Submitted by Bilal Hafeez of Nomura

Markets are creaking after the recent surge in yields. European equities are weak today, credit spreads are widening and some EM are underperforming. But we need to be careful in calling for full-on risk aversion as US data is still strong and importantly the Fed could easily guide the market to a lower r* (ie lower long-term rates).

What could undermine both these supports would be resurgent inflation. So far markets are pricing a benign picture – that is, inflation to pick up in the short-run but the Fed to be able to contain it. Today’s payrolls report could be important in that regard – weak employment but high wage growth would be the worst mix.

As for markets to focus, I’m looking at US credit and FANG stocks. High-yield US credit is behaving remarkably well given the rise in US yields. What has probably helped is that oil prices are high, but also that growth is still strong. Real yields are still comfortably below real growth and the gap between the two doesn’t seem to be worsening yet (see first chart).

On the equity side, we have to remember that US stock outperformance has masked a very mixed sectoral performance. Only half the MSCI sectors are comfortably in positive territory and of those, three stand out: tech, consumer discretionary and health (see second chart). And within these sectors, the outperforming companies are the FANG ones - Apple, Alphabet (tech) and Amazon (consumer discretionary). Yesterday, tech stocks underperformed, so today’s session will be important. Also, US earnings season is soon upon us, and these companies report towards the end of the month.