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Why higher rates are good for stocks

Interest rates are up, but is it a signal that the world is getting better?

The day before yesterday (that is, the day before the NASDAQ temporary shutdown), the US stock markets had a wild ride. It dropped 46 points, then surged 103 points only to drop 120 points in the last two hours of trading.

(Read: Stocks close higher after 3-hour NASDAQ trading halt)

The reason? The Federal Reserve's Open Market Committee released minutes from its June meeting. Analysts, reporters, and traders alike tried to parse the notes in an effort to divine the Fed's next move with quantitative easing.

Over the last several years, the Fed has been buying US Treasury and mortgage bonds in order to add dollars in the financial system. Known as quantitative easing, this policy means higher bond prices and thus lower bond yields so long as the Fed keeps buying. However, back in May, Fed policymakers including Chairman Ben Bernanke hinted that they would begin tapering the $85 billion per month program should economic conditions in the US improve.

So, when the Fed released its meeting minutes, everyone scoured the wording to find signals on if and when the Fed would taper. Any clue traders could grasp on to, they took it. Besides shaking the stock market, this also led to a selloff in bonds towards the end of the trading day yesterday. Yields on the US 10-Year Treasury note went from 2.81% to 2.90% by this afternoon.

(Read more: Cauldron of hawks emerges on Fed policy committee)

But while higher interest rates are thought of as a negative for stocks, what if the economy has a reason to improve, the basis for tapering to begin with?

Sure enough, Europe is showing signs of improvement. Eurozone GDP grew 0.3% in the second quarter of 2013 and a purchasing managers index (PMI) released today came in at 51.7 for the euro zone. When a PMI is above 50, that means more activity.

Over in China, a couple of PMI releases points to a little bit more growth there, as well. A PMI compiled by HSBC came in at 50.1 for the month of July while China's official PMI is now at 50.3.

(Read: US oil ends above $105 on strong China, Euro zone data)

As the euro zone and China improve, they may take US stocks with them. And, that may mean higher interest rates as investors sell their bonds for better returns in stocks.

Is the prospect for this possible?

We talk numbers with Blaze Tankersley, Senior Managing Direct at BayCrest Partners, on the technicals. Looking at the fundamentals is Steve Cortes, founder of Veracruz TJM. Tankersley and Cortes analyze what's next for the markets and if higher rates are a reason not be worried for the future of US stocks.

To see Tankerly and Cortes analyzes the US markets, watch the video above.


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