Global Stocks May Fall as U.S. Yields Rise: Technical Analysis

By Patrick Rial

Nov. 6 (Bloomberg) -- Global stocks may be headed for a “correction” as an increase in U.S. 10-year yields prompts a reduction of carry trades, according to Citigroup Inc.

The yield on 10-year government bonds climbed 37 basis points from a July 31 low to Aug. 8. Using that range, the resistance level stands at 3.55 percent from a low of 3.18 percent on Oct. 1, said Yutaka Yoshino, chief technical analyst at Citigroup in Tokyo, who uses the Japanese technical analysis method of “ichimoku kinko,” which looks at wave patterns and repeating trends. Yields move inversely to bond prices and 1 basis point is equal to 0.01 percentage point.

“If we pass that 3.55 level on the yield, we stop being in a rebound phase and enter into a rising trend,” said Yoshino. “Inflation concerns are starting to creep in and the Federal Reserve has no control over long-term interest rates.”

The yield on the 10-year note finished at 3.53 percent yesterday and will keep rising should it break above the resistance level, Yoshino said. Rising U.S. interest rates mean investors can’t borrow as cheaply in dollars to fund purchases of higher-yielding assets including stocks, a strategy known as a carry trade, he said.

The Dow Jones Industrial Average could decline 14 percent to as low as 8,600 and the Nikkei 225 Stock Average may slide 13 percent to 8,450, he said.

Fed officials said on Nov. 4 they’re more optimistic about the economic outlook and maintained a commitment to keeping interest rates near zero for an “extended period.” The central bank specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

Ichimoku kinko, a strategy developed by a Japanese journalist prior to World War II, translates as “one glance equilibrium chart” because of the cloud-like patterns formed by trend lines that make it easy to understand at a glance. The style of analysis is similar to the Elliott Wave theory developed by accountant Ralph Nelson and popularized by Robert Prechter.

Technical analysts make predictions based on patterns in price charts and market data.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.