Equities: Resilience versus rates and Oil shock – Danske Bank

Danske Research Team notes that equities advanced on Friday, leaving the broader market only about 1% lower for the week despite hotter US CPI, higher front-end yields and a sharp Oil rally. Cyclicals outperformed defensives and the VIX stayed below 16. They argue this resilience reflects investor confidence in a strong underlying economy and earnings backdrop.

Cyclicals outperform despite headwinds

"Equity resilience meets a new AI concern. Equities advanced on Friday, leaving the broader market only around 1% lower for the week. The gains came despite a CPI print marginally on the hotter side, which pushed the US front end higher and increased the implied probability of a Fed hike this week."

"The ability of equities to advance against this rates headwind was noteworthy. Cyclicals outperformed defensives over the week, while the VIX closed below 16."

"The resilience becomes even more striking when considering that front end yields rose by approximately 25bp in both the US and Europe last week, while oil gained around 10%. In other words, rates moved higher partly for precisely the wrong reasons from an equity perspective. Yet equities declined by only 1%, volatility remained compressed and cyclicals outperformed."

"This suggests that investors remain acutely aware of the exceptionally strong underlying economy and earnings backdrop."

"This morning, Asian equities are trading lower, led by IT, with European and US futures pointing in the same direction. The market is beginning to engage with what we call AI Fear 3.0."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)