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Equities over-extended

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

  • Cost of capital has skyrocketed
  • This causes downward pressure on the stock market

The Fed’s relentless fight with inflation has caused the federal funds rate to jump 525 basis points, which is not only the steepest but also the most aggressive rate hike cycle over the last 40 years. This aggressive central bank policy has led to the worst sell-off in long-term US bonds in over four decades, as the costs of capital have gone up tremendously.

On Monday, the 10-year Treasury yields surpassed the 5% mark, a level not seen since 2007. This move has been influenced by the strong U.S. economy and a hot labor market, causing the Fed to keep its hawkish stance.

The 10-year us debt, a key financial metric, is viewed as a safe-haven during economic downturns and a reference rate for many financial instruments, including those for student loans and mortgages. Following recent quantitative tightening measures, mortgage rates climbed to an unprecedented 8% last week – a peak not reached in two decades. Ripple effects will lead to softer housing and consumer spending conditions.

On top of that, worries about the exploding US fiscal deficit have led to term premiums on the yield curve going up. President Joe Biden is seeking from Congress $100 billion in new foreign aid and security spending, including $60 billion for Ukraine and $14 billion for Israel.

The fears of economic slowdown do not bode well for equities, which look dangerously high, given where rates are. Nasdaq 100 stability is further tested as the earnings season is in full swing with lots of positive and negative surprises.

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Lastly, there is the classical late-cycle warning sign from the bond market as the yield curve steepens before the incoming recession. Flattening the inverted yield curve, as the long end catches up to the short end, preceded the incoming GDP contraction by an average of 15.3 months. And we are close to that point as the 10-year minus the 2-year curve first inverted in July 2022.

A graph of stock market

Description automatically generated with medium confidence

Equities are in a treacherous position. The longer the Fed keeps the “Higher for longer” stance, the more treasuries stay above 5%, and the more stocks will suffer.

Investors can long the NASDAQ 100 using our 3x US Tech 100 and/or 5x Long US Tech 100 .

Alternatively, they can short the NASDAQ 100 using our -3x US Tech 100 .

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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