Equities shrug off bond jitters

The recent sell-off in bonds has so far not impacted sentiment towards global equities. Ten-year US Treasury yields finished the week at 2.55%, having traded close to the 2.6% it reached towards the end of 2016, on Donald Trump's election. Fridays US inflation data reported that the core Consumer Prices climbed the most in a year. Overall the data was mostly in line with expectations, this was despite some indications earlier in the week, including weaker producer prices, that inflationary pressures remain benign. The debate, for now, has turned away from equity valuations and towards bonds and whether we are now entering a bond bear market. Overall market commentary seems to take the considered view that inflationary pressures remain subdued enough, for now, to not create a major bond bear market. 

The recent rise in ten-year yields, along with the rise in equity prices that have reduced equity yields, has resulted in ten-year bonds now offing a better yield than US equities. The spread between high yield and investment grade debt has also widened slightly from recent lows. Despite the continued stela performance from equity prices at the start of the year, the Vix index has crept higher in the past week, back over 10.  

The earnings season started on Friday with JP Morgan leading the way. The stock finished the day modestly higher, as earnings beat expectations. Investors had probably anticipated as much, and the rise in the share price was probably as much of a reaction to higher US bond yields. In the earnings call post the results, the management did confirm that as a result of the tax reforms shareholders would benefit with share buybacks and dividends. 
The week ahead will be dominated by earnings, with heavyweights from all sectors including one of the group of FAANG, reporting in the coming days. 

Monday markets in the US are closed for Martin Luther King day, so there is nothing of note, however as the week progresses there a few pieces of economic data to highlight. US industrial and manufacturing production data on Wednesday and on Thursday the Phili Fed Manufacturing Index always draw some comment, and then on Friday, we get the Michigan consumer sentiment index. 

As for the UK economy, the beginning and the end of the week are the days we get noteworthy data. On Tuesday a series of inflation points for December, then on Friday Decembers retail sales. Depending on the outcome of the data this week the interest rate debate will probably resurface amongst the financial press. The euro continues to climb, driven in the past few days as Merkel manages to secure a coalition deal, inflation will also dominate the macro reports from this region. 
As equities continue to climb and what feels like complacency continuing to enter sentiment, one feels, when the correction comes, it will be swift and may not leave much time to react. 

Posted on January 14, 2018 .