Hard to blame equity weakness on interest rates

Tech stocks have fallen despite lower real yields

Chart of the Day

The comments by Treasury Secretary Janet Yellen yesterday, that interest rates might need to rise to prevent the economy from overheating, were blamed for the equity market weakness that followed. Yet while higher interest rates would indeed be bad news for some stocks, especially tech firms, interest rates didn’t actually move higher - as the (inverted) green line here shows, they fell yesterday. That would normally be associated with a rise in tech stocks, rather than a decline. Put differently, something else seems to be going on.

Macro

The March trade data showed exports rose by 6.6% MoM and imports increased by 6.3% MoM - largely because the extreme weather in February had weighed on trade. That left exports 8.1% higher than a year earlier, and imports 18.1% higher.

Up north, export growth increased to 14.4% YoY in March, while import growth increased to 6.3% YoY. Base effects are now boosting growth in both directions.

In the UK, the flow of mortgage credit rose sharply in March.

Markets

Another reason not to blame interest rates is that equities were dropping across the world before Yellen spoke. Moves in stock markets yesterday ranged from a fall of 2.5% for the German Dax to a rise of 0.8% for the Korean Kopsi.

And in the end, US yields generally fell yesterday. The US 10-year yield has fallen by 3 bp in the past week, the 5-year has fallen by 6 bp and the 30-year has fallen by 3 bp.

The relative performance of momentum stocks, like the big tech names, to high-dividend stocks is moving back toward the lows earlier this year.

Similarly, the value index far outperformed the growth one yesterday. Over the past week, value stocks have risen by 1.3% while growth stocks have fallen by 2.2% .

Commodity prices just keep going, mostly anyway.

Commodities do not seem to be taking their cue from China's credit impulse, which might normally be pointing to weaker commodity price growth.

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