Time to take off some risk

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Today we issue another general note of caution on the status of global equity markets, which look stretched even if there are rational (real yields) and especially seasonal narratives in support of recent developments. Elsewhere, we dive into Amazon's broadside against Visa, whether that company and Mastercard could see eventual pressure on margins, other key equity stories and earnings, the dire potential supply situation for European natural gas, the very weak euro and a weak German 30-year bond auction, US treasuries and more. Today's pod features Peter Garnry on equities, Althea Spinozzi on fixed income and John J. Hardy hosting and on FX.

Reasons why interest rates will continue to rise in 2022

Arguments for higher bond yields are piling; hence the MOVE Index is creeping higher. In 2022, inflationary pressures will remain sustained, and the Federal Reserve will tilt hawkish, with Bullard, George, Mester and Harker becoming voting members. That means that interest rate hike expectations will need to advance, and demand for US Treasuries will decrease further as tapering goes forward. Once resolved, the debt ceiling issue will also remove resistance on long term yields.

THE BOND MARKET REMAINS ON HEDGE: WATCH THE MOVE INDEX

Despite 10-year yields remaining rangebound between 1.40% and 1.70%, something is happening under the surface.

FEDERAL RESERVE: HAWKISH TILT IN 2022

It has arrived the time to care about comments that the Federal Reserve’s ultra-hawks are making.

This week, the president of the St. Louis Fed, James Bullard, urged for more hawkish policies to cool off inflationary pressures. He brought up interesting points, including that early hikes might allow the central bank to hike less, that it is still possible for the central bank to hike rates before tapering ends and that a balance sheet run-off might begin soon after the conclusion of tapering.

His comments didn't go unnoticed, and at the time of his speech, 5-year and 10-year yields rose approximately by 3bps. Yet soon after Bullard’s Bloomberg interview ended, yields dropped, signaling that the above hawkish comments do not make a difference after all.

However, they might soon have more weight as Bullard, and another five notable hawks will be voting members at the FOMC meetings next year.