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  • The S&P 500 and Nasdaq 100 finished flat but the Dow and Russell 200 gained.
  • Rising US bond yields are yet to deliver a serious dent to bullish equity market sentiment.
  • US CPI data and Biden’s stimulus plan announcement will be the key events to watch on Wednesday.

The S&P 500 and Nasdaq 100 both closed out the session flat, the former having again briefly sold off below the 3800 level into the 3780s, only to sharply recover back to the big figure. The Nasdaq 100, meanwhile, survived a drop as low as the 12800 level to recovery back to current levels around 12900. Both remain close to recent all-time high levels and at valuations that an increasingly loud chorus of analysts think are overvalued.

Meanwhile, the Dow Jones Industrial Average closed the session with modest gains of 0.2% that saw the index close above 31,000, while the Russell 2000 saw the most impressive gains of 1.67%, taking the index to a fresh record closing high at 2125.

Higher commodity prices gave a boost to the energy sector (+3.5%), materials sector (+1.34%), while higher bond yields gave a 1.06% boost financials. Automakers performer well also; Tesla was up 4.7% after registering to launch its presence in India and after its Model Y car reportedly aced its NHTSA crash and safety test and obtaining a five-star rating. General Motors performed even better on the news that 500 of its new BrightDrop electrical commercial vans would be delivered to FedEx by the end of the year.

Looking ahead, stocks will be on notice for Wednesday’s US Consumer Price Inflation to see if the recent run-up in inflation expectations that has seen break-evens rally to above 2.0% from around 1.7% in November 2020 will begin to translate into the hard data. If the data, which is released at 13:30GMT, does show a material pick up, this may trigger further upside in inflation break-evens further benefit inflation-sensitive assets.

Meanwhile, incoming US President Joe Biden will formally unveil his pandemic fiscal stimulus plan, though the announcement will not tough on tax and infrastructure. A larger than expected package could well trigger further upside in stocks and bond yields.

Factors to consider for US equity markets

US equity markets are yet to show significant signs of wavering in face of a persistent rise in US bond yields. Yes, 10-year yields might have hit their highest levels since March 2020 of above 1.17% on Tuesday, but equity investors seem calmed by the fact that almost the entirety of the rise from the early August lows of just above the 0.5% level has been driven by rising inflation expectations, which over the same period of time have risen about 0.4%. Indeed, though real yields have rallied in recent days, they remain close to recent lows; the 10-year TIPS yield is currently at -0.95%, only just over 15bps above all-time lows.

The above-noted rise in US yields has been accelerated since 5 January after the Democrat’s secured a majority in both chambers of Congress, ensuring significantly more fiscal stimulus is on the way; this will, of course, be deficit-financed, meaning lots of new debt issuance which puts upwards pressure on yields, has boost inflation expectations (10-year break-evens still well above 2.0%) and adds to the narrative of the faster US and global economic recovery in 2021.

Meanwhile, numerous Fed officials having spoken over recent days and indicated that they are not overly fazed by the recent rise in yields; this is predominantly because it has been driven by rising inflation expectations, which the Fed wants, and real yields are still close to all-time lows. However, amidst a backdrop of growing chatter about a potential sooner than expected tapering of the Fed’s ongoing asset purchase programme, officials generally been keen to emphasise that it is still far too early in the recovery to be talking about tapering or changing policy in any way.

The fact that the Fed is so keen to emphasise that ultra-accommodative policy stance is not going anywhere any time soon might contribute to a further sustained rise in inflation expectations which might contribute to further nominal bond yield upside, but ought to keep real-yields relatively subdued, which ought to keep stock markets from getting too wary. If indeed real yields were to see a sustained rally, this would present a much greater threat to stock markets. For now though, with the 10-year TIPS yield at -0.95%, stock market investors can rest assured that TINA is going nowhere yet (TINA being an acronym meaning There Is No Alternative in reference to how investors can no longer buy bonds but must instead buy stocks if they want any yield).

Elsewhere, the Democrats indicated on Tuesday that they would give US President Donald Trump one final chance to leave office before the end of his term or they would pursue impeachment. Fears that in pursuing the impeachment of US President Donald Trump for his alleged involvement in egging on last week’s Capitol Hill riots, Democrats may hamper incoming US President Biden’s agenda by delaying the passage of another Covid-19 fiscal aid package or delaying the confirmation of his appointees have not affected markets.