After resisting the sell-off in bonds and rising yields for nearly 2 weeks, US equity markets finally bowed to pressure last night, dropping below the recent trading range. The Australian market will follow with a weak opening this morning.

Stock markets are becoming nervous about the prospect of rising interest rates against a background of moderate profit growth and relatively high valuations, particularly in the US.

Possibly ironically, for chart followers, this bond induced nervousness in stock markets has emerged just as bonds are testing significant chart levels. The Australian 10 year bond yield, for example is now close to its 200 day moving average around 2.27%.  Failure to get clear of this level could signal the end of the bond sell-off with markets judging they have already made sufficient adjustment for a moderate improvement in inflation and a glacially paced Fed monetary tightening program.

The reverse applies though, if bond selling does maintain its momentum beyond current levels yield based stocks like the Australian REITs will be casualties and this prospect will keep investors nervous until the situation is resolved.

Oil prices showed signs of faltering last night as they approach critical resistance around the low $50 price zone. With the prospect of increased producer hedging if prices move much higher, oil may begin to struggle in the absence of a compelling OPEC agreement. This will have implications for inflation and potentially limit the near term sell-off in bond and equity markets.

Investors are also likely to be cautious ahead of the Fed minutes due for release tonight. Given how critical the interest rate outlook is for markets at the moment, markets will be focussed on the degree of support for a rate hike this year revealed in the Fed minutes.