Global equity rally fueled by the US, reflation trade sets in 

The anticipated reflation tradehas set in, with shares and DM bond yields breakinghigher, but USD has not participated in this move. Instead, USD has decorrelated from the performance of the US bond market, drifting lower while the US 10-year bond yield has breached the 10-year 2.52% technical barrier. The government’s monthly sale of US$34 billion in five-year notes drew the weakest demand since July, based on the number of bids received relative to the amount offered, seeing investors switching into equity holdings. Cyclicals such as transportation and financials have led to the upside, suggesting the market making bets on US economic expansion gaining momentum. In this sense the current equity market rally is different to the liquidity-induced, dividend-focused rally seen for most within the post Lehman world. The new structure of this equity market rally makes sense for an economy having closed its output gap now entering into a new area of re-building its capital stock.