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Rate Hikes Coming?

While it has not paid to recommend short positions in equities for most of the last 15 months, uncertainty in the marketplace is expanding, and the markets are certainly overbought from a long-term perspective. In addition to macroeconomic uncertainty in China, the markets are now presented with the potential for a return to lockdown in portions of Europe. We would also note divergence between the Dow futures and the rest of the market, which can also signal a top. The NASDAQ is in favor because of the potential for a return to lockdown, as that helps e-commerce and stay-at-home stocks.

US coronavirus cases

Fortunately for the bull camp, Treasury yields have declined significantly, thereby providing a cushion for equities. Furthermore, the markets have seen forward progress on the Build Back Better stimulus package, this week’s US economic data was positive, and there is the potential that a new, more dovish Fed chairman will be nominated.

On the other hand, some traders think Brainard could push the Fed into making changes to how America’s financial system works, and that creates uncertainty and anxiety for equities. The stock market is anticipating an eventual rate hike, and positive scheduled data could spark selling. Any market perception that the rate hike timing has been pulled forward could be devastating to markets that are trading at all-time highs.

US 30 year bond yield

Originally Published on November 19, 2021

Charts Source: Bloomberg

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