The focal point for investors is now the changing trajectory in the bond markets. Price action on equity market indices – mostly stable to marginally negative over the past week – was correspondingly led by cyclical stocks, particularly those linked to commodities, and banks.

The broad-based rise in yields (10-year Treasury 1.38% and 10-year Bund -0.3%) is being fuelled by fears of inflationary pressure that could break out and disrupt the nascent economic recovery and alter the course of monetary policies. A less accommodating stance by central banks could then cut off the flow of liquidity. As a result, investors have this past week been reviewing their portfolios and adopting a more cautious attitude towards stocks in richly valued sectors such as technology. Yield-free gold has also been left trailing while copper has taken the lead, rising to a 12-year high, driven by expectations of an economic upturn and a positive clean energy trend.

Some think it’s premature to be worried about rising long-term yields and the performance of asset classes that gain from the low-rate paradigm. This upswing signals a return to normality, powered by the mass vaccination campaigns. Some see little justification for the scare stories emanating from economists, even if the vast fiscal stimulus package proposed in the US (USD 1.9 trillion) to revive the economy is eventually implemented. Considering the high unemployment, widespread wage pressure is unlikely to emerge. The Fed’s minutes from its latest FOMC meeting also made it clear that the US economy is still far from achieving its long-term goals.

Economic statistics have been encouraging in the past week. In Europe, the manufacturing PMI stood at 57.7 in February versus 54.8 the previous month. In the US, retail sales sprang a surprise, rising by 5.3% in January whereas +0.8% was expected. Arrival of the latest USD 600 household cheques and a faster rollout of vaccines has encouraged consumers to loosen the purse strings. Spending has accelerated for non-durable categories such as sports equipment (+8%). All this is good news for GDP growth in the first quarter (+4.1% expected). The US producer price index rose by 1.2% in January, well above expectations for +0.2%. But this upward trajectory seems to be largely in response to surging oil prices. Other historically reliable benchmarks, such as inflation expectations in relation to consumer prices, remain frail.

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