Daily Briefing: Watch those yields

A look at the day ahead from Danilo Masoni.

The economic recovery narrative is gaining steam and with it, global bond yields.

Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

U.S. 10-year Treasury yields have topped 1.3% for the first time in nearly a year, as vaccination shots and the prospect of more stimulus push up inflation expectations.

It’s starting to make equity investors anxious — stock markets which prospered in a world of near-zero interest rates may fare less well if the rise in bond yields erodes the risk premium stocks have been offering.

What’s the bite point though? Views differ: some such as Bernstein strategist Inigo Fraser-Jenkins notes a “palpable fear” that a move of U.S. 10-year yields towards 2% could destabilise the market. Others such as Amundi put it as low as 1.3%, exactly where we are now.

So unsurprising perhaps that global equities have pulled back from scaling new record highs, having posted an 11-day winning streak. Futures point to a muted start for Europe and Wall Street. Tonight’s Fed meeting minutes might provide some reassurance but markets will be watching for any hints of a debate about tapering stimulus.

Highlighting the post-pandemic economic recovery, especially in China, miner Rio Tinto just beat profit estimates for 2020, joining peers BHP and Glencore.

Finally, Bitcoin which some perceive to be a hedge against inflation, is back above $50,000 after crossing that historic milestone on Tuesday. But risks of tighter regulation could render the crypto market even more volatile than it has been

Key developments that should provide more direction to markets on Wednesday: – British inflation rose a little more than expected in January as the country went back into a coronavirus lockdown – Rio Tinto reported its best annual earnings since 2011 and declared a record final dividend, sending Australia-listed shares to an all-time high – Sales at Kering’s Gucci fashion brand fell 10% in Q4; Kering shares seen falling 5% – Nestle shares marked 1% higher on plans to sell some North American water brands for $4.3 billion -Dallas Fed’s Robert Kaplan speaks -Fed releases meeting minutes -NATO defence ministers start two-day meeting -US retail sales/industrial production Jan -U.S. 20-yr bond auction -U.S. results: Baidu, Marathon Oil, Sunco, Sunpower, Herbalife, Hilton, Hyatt

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