Equities will be able to weather repricing in bond markets, JP Morgan says
By Alexander Bueso
Date: Monday 01 Mar 2021
(Sharecast News) - Equity prices will be able to digest the repricing now unfolding in government bond markets and the Growth-Policy tradeoff remains "supportive", strategists at JP Morgan argued.
The reason for the recent drop in stocks was the speed at which yields had risen together with the move higher in real rates, as inflation forwards fell.
But those increases should slow, the strategy team led by Mislav Matejka said, pointing out that a convergence with breakevens was not imminent because growth and inflation were about to accelerate.
"Big picture, the phase of activity pickup is ahead of us, as signalled by a M1 surge, which should also coincide with the easing of lockdowns across Europe," they added.
"At the same time, excess liquidity is likely to stay ample, as policymakers err on the side of caution."
Two potential flies in the ointment were the US dollar and the China credit impulse.
Instead of continuing to weaken, as the consensus expects, the Greenback might remain "resilient", Matejka explained.
The Chinese credit impulse meanwhile, which leads commodity prices by 6-9 months, had peaked.
In his view, Miners were "tactically stretched" and investors should instead focus their longs in Financials and the consumer reopening trade.
"Regionally, while we were OW US in 2020, we believe that US will not be the leader this year. Tech correlations with bond yields are becoming more and more negative."
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