Wednesday, 21 February 2018

US stocks fall as bond yields rise but big test yet to come

Markets were mixed on Tuesday.

The S&P 500 fell 0.6 percent, snapping a six-day winning streak, while the Nikkei 225 fell 1 percent. However, the STOXX Europe 600 rose 0.6 percent.

Higher bond yields put pressure on stocks on Tuesday, but a report by Credit Suisse says that stocks actually have little to fear from higher interest rates.

“Year-to-date, if you invested only on dates when interest rates went up, your annualized return would be 16 percent,” said Jonathan Golub, chief US equity strategist at Credit Suisse.

Golub said stocks should respond positively to higher yields until they reach a level around 3.5 percent.

Still, Morgan Stanley strategists warned in a note on Monday that a bigger test for stocks from higher bond yields is yet to come.

“It’s when growth softens while inflation is still rising that returns suffer most,” the strategists wrote. “Strong global growth and a good first-quarter reporting season provided an important offset. We remain on watch for ‘tricky hand-off’ in the second quarter, as core inflation rises and activity indicators moderate.”

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