29 January to 4 February: A Long Time Coming

Every week this year, we have written that the nature of the equity market rally has changed – that the acceleration in global growth has started to stimulate higher bond yields and energy prices, thus sowing potential headwinds. In the short run, we saw 3 “canaries” for investors: the US 10 year bond yield, the oil price and wage growth.

Last week, as if like clockwork, equities experienced their heaviest losses in 2 years after all 3 measures broke out of their almost 4 year range. The question now is whether this represents the end of the bull market, or a release of pressure before new highs. We view the latter as more likely. Rising bond yields are rightly highlighting that global monetary policy is starting to tighten. However, aside a single US labour market data print on Friday (see below), core inflation pressures remain lacklustre. Moreover, we would suggest that the US is later cycle than its global peers and has less “slack” – i.e. whilst it is important, it is not fully representative of the global economy (see European inflation data below). Nonetheless, the market has confirmed the 2 big (and related) risk factors; higher bond yields and inflation.

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