Real interest rates surge

Could be bad news for tech stocks

Chart of the Day

With bond yields jumping last week, and 5-yr/5-yr inflation-linked swaps closing sharply down on Friday, implied longer-term real yields shot up in both the US and eurozone. We should be a bit cautious about interpreting that move for now, as markets can go a bit crazy on options expiry dates, of which last Friday was one - the spike last March in the chart above also coincided with options expiry. Nonetheless, if it is sustained, it could be bad news for tech stocks and further bad news for gold.

Macro

The February composite PMIs showed diverging conditions in the US and Europe. In the US, it rose to 58.8, while the PMI for the eurozone increased to 48.1 and the PMI for the UK rose to 49.7. At below 50, those PMIs imply activity is contracting.

That message for the UK was matched by the retail sales data, which fell by 8.2% MoM in January, and which pulled the annual growth rate to -3.8% YoY. UK consumer confidence suggests growth should pick up again soon.

In Canada, retail sales decreased by 3.4% MoM in December, with annual growth at 3.3% YoY.

Markets

10-year yields continued to rise on Friday, with the exception of Italy where yields are still benefiting from the recent formation of a government by former ECB president Mario Draghi.

Longer-term inflation swap rates closed down sharply on Friday, with the 5-yr/5-yr rate dropping by 15 bp over the course of the week.

Real yields rose as we saw earlier, which could be bad news for tech stocks this week if the yield moves are sustained.

After all, the current long positioning on the Nasdaq probably reflects an assumption that real yields would stay low.

Meanwhile, compared to their long-run positions in various commodities, non-commercial traders are currently most favorable on Corn and least favorable on Palladium. The big picture is that traders currently favor commodities more than usual though.

That appears to have been the right trade - the GSCI all-commodity price index has risen by 8.9% in the past month.

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