⏰Signs of Rotation In-Play

Treasury yields are rising again after the Fed’s hawkish stance improves the prospects for higher interest rates by year-end. The 10-year note had reached 1.54% on Tuesday morning, the highest level seen since June, as inflation fear is back on track.

The higher yield reflects better days ahead than the fear of an economic slowdown due to the Delta variant. Our eye will be on the 1.75% benchmark, where it will hit the previous high.

🏦Banks: Major Beneficiary of a Higher Yield

Financials is one sector in the S&P 500 most correlated with long-term bond yield. This is because they can borrow cheaply and lend at a higher rate; they tend to shine brighter when economic growth is robust since banks have a higher chance to make more profitable loans.

Since 2020, the S&P 500 financial sector registered around 66% correlation with the 10-year Treasury yield. That is why Pika World favours financials in the mid-cycle transition as a hedge on higher prospective rates.

🚂Capital Goods Manufacturers

The heavy capital goods manufacturer sector and energy companies tend to do well with the rise in yield too. This is not surprising given that a rosy outlook often reflects better earnings for companies such as Caterpillar (CAT), Boeing (BA) and General Electric (GE).

🚏Energy Sector has moved

We have seen a strong performance by value stocks, mainly in the energy, financials and sectors linked to the reopening play. The power crunch that led to a hint of global energy crisis further supports the energy sector, giving the industry an invisible hand.

💡The Next Highlight

Towards early summer in the US, the reflation trade and value rotation collapsed at the backdrop of the fear of the Delta variant. So now, the big question is whether these cyclical stocks can shine once more before inflation starts to choke their growth again.

Pika World will cover more insights on our next move as we look forward to another profitable quarter.

📰What’s on the Menu Today?

At 10 pm, we will welcome Pending Home Sales for August, which we expect to climb by 1.4% compared to -1.8% in the prior period.

Next in line is Crude Oil Inventories which comes at 10.30 pm. Again, a smaller drawdown of 2.333M is expected.

At 11.45 pm, Uncle Powell will continue to speaks for the second day as the market hear eagerly for the latest insight.