Bond yields retreat, sending Nasdaq futures higher and Bitcoin lower

Good morning.

It’s Fed week. It’s also stimmy week. And, so far, it’s a good start to the week for global stocks. Bond yields have been in retreat most of the morning, and that’s pushing U.S. futures higher.

In the crypto corner, Bitcoin is having a rough start to the week. It hit an all-time high of $61,556 on Saturday, but has fallen more than $5,000 since then.

In today’s essay, I have some research that you bulls will cheer—yes, even you tech bulls. In today’s Postscript, I have a history quiz for you.

But first, let’s check in on the markets.

Markets update

Asia

• The major Asia indexes are mostly lower in afternoon trading, with the Shanghai Composite down 1%, but off bigger lows.
• Tesla rival Xpeng Motors raised $1.5 billion in a U.S. IPO listing in August, but it hasn’t stopped fund-raising. It’s scored 500 million yuan ($76.9 million) from a funding source closer to home.
• Shares in Xiaomi were up as much as 10% on Monday after a U.S. judge ruled Americans could once again invest in the smartphone maker, temporarily reversing a Trump-era ban.

Europe

• The European bourses were higher with the Stoxx Europe 600 up 0.3% at the open.
• Shares in Roche were up 1% mid-morning after the Swiss pharma giant agreed to buy California-based Genmark Diagnostics in a $1.8 billion deal. Genmark’s technology is used in COVID testing.
• AstraZeneca issued a statement on Sunday defending the safety of its COVID vaccine as a trio of EU countries and regions hit pause on their rollout of the jab. Shares in the drugmaker were flat at the open.

U.S.

• U.S. futures are off their lows with the 10-year yield sitting at 1.615%, below Friday’s highs. That’s after the Dow rose an impressive 4% last week.
• Stimulus checks are in the mail, and, yes, most economists agree that higher prices are likely. But Treasury Secretary Janet Yellen, for one, is not concerned by a tick upwards in the inflation rate in the near term.
• Don’t look now, but the shorts are doubling down (and then some) on their bets against SPACs. Short positions against the so-called blank-check entities have nearly quadrupled since the start of the year to $2.7 billion with the likes of Muddy Waters and Hindenburg Research leading the charge. I know most of you loathe the shorts. Even still, you may want to read my feature from December on this largely misunderstood force in the markets.
• What’s on the calendar this week? FOMC meeting (tomorrow and Wednesday), and earnings from Nike, FedEx and Accenture (Thursday).

Elsewhere

• Gold is up, trading around $1,725/ounce.
• The dollar is up.
• As is Crude. Brent is trading around $70/barrel.
• Bitcoin is not having a good day, trading below $56,000.

***

Bargain hunting

Let’s recap where things stand. The Dow and S&P 500 closed at all-time highs on Friday. The Nasdaq may have ended the week on a down note, but the tech-heavy index also advanced a solid 3% for the week as whole.

Those gains came as the yield on the U.S. 10-year Treasury climbed by six basis points, or 3.9%, closing Friday at a 13-month high.

Such a performance would seem to shoot a hole in the yields-go-up-stocks-go-down narrative that’s been unnerving investors of late. In truth, it was never quite that simple.

On cue, I have a few bullish calls for you this morning. The first comes courtesy of Deutsche Bank. Equities analysts at the German banking giant have raised their S&P 500 year-end target to 4,100 (previously, it was 3,950). And, they’re forecasting the Stoxx Europe 600 will finish the year at 465; the old target had been 450. That implies European equities have a 10% run left in them, and that the S&P will continue to grow by about 4% over the next eight-and-a-half months.

I can almost hear some of you grumbling right about now, just four lousy percent?!.

The other bit of bullish news you can use comes from a Goldman Sachs report published on Friday. David Kostin’s team outlines a case that there’s still plenty of legs in this markets run. They say:

Don’t worry about bond yields (for now). “We believe equity valuations should be able to digest 10-year yields of roughly 2% without much difficulty. A 10-year yield of 2% and a constant S&P 500 forward EPS yield of 4.5% (the inverse of a 22x P/E multiple) would reduce the yield gap between stocks and bonds to approximately its 45-year average of 250 bp,” Goldman writes.

Yes, rates will continue to climb. Again, don’t sweat it. “Based on our client conversations, most investors share our view that interest rates will continue [to] rise. But many believe that the equity market rotations that have recently accompanied rising rates have gone too far,” they write.

Don’t rule out tech. High-growth is underperforming value. Ergo, is it time to ditch tech? The answer: Not so fast. As rates continue to climb, value should continue to outperform. But there are some relative bargains to be found in tech. “Tech’s current 16% P/E premium to S&P 500 is actually lower than the 40-year average of 32%,” Goldman writes, suggesting the pull-back in tech could present some opportunities for canny investors.

There are plenty of other bargains out there (by the same definition). They include Consumer Staples, Communication Services, and Health Care, all of which trade at the lowest valuations relative to their own histories. Even energy and financials have more room to grow despite their epic rally over the past six months.

Postscript

The dreaded third wave has finally hit Rome. That means, as of this morning, we’re in a zona rossa, which [checks notes from the Ministry of Bad News] means we can only drink red wine.

Wait, that’s not right.

It means schools are closed until our region’s color changes from red to orange, yellow, or, even better, to white. So, for the first time all school-year, the apartment is doubling as a classroom.

You all know the drill. Yes, it’s distance learning time.

This morning it means I can eavesdrop on today’s big history quiz. My wife and I took turns over the weekend quizzing the girls on the reign of Otto the Great. You remember Otto. He wasn’t just a king of the German tribes, but also got crowned Holy Roman Emperor. He’ll feature prominently in today’s quiz.

These little tutoring sessions fill in many of the holes in my understanding of Rome’s history. For example, Otto’s reign, I learned, coincided with the rise of Rome’s many noble families that would go on to jockey for influence and power inside the papacy, and around town. To really get ahead and climb the social ladder of the day, the idea was to get a nephew or son elected pope. I guess the modern equivalent would be to get your little brainiac into Stanford or Harvard and then hope she launches some buzzy app that achieves unicorn status.

The noble families of Rome—think the Borghese clan—aren’t the movers and shakers of yesteryear. But you’d be surprised how many my-great-uncle-the-pope conversations you can get into over a nice glass or wine in this town.

We know one such noble, a count. He’s not just a really sweet guy. He’s a hell of a surgeon. In 2019, my wife and I got invited to a gala dinner here in town for an international conference on pediatric surgery. The big fancy to-do was held at Galleria Colonna, a 14th century Baroque gem of a palace. The above-mentioned surgeon was the host. And what a gracious host he was. When he saw me slowing down to peek at the history of the place, he grabbed my elbow and gave me a private tour.

At one point we stopped in front of an ancient oil painting that sat above an ornate thrown. Here’s how that conversation went down:

Me: So you had a pope in the family? 

The count: Yes, on my wife’s side.

Me: Which one?

The count: Here, I’ll show you. [We get up close to the throne and portrait.]

Me: Does that Latin inscription say something about the Great Schism?

The count: Yes. He said to the French, “Why don’t we all go back to Rome? Enough of this craziness.” They liked the idea of coming back to Rome so much, they said, “You should be pope!” And he became pope. 

Me: That’s how they resolved the Great Schism?

The count: Let’s get a drink.

***

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

Today's reads

"Crypto kryptonite." The European Central Bank in the coming weeks will tell us where it stands on a digital currency—specifically, what it's calling the "digital euro." The prospect is being closely watched by the established banking world and the fintechs, as literally trillions are on the line. Here's who stands to gain the most from such a move.

Yield ahead. As we've all witnessed in recent weeks, rapidly spiking bond yields are bad news for growth stocks. But just how high are yields expected to go, and what might that mean for your tech-heavy portfolio? Fortune's Anne Sraders talks to a bunch of Wall Street pros who think that higher interest rates are coming "sooner than people think." Here's what such a scenario could mean for stocks. 

Postcards from paradise. Before the pandemic, tourism in the EU—travel to hot spots like Athens, Rome and Paris—represented more than 6% of the bloc's GDP, or €427 billion. It crashed a year ago. To salvage the sector and all the jobs that go with it, countries in Southern Europe, led by Greece, are pushing for the adoption of so-called vaccine passports. It's a tall order, but, as Greek tourism minister Harry Theoharis tells Fortune, “we believe that by the beginning of the tourist season, we will be ready.”

Some of these stories require a subscription to access. There is a discount offer for our loyal readers if you use this link to sign up. Thank you for supporting our journalism.

Market candy

Where will America spend $1,400?

Turns out the U.S. Census Bureau tracks such questions. In a survey of 110 million previous stimulus check recipients, an overwhelming number (52%) used the dough to pay off debt. Looking ahead, likely recipients plan to use the money to buy staples (on food, or to pay utilities). And what about putting the money into the stock market or to buy Bitcoin? Yep, that was another popular response.