Key Talking Points:
- Bond yields rise as the economic recovery gathers momentum
- Equities are tracking yields higher for now, correction to follow in due course
- DAX 30 continues to aim for all-time high
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Equity markets continue to attract positive momentum despite bond yields rising rapidly as the economy remains well supported in the short-term with regards to monetary stimulus. Yields on US treasuries have risen to almost pre-pandemic levels as the nation of economic recovery is gathering steam, leading to an increase in risk appetite in the short-term.
Companies that have a positive correlation with economic performance were rising this morning alongside an expectation that inflation will be higher during the year, driven by higher output growth, hindering the expected performance of longer-dated bonds.
There is generally an inverse relationship between bond yields and equities, given that they represent the opportunity cost of investing in stocks, which means that a stock has to offer a return at least as high as the yield on bonds to make it an attractive investment. As bond yields go up, equities become less attractive because the higher return from taking on additional risk is diminished.
Whilst this relationship may take some time to materialize given the current recovery from the pandemic lows, rising bond yields pose a threat to stocks once the euphoria of an economic recovery settles.
Chart: US 10 year yield vs S&P 500
For now, stocks seem to be focused on improved economic data and the possibility of a return to normal this summer as the rate of vaccinations picks up worldwide, leaving a short-term positive correlation between yields and stocks, but investors need to be aware of any sign of inflexion on equity prices as a downside correction is bound to happen at some point.
DAX 30 Daily chart
The DAX 30 continues to show strong resilience by avoiding further bearish correction and pushing towards a new attempt at breaking the all-time high. Strong resistance at 14,140 has once again caused bullish momentum to stall but a build up in buyer support could see the German index breaking above 14,195 in the short-term, with a strong attempt at 14,250, where signs of caution could creep in, leading to a possible correction.
Momentum indicators seem to be showing that the DAX is creeping into overbought territory again, but I expect bullish momentum to hold as buyers attempt to take the index higher, above the previous all-time high. To the downside, 13,830 continues to be a strong area of support, but expect strong bearish support to bring the index back towards 13,500 once, and if, the sell-off takes place.
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— Written by Daniela Sabin Hathorn, Market Analyst
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