The positive news headlines last week led to a broad based rally in risk markets. Global equity markets increased and credit spreads tightened last week. The S&P 500 approached new all time highs.
The vote in the Greece parliament enacting the bailout terms and the continued intervention by the Chinese government to support the stock market helped change the overall tone in the market. We are getting into the heart of earnings season and so far earnings have been solid. Google’s solid second quarter earnings report should continue to support optimism for technology stocks. On the economic front Janet Yellen’s semi-annual testimony to Congress continue to reinforce that an increase in interest rates is likely this year but the pace of tightening will be gradual.
Over the next several weeks I expect the favorable market tone to continue for equities and we could see the market appreciate another 3-5% from this level if earnings continue to exceed expectations. I remain cautious on fixed income assets and a risk market rally could exacerbate any selloff in the short term. From a yield curve perspective shorting 3-7 year bonds versus 10-30 year bonds appears reasonable. I expect the yield curve to flatten led by the belly of the curve as we approach a Fed rate increase.
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