Due to last week's rogue volatility, markets are questioning the far-reaching 'goldilocks' environment. Rapid rise in equities' volatility spurred investors into safe-haven US treasuries, pushing the 10-yr yield from 2.8% down to 2.6%. Stronger data and rising inflation have sparked fears that central bank could tighten further. US equities were at the epicentre of the panic collapse, which is understandable given high valuations. Higher bond yields are a concern but S&P500 earnings yield of 6% is still significantly higher than bond yields. Hence markets are already rethinking last week technical correction.
Following the recent market drop, we are see extended recovery on markets. MSCI World Index increased by 1.22%, closing at 2’076 points, its highest rate hike since April 24th 2017, supported by Materials (+1.79%), IT (+1.67%), Energy (1.64%) and Industrials (1.20%) sectors. US markets extended Friday’s gains, with the Dow Jones Industrial Average surging at 24’601 (up 410 points or +1.70%), heading toward hourly resistance at 25’293 (February 7th 2018 high). The commodity complex rebounded after a 6-day losing streak as oil prices stabilised and gold and base metals reverse downward slide.
This Wednesday’s US consumer price data, we believe, will come in lower than expected, thanks to easing energy prices. Clearly, traders have front run real data with speculation, which had a negative effect on risk asset. Yet real data indicates that US and global economy is expanding, while corporate profits are rising, and the bull market, while now wounded, still has room to run.
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