BNY Mellon Capital Markets, LLC Weekly Market Commentary

This is a fundamental shift in our view, and one that the Fed is likely encouraged by, so long as rates remain anchored in the current trading range. While we have had fairly substantial intraday and even intraweek moves, the 10-year is essentially where it was at the start of July. What has shifted is the shape of the curve, with the market indicating its altering view on term premia as the curve reaches multi-year steeps. While a reversionary flattener would seem like a safe bet, we remain hesitant to recommend this trade as we think the trend will continue favoring a steepening, with worries over the impact from tapering on longer-term economic growth. Other fixed income asset classes also remain near early July levels, having reached a happy medium as we push through the end of summer and wait for the next sign of a QE move in the September. Fund flows into the fixed income markets remain weak, which is completely logical given expected losses were rates to continue their upward ascent. In contrast, equity flows remain strong as the great rotation continues to push equity values into record territory. 2Q:13 earnings have been mixed at best; highlighted by generally low quality earnings gains and the complete reliance on large y/y EPS growth from the financial sector. Despite these poor optics, we have seen a lifting of 2014 revenue and EPS expectations for the S&P, which has provided a logical catalyst for continued equity flows. While the summer doldrums seem to be setting in, from a volume and volatility perspective, we would highlight an increase in global risk, both from a financial markets perspective and on a geo-political basis. We have also started a multi-part discussion on changes to the financial sector from upcoming regulations in this week’s report that we will expound upon in later weeks. Read the full commentary now.

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