April 27, 2021
Bond yields: The recent consolidation in bond yields is a mean reversion trade after prices became deeply oversold in mid-March. The consolidation allowed high multiple stocks to regain their footing after three weeks of rerating. Ten-year yields pulled back ~21bps over the last 3 weeks and the Nasdaq 100 (NDX) was able to record a new high. Bond yields should stay in ‘consolidation mode’ at levels below 1.65%, but Treasury prices are now short-term overbought and there’s no shortage of catalysts on the horizon. Stay with a ~1.90% target sometime in late-Q2.
Cyclical/value: Bond yields and cyclical/value equity performance are positively correlated most of the time. But the correlation between cyclical/value equity sector performance and global manufacturing PMI is unambiguously positive. Global manufacturing PMI for March expanded to 55 from 53.9 in February. Flash manufacturing PMIs for April signaled (only get G4 countries) further acceleration with final April PMIs due next Monday. Every internal and cross-market relationship (Gold/Copper ratio etc.) we check points to cyclical/value equity outperformance over the next 2-3 quarters. The relationships should also lead to Russell 2000 (small cap) outperformance and a period of catch-up for broad European indices.