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Marketmind: It's getting real

EconomyJan 10, 2022 03:15AM ET
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© Reuters. FILE PHOTO: Raindrops hang on a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S., October 26, 2020. REUTERS/Mike Segar/File Photo

A look at the day ahead from Sujata Rao.

As markets move to price a U.S. interest rate liftoff, possibly even from March, 10-year Treasury yields have risen a quarter point since the year started. Even more interestingly, "real", or inflation-adjusted U.S. yields are driving the moves with a 33 basis-point jump.

Real yields, while at the highest since last June, will remain deeply negative for a while. But their rise poses challenges for assets that benefited from the there-is-no-alternative reasoning. The past week saw stocks wobble, bitcoin tumble 8% and Nasdaq tech, the quintessential low-rate play, fell 4.5%. Graphic: Real yields, https://fingfx.thomsonreuters.com/gfx/mkt/egvbkjowdpq/Pasted%20image%201641767281191.png

Holders of longer-duration bonds are also likely nervous -- such assets saw big outflows in the past four weeks, Goldman Sachs (NYSE:GS) notes.

Meanwhile, inflation isn't letting up; euro area prices rose 5% year-on-year in December and Wednesday's U.S. CPI reading is expected at 7%-plus. The ECB has stayed resolutely dovish however -- board member Isabel Schnabel did say on the weekend the bank may need to act if energy price rises prove persistent. The euro started Monday 0.3% lower.

Stocks are trying to claw their way back up -- U.S. and European equity futures are inching up even if Treasury yields, both real and nominal, are a touch higher.

So what happens to stocks if real yields continue rising? There have been episodes a-plenty when equities rose alongside real yields, most recently in the March 2020-February 2021 period when a 1.5 percentage real yield increase was accompanied by a 50% global equities return.

Noting this, Berenberg recently advised clients to stay put. The share of rate-sensitive tech however is now far higher than in the past which possibly changes the equation a bit.

Finally, let's not forget the worrying geopolitics and fast-spreading Omicron, both capable of adding to inflation and dampening economic growth. Oil prices are extending last week's 5% gain and U.S.-Russia talks look set to start later in the day with few expectations.

Key developments that should provide more direction to markets on Monday:

-German Finance Minister Christian Lindner and Paschal Donohoe, Eurogroup president hold press conference

-NATO head Jens Stoltenberg meets with Ukrainian Foreign Minister

- Kazakh president steps up purge of security agency

-No concessions, no breakthroughs: Russia, U.S. cast pall on Ukraine talks

-Evergrande onshore bondholders to decide on extension; fellow developer Shimao puts all projects on sale

-UK manufacturers positive about 2022

Marketmind: It's getting real
 

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Comments (4)
bret lafrance
bret lafrance Jan 10, 2022 7:10AM ET
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How about futures driven inflation?
Arno Pfohl
JackR3acher Jan 10, 2022 3:41AM ET
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FED thinks Inflation is DEMAND driven by consumers, although in fact it is SUPPLY driven through factors of production such as High oil prices manipulated by Governments(USA - push for RE, Russia - retaliation for sanctions) and OPEC - oil cartel.
bert prince
bert prince Jan 10, 2022 3:38AM ET
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comparing from march 2020 equities path with rates path is just not serious and misleading
Chris Hall
Chris Hall Jan 10, 2022 3:36AM ET
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Recession
Arno Pfohl
JackR3acher Jan 10, 2022 3:36AM ET
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Depression = negative growth
Red Rou
Red Rou Jan 10, 2022 3:36AM ET
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Arno Pfohl  It's already a depression. Your infliation is higher than your gpd
 
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