Inside Markets — Rate Relief

The post-election rotation into cyclical equity groups is back this morning after yesterday’s backup in yields put the theme on pause.  Bond yields reached session lows immediately following this morning’s inline CPI report, but have been rising since with notable curve steepening that largely supports a pro-cyclical bias. The post-election cyclical bias makes sense given initial pro-growth policy proposals, but can’t survive in a flat curve/higher yield environment. The theme also remains ‘unconfirmed’ when comparing the near-term performance of the Russell 2000 (RTY) to the Nasdaq 100 (NDX). The performance ratio has been building a base since mid-August but needs to sustain a break above January-May range to confirm a lasting cyclical rotation in our view. It’s very close with the performance ratio now sitting at 0.113 and 0.116 as the level to clear.

Strong seasonal fund flows and a wide open buyback window create a bullish technical dynamic into year-end. The macro backdrop remains friendly for risk assets but turns unfriendly if/when 10-year yields break above the cyclical peak at 4.99%. We see upside risk if/when the index breaks above 6150 – this is the level where option dealer hedging (gamma) is neutral. A break above 6150 would add fuel to any year-end momentum-based rally.