial coverage stance, with a majority of Fed officers hinting at 2 price hikes by the top of 2023, in response to the dot plot. A debate about scaling again month-to-month asset purchases has additionally began amongst key members.

These developments led the US Treasury yield curve to flatten as traders tried to cost in earlier Fed price hikes and a gradual tapering path. The 10-2 12 months Treasury yield unfold plunged to 118 bps following the June assembly, marking a drastic decline from the latest peak of 156 bps seen on the finish of March (chart beneath). Wanting into the final rate-hike cycle, a speedy fall within the 10-2 12 months yield unfold was adopted by the Fed’s sign of tapering QE in 2013. It is because front-dated yields are inclined to rise quicker than longer-dated charges throughout a tapering cycle.

A hawkish shift within the Fed’s financial coverage stance might mark one other interval of outperformance within the Nasdaq 100 index versus the Dow Jones Industrial Common. It is because a flattening Treasury yield curve makes the tech-heavy index extra interesting when the front-end borrowing prices rise quicker than the longer-end charges. Giant-cap know-how corporations, akin to Amazon, Tesla and Netflix, are significantly delicate to longer-dated borrowing prices, as their valuations are tilted to long-term progress prospects. Smaller know-how start-ups are additionally much less delicate to short-term borrowing prices as enterprise capital invested in them is normally locked in for 5-10 years and even longer.

Vulnerability of Worth Shares

For the Dow Jones Industrial Common nonetheless, worth shares akin to McDonald’s, 3M and Coca-Cola could also be extra weak to a speedy rise in near-term charges. It is because increased short-end borrowing prices make these dividend-paying shares much less engaging to traders than throughout an ultra-low rate of interest period.

The Nasdaq 100/Dow Jones ratio reveals a unfavourable correlation with the US 10-2 12 months yield unfold over the previous few months, highlighting the opportunity of buying and selling of Nasdaq 100 versus Dow Jones unfold as we transfer nearer to a rate-hike cycle. However nonetheless, if the inflationary pressures grow to be sticky and persisting, longer-dated yields might begin to meet up with front-end charges, leading to a steepening yield curve. Below this state of affairs, merchants might contemplate doing the reverse – that’s, on the lookout for the Dow Jones to outperform towards the Nasdaq 100.

Nasdaq 100/Dow Jones Ratio vs. US 10-2 Yr Yield Unfold

Chart by Margaret Yang, Created with TradingView

See the favourite trades from every DailyFX Analyst for the third quarter. Obtain our new 3Q high buying and selling alternatives information from the DailyFX Free Buying and selling Guides!

— Written by Margaret Yang, Strategist for DailyFX.com

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