Equity squeeze and yield plateau - VP Portfolio Watch
- Our autocorrelation signals have triggered in both US and European equities: a powerful indicator of an ongoing short squeeze. The median bear market rally sees a 40-45% retracement of the initial drawdown, which would equate to around 4150 on the S&P 500.
- The peak in 10y yields has likely already been established at just under 3.50%. The bond sell-off is now very extreme by historical standards, driving yields well above our fair value models.
- Expect a high yield plateau for now; a meaningful drop in yields needs the Fed to blink or a recession to hit.
- Given the high level of uncertainty around commodities and FX, we update our historical analog finder to offer some guidance for clients. The best historical analogs for next 3-6 months suggest
- crude oil to trade sideways
- DXY is in middle of a bull market
- USDJPY is vulnerable to a JPY short squeeze as the BoJ capitulates
- Gold is in an ongoing correction within a major bull market.
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