Talk of a tantrum has subsided after the big shift at the beginning of the year at the 10-year Treasury.
But the factors that led to this brief sale of the Treasury are still at hand. Chief among them are the launch of COVID-19 vaccines, as well as the huge fiscal stimulus already enacted with more in the pipeline, the repressed purchasing power in household savings and easy monetary policy.
Scott Peng, founder and chief investment officer of New York investment manager Advocate Capital Management, says a perfect storm is breaking out. Its model estimates the yield of the 10-year Treasury TMUBMUSD10Y,
it will jump 162 basis points this year and another 160 basis points next year – which is well ahead of market estimates of approximately 17 basis points of earnings in each of the next two years. The 10-year maturity yielded 1.12% on Wednesday’s stock.
Peng, previously chief interest rate strategist at Citi and one of the first to detect price anomalies in Libor, says his model does not even include any additional fiscal stimulus from the Biden government, which proposed a $ 1 coronavirus relief plan. , 9 trillion, as well as additional infrastructure spending.
Central to his view of an increase in interest rates is the historical correlation between the growth of nominal gross domestic product and short and long-term interest rates in the USA, the UK, Germany and Japan. The long-term regression reflects a 50% ratio between GDP growth and Treasury income since 1960, although more recent history suggests that the proportion may have decreased to 27%.
Even this lower level of correlation would suggest the launch of the vaccine, suppressed purchasing power, increased government debt and monetary stimulus would increase yields.
Wouldn’t this increase in rates sound the alarm at the Federal Reserve? Peng estimates that the Fed would have to quadruple the size of its quantitative easing to make up for the projected 2021 rate hike. , especially if the economy is recovering well, ”he says.
Peng did not extend his analysis to the actions, but the implications would be direct. An increase in yields would make relative valuations much less attractive – although it could create the conditions for value stocks to thrive after a decade of underperformance.
The buzz
GameStop GME,
The shares rose 2% in the pre-market, after falling 60% to $ 90 on Tuesday. The slight pressure driven by Reddit WallStreetBets forum users brought the stock to $ 483 last week. Movie operator AMC Entertainment AMC,
which plummeted 41% on Tuesday, also rose 2%.
Online retail giant Amazon AMZN,
reported earnings and declining revenue in the fourth quarter along with news that Jeff Bezos later this year will step down as chief executive to become executive president, focusing on new products and initial initiatives. Andy Jassy, head of his rapidly growing cloud division, will take over as CEO of the entire company.
Alphabet GOOGL,
GOOG,
jumped 7% in the pre-market, as Google’s parent company easily surpassed fourth-quarter profit estimates, achieving both an increase in search revenue and its rapid growth in the cloud business.
There are a number of gains on the deck, including the PayPal PYPL payment service,
and eBay EBAY online auction service,
after trade closes.
In front of the coronavirus, pharmaceutical GlaxoSmithKline GSK,
will pay up to € 150 million for CureVac CVAC,
to develop state-of-the-art vaccines targeting multiple variants. Glaxo will also help produce up to 100 million doses of the first generation CureVac vaccine, a boost for Europe, which has been slow to launch vaccines. Separately, preliminary research finds AstraZeneca AZN,
–The Oxford University vaccine provides protection up to three months before the second dose is administered. New coronavirus cases in the U.S. dropped to 115,619 on Tuesday, from a peak of 243,996 in mid-January, according to the COVID-19 screening project.
The economic calendar includes the ADP estimate of private sector payrolls and the Institute for Supply Management service index. A measure of China’s service sector was below estimates.
The markets
The Nasdaq-100 NQ00,
contract led to an advance in the future of ES00 shares,
after the results from Amazon and Alphabet. The DXY dollar,
it was stable.
Italian shares I945,
increased with expectations that former European Central Bank President Mario Draghi will become the country’s next prime minister.
The graph
In a letter to investors, hedge fund firm Crescat Capital said the scenario is set for a massive shift in investors from overvalued megacap growth funds and fixed income securities to undervalued materials, energy and other commodities. He said that if he could focus on just one chart for the next three to five years, it would be the relationship between commodities and stocks. “The opportunity to buy gold shares and sell overvalued large-cap growth shares appears as in 1972. In just two years, in 1973-74, the S&P 500 SPX,
it fell 50%, while gold stocks increased fivefold, ”he said.
Random readings
Speaking of Reddit posts – a study found that using the language on the platform could predict future relationship breakdowns.
It looks like the beginning of a script for a new Indiana Jones film – mummies with golden tongues found in Egypt.
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