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Stocks pull back from records as yields rocket

Tesla, man and machine

European and US stocks flirted with new records in overnight trading, before surging bond yields saw them pull back from the session highs. US 30 year yields smashed through 2%, and the benchmark ten year maturity closed up at 1.31%. In other developments, Bitcoin touched $50,000 and crude oil prices rose as US producers shuttered facilities against an icy weather snap.

Stocks generally have now departed from traditional valuation measures. As an example, the S&P 500 is trading on 23 times wildly optimistic 2021 earnings. The consensus earnings estimates include a 50% average increase in earnings across all 500 companies in the second quarter of this year alone. Only the upward revision of earnings pulled that ratio back from all-time highs at 27 times last quarter.

These stretched valuations leave no room for error in stock markets. More disturbing is the clear divergence in thinking between bond and share investors. Share markets appear to expect lower interest rates for longer, whereas bond markets are clearly reflecting rising rates this year. The inevitable resolution of this conflict could lead to violent market moves.

The US dollar index increased its trading range overnight, but finished largely unchanged. Bitcoin may be attracting more safe-haven buying, touching new highs as gold slipped below $1,800. The yellow metal is also less attractive in a rising interest rate environment.

Australian stocks that reported above forecast earnings this morning include Tabcorp, Dominos, Super Retail, Coles and the Netwealth group. Corporate Travel and Webjet both reported larger than estimated losses, and may give up some recent gains in trading today. The most prominent reporter today is Rio Tinto, expected to deliver its result between the Sydney close and the London opening.