Market snapshot: bond bears and equity bulls

It is the bond market where the alarm bells are beginning to ring, while the US equity markets continue to test fresh record highs.

Yields are currently at or around 5%, suggesting that bond investors consider that an interest rate hike is increasingly on the cards, with the likelihood having spiked to around 45% this week, double the level it was just a few days ago.

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The oil price has risen once more, as the US/Iran stalemate continues, and with reports of attacks and the seizure of ships in Oman and the UAE. The impact has already been seen this week following two hot inflation prints, with both the consumer and producer price indices coming in much higher than expected.

In addition, the consumer shows little sign of slowing down spending, while soft Treasury auctions this week could signal that investor appetite for bonds could be fading. Taken together, these signals point to an economy where monetary tightening would be the traditional response, as opposed to the easing which investors had assumed would be the story this year.

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Equities, on the other hand, are on a tear. The Dow Jones is up by 4.2% in the year to date, and just 0.2% away from the record high which it set in February. The more tech-focused S&P500 and Nasdaq each closed once more at record closing highs, bringing their gains in the year so far to 9.6% and 14.6% respectively.

Amid what has been an outstanding quarterly reporting season, the appetite for tech stocks is back with a vengeance. The latest beneficiary was Cisco Systems Inc, whose shares rose by 13% yesterday after the software giant posted better than expected third-quarter numbers, and an equally optimistic outlook.

Meanwhile, AI poster child NVIDIA Corp added more than 4% after the CEO was invited at the last minute to attend the current US/China round of talks, and as reports suggested that the company had been cleared to sell its H200 chip to around 10 Chinese firms.

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In the past two months Cisco, Nvidia and Amazon.com Inc have gained 47%, 30% and 28% respectively, while more broadly investors have moved away from concerns around the current level of AI spending – which is estimated to exceed $1 trillion next year – to concentrate on some of the blockbuster earnings which are already in evidence. Indeed, the next test, where the bar is being set increasingly high, will come next week as Nvidia reports its latest quarterly numbers.

For the UK market, sentiment is being driven by any number of conflicting factors. Political manoeuvring ahead of a potential tussle which could lead to even less leadership in the short term has exacerbated the pressure being felt on yields due to the inflationary effects of an elevated oil price.

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On the other hand, the first reading of the latest GDP number was a pleasant surprise, although observers have been quick to point out that the economy often jumps in the first quarter before tailing off for the remainder of the year, let alone the fact that the report did not reflect the full impact of the conflict so far due to its timing.

This uncertainty tends to be most keenly felt in the more domestically focused FTSE250, as is the case today at the open. The latest dip reduces the mid-cap market's gain to just 0.6% in the year to date, although the FTSE100 remains 3.7% ahead despite its own opening weakness.

Noticeable dips in the mining and banking sectors were the main culprits Friday, driven by a combination of a mixed economic outlook and a move to risk-off by traders heading into the weekend. Despite having been something of a safe retreat during the most volatile times of the conflict, the index is now very much playing second fiddle to the resurgent US technology theme.