Does divergence of S&P 500 and treasury yields pose threat to equities?

After a dismal start to the month, the S&P 500 (CME:SPZ14) rallied to a record high last week and is nearing an important psychological resistance zone around 2,000.

If the index manages to break through this level, it should bode well for US stocks in the near-term. The strong performance of US stocks over the last couple of weeks can be attributed to easing geopolitical tensions, a strong earnings season and encouraging US economic data, which helped the market brush off mildly hawkish minutes from the Fed last week.

On the data front, the optimism surrounding the US labour market has been bolstered by strong US housing and manufacturing data. It’s worth pointing out that while the economic data out of the US has been broadly positive lately, it hasn’t materially changed the market’s perception on when the Fed will begin hiking interest rates. Thus, it’s supportive for US equity markets.

 

 
S&P 500 (white) and U.S. 10-year Treasury Yield:Source: FOREX.com, Bloomberg (Note: This chart may not represent prices offered by FOREX.com)

In the QE era, strong US economic figures can result in a negative reaction from U.S. stocks because it makes the market jittery about the prospect of higher rates. This time is different because the market’s expectations for monetary policy haven’t really been altered, despite the general feeling from the Fed’s July policy minutes that the doves are moving closer to becoming the minority.

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