To reiterate our comments from last week, conditions in 2017 were near perfect for equity markets with strong and broadening growth but no inflation and central banks therefore still in (aggregate) easing mode. The second week of 2018 started where the first left off – with a different flavour of equity market rally. Specifically, with investors increasingly attuned to the risk of interest rate tightening and inflation (oil is now up 50% since June), fixed income sold off to leave bond yields near their highest levels in recent years.
For now, yields remain at very low levels, with the magnitude of recent moves contained. They key factor, will be inflation data, which although suggesting an increased pace of price rises, is still well short of target for most major central banks. Still, the market is at least waking up to the idea that the “perfect calm” cannot last forever.
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