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CBOE Interest Rate 10-Year (TNX.I) & RBOB Gasoline Continuous Contract (RB.F)

A significant shift in market sentiment appears to be underway across asset classes this week. Better than expected Manufacturing PMI reports from around the world, and stronger than expected US ADP payrolls have suggested that the world economy has remained resilient and may even be improving. Signs of an improving economy, particularly in China, has boosted resource demand expectations and commodity prices with Crude Oil, Gasoline, Silver, Copper, Cocoa and Coffee rallying this week. This in turn has boosted inflation expectations, which also turned up in rising US manufacturing prices, although slowing growth in US service prices offset this slightly.

Amid signs inflation may be picking up again, investors started to pay more attention to the neutral-hawkish comments coming out of central bankers who continue to reiterate the “higher rates for longer” party line and with some even starting to cut back the number of rate cuts they are expecting this year. This shift has sparked a rally in treasury yields sending the US 10-year treasury note yield up toward 4.40% from 4.20%.

These developments have had a twofold impact on equity markets. First the advance in indexes that started back on November 1st appears to be stalling. Last week the majority of world indices returned between -2.0% and +2.0%. Second, rotation of capital between equity market sectors appears to be accelerating with only 3 of the 11 main industry groups posting gains in the last week, led by Energy and Materials.

We also have started to see cracks in some of the areas which had previously benefitted from high investor confidence and risk appetite. Among the 8 main industry groups who fell last week were previous sector darlings like Information Technology, Communications Services, and Industrials. Also cryptocurrencies started to sell off and the Russell 2000 small cap index fell faster than its big cap counterparts.

The coming week is looking to be a busy one for economic and monetary news. Tomorrow brings US nonfarm payrolls, Canada jobs and North American wage inflation numbers, then next Wednesday-Thursday, consumer and producer prices for the US and China are due. Central bank meetings also start up again then with the Bank of Canada, Reserve Bank of New Zealand, and European Central Bank all releasing decisions and statements related to economic conditions and monetary policy trends.

As is somewhat expected in a positive business environment, confession season has been quiet so far except for news that Intel’s business of manufacturing chips for other companies is struggling. Earnings season kicks off next Friday with results due from three big US banks. Heading into earnings season, investors may note that prices, valuations and expectations are significantly higher than they were this time last quarter.

In this edition of Equity Leaders Weekly, we look at rising treasury yields and energy prices.

CBOE Interest Rate 10-Year (TNX.I)

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