Changes in Yields Impact Equities, Economic Data Mixed

Last week was truly eventful, with significant changes in the global financial markets. Fixed income markets experienced a notable shift as yields crossed the 4% threshold in the long end. Initially, we witnessed a bear flattening followed by a bear steepening. The catalyst for these movements was robust employment data, including both jobless claims and non-farm payrolls (NFP).

While NFP figures were slightly weaker than previous reports, earnings growth remained strong. Consequently, the Federal Reserve (Fed) made further comments, indicating their intention to proceed with rate adjustments in July. This development led market participants to eliminate expectations of future rate cuts.

Equities Falter as Markets React to Economic Data

The impact on equities was evident as they faltered from their previous highs. Despite this correction, equity markets, particularly in the US, still remain at elevated levels. In Europe, equities reached all-time highs before reversing course due to disappointing economic data.

Although Spain saw a decline in inflation, the rest of Europe continues to face persistently high inflation levels contributing to a sell-off in fixed income. Notably, 10-year German bund yields climbed back to 2.65%. A few months ago, they had reached a peak of 2.70% before dropping to less than 2.30%. This recent upward movement represents a substantial 30 basis points (bp) sell-off within a few weeks.

UK Faces Challenges Despite Full Employment

The UK's financial landscape tells a different story, characterized by mounting challenges. Two year yields surged to 5.40%, indicating a continuous upward trajectory. Although full employment is an encouraging factor, the UK faces issues with productivity, as it witnessed negative growth last week.

Nevertheless, wage increases linked to full employment may necessitate ongoing measures from the Bank of England (BoE). Similar concerns are relevant for the Fed and the European Central Bank (ECB), underscoring the potential need for sustained actions from central banks.

Currencies and Commodities

Taking a step back and looking at the bigger picture, equities remain at elevated levels, while credit spreads are tight in both Europe and the United States. Although cracks may appear at some point, it is challenging to predict when exactly they will materialize.

The dollar index has not experienced significant movement. Yields have increased elsewhere, especially in Europe, contributing to this lack of impact on the dollar's value against its main trading partners.

Commodities had a relatively uneventful week, with minimal fluctuations. The lackluster performance of the commodities space can be attributed to China's continued struggle to rebound. Oil prices experienced some volatility but lacked a compelling narrative to drive a significant market story.

Equities May Face Downward Pressure Amidst Market Enthusiasm

Considering the recent fluctuations in yields and other market factors, one might expect equities to trade down. However, it remains to be seen if there will be a more substantial correction. Although a downward movement seems likely, the current market sentiment, characterized by a fear of missing out (FOMO) and considerable enthusiasm, could potentially prevent a sharp decline.

In the realm of non-liquid investments, Bed Bath & Beyond, despite being bankrupt, continues to trade around 30 million shares per week, an astonishing figure. This situation highlights how certain assets have become detached from traditional valuation metrics, reflecting the current market mindset.

Market Outlook: Need for Catalysts and Impact of Fear

As long as fear remains absent, it is unlikely that markets will experience a severe downward movement. The CNN Fear and Greed index remains in greed territory, underscoring the need for a catalyst to prompt a shift, such as central bank actions, significantly high inflation readings, or further bond sell-offs. Barring these factors, equities may experience a gradual drift downward, albeit reluctantly.