Michael Kramer | Feb 14, 2020 17:19
This post was written exclusively for Investing.com
The risk appetite among investors appears to be on the rise and that means yields may be on their way higher. Equity markets are climbing following the recent coronavirus led sell-off. Markets in Asia, North America, and Europe have rebounded sharply, and in some cases, to record highs.
Sector rotation in the S&P 500 suggests that investors are once again moving into the riskier parts of the equity market. But it isn’t just equity markets that are seeing a bounce: essential global growth commodities such as copper and oil appear to be stabilizing and even creating technical reversal patterns, suggesting they may begin to increase in price. As investors start to move back into risk assets, one would think that yields on the 10-year Treasury would start to rise once again.
Yields May Be on The Rise
Yields on the 10-year Treasury have declined to their lowest levels since early October as fears of the rapidly spreading coronavirus caused investors to sell risk assets and move into safe havens. However, the risk aversion trade appears to be slowly unwinding, and that should result in yields on the 10-year starting to risie once again.
The yield on the 10-year reached roughly 1.5%, where it found a healthy level of technical support in early February. Since that time, the rate has bounced back to approximately 1.62% as of Feb. 13. Another sign that yields may climb is found in the relative strength index which reached oversold levels below and is now trending higher. The pattern would suggest that rates will rise back to resistance at a level of around 1.75%, while potentially signaling an even longer-term move higher to 1.95%.
Equity Markets Are Racing Higher
The most obvious sign that the risk appetite of investors is shifting is the move in equity markets. Since Jan. 31, the markets around the world have been ripping higher, with the South Korea KOSPI rising by roughly 6%, while Germany has increased by almost 5.4% to a record high, and the S&P 500 has increased by almost 4.6%, also to a record high.
Sector rotation within the U.S. markets shows that the VanEck Vectors Semiconductor ETF (NYSE:SMH) has increased by over 10% in February alone. That has been followed by the SPDR S&P Biotech ETF (NYSE:XBI) which has jumped by almost 9%, and the Technology Select Sector SPDR ETF (NYSE:XLK) rise of 6.5%. Meanwhile, the two worse performing sectors have been the risk aversion groups, the Utilities SPDR ETF (NYSE:XLU) and Consumer Staples Select Sectors SPDR ETF (NYSE:XLP).
Even more impressive is that we are seeing commodities such as oil and copper begin to put in a bottom and are forming patterns that suggest significant reversals maybe on the way. For example, oil has formed a bullish reversal pattern known as a falling wedge. The commodity has already broken out of the falling wedge pattern, suggesting that oil prices may head higher from their current levels, perhaps to as high as $56.
If the market has moved from a risk-off to risk-on sentiment as the equity market rally, sector rotation and rising commodity prices would seem to suggest, then it seems fair to believe that yields have only one way to move from current levels, and that is higher. That may be especially true if the latest run of better than expected economic data continues.
Written By: Michael Kramer
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.
More content, faster quotes and charts, and a smoother experience is available only on the App.