Goldman with the note:
In 1H rising inflation expectations and inflation surprises have been a driver of higher rates volatility, resulting in a more negative equity/bond yield correlation. But more recently investors’ worries of a growth slowdown in 2H have increased. In particular last Monday risk appetite fell sharply and risky assets sold off, only to recover during the rest of the week. On a positive note, Euro area flash PMIs have surprised on the upside in July, and while UK Composite PMI have softened more than expected, COVID cases seem to have inflected.
The regime shift from inflation risk to reflation capitulation has pushed the equity/bond yield correlation back above zero (Exhibit 1). While the volatility of US 10y breakevens remained muted, real rates have been the main driver of higher equity/bond yield correlations, more consistent with a growth re-pricing for the coming years (Exhibit 2). As we highlighted in The Equity Duration Puzzle, with more skew towards long duration growth stocks the rate sensitivity of broad equity markets has risen. Thus, while cyclical and value stocks have been under pressure, quality growth stocks boosted the S&P 500 on an index level towards all-time highs. Long duration secular growth stocks rallied as 10y TIPS yield fell by 48bps since mid-June – their outperformance vs. value has been well above the historical beta to rates (Exhibit 3). EM and APAC ex Japan equities underperformed with headwinds from the Delta variant and concerns on China growth and policy. Gold also lagged and remains a value buy, both as a hedge against the deterioration of growth momentum or inflation surprises.
