Chart of the Day
It was a nervy start to the day for US equities yesterday as the market opened lower and bond yields rose further, but they soon regained their poise to finish up for the day. The strength of equities despite yield rises is largely because the same factors driving yields higher, i.e. stronger expectations for global growth, are also pushing up those equities that are most sensitive to economic growth and least sensitive to interest rates - value stocks. Value stocks rose by 1.5% yesterday and are now up by 2.5% in the past week, whereas despite a modest rise yesterday growth stocks are still 2.4% lower.
In the US, mortgage applications for house purchase fell by 11.6% last week, and the 30-year mortgage rate rose to 3.1%. It’s unlikely the rise in mortgage rates was behind the drop in applications, which was likely down to the severe weather in Texas and elsewhere.
In Brazil, growth in foreign direct investment rose in December for the first time in months, but only to a still very weak to -50.6% YoY.
The weekly EIA report showed the amount of gasoline supplied to the market fell by 1.2 mn barrels last week and are now 18.5% lower than their average at this time of year over 2017-19. Again, that was probably due to the severe weather.
Likewise, that explains the drop in production.
Yields continued to rise modestly yesterday. The US 10-year TIPS yield has moved 14 bp higher in the past week, while the breakeven inflation component moved 5 bp lower.
Moves in stock markets got better as the day went on, with the Asian indices doing poorly, the European indices in the middle of the pack, and the North American indices doing the best.
Of the S&P 500 sectors, the defensive utilities performed worst and energy and other cyclical sectors like financial and industrial the best yesterday.
With the very large tech stocks being hit by rising real interest rates, the S&P 500 has been little changed at in the past week while the equal-weighted index has risen by 2.2%. The equal weight has almost caught up with the overall index in terms of its post-2020 performance.
The relief rally was evident in the VIX, which has dropped back to 21.3. The MOVE also edged down, despite further gains in yields, which could be a sign the sharp moves in bond yields are now mostly behind us.
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