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Thursday Look Ahead: Global Rates Rise Sparking Debate

The increase in global interest rates is signaling a willingness by investors to take on more risk, even as year end profit-taking hit gold and other commodities.

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The debate among traders, however, is whether that run up in interest rates is reflecting improving optimism for economic recovery, or longer term concerns about spending and deficits. The 10-year yield has risen 60 bps in just six sessions.

"To explain such a violent move, I would say it's probably (reacting) to both," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.

The run up in the 10-year note yield accelerated this week with the announcement by President Obama that the U.S. could maintain current tax rates and add another one year tax break on Social Security taxes. That news prompted economists to raise their growth outlooks for the coming year, but it also put the focus on the growing federal deficit.

The 10-year yield hit a six-month high of 3.34 percent as the government auctioned $21 billion in reopened 10-year notes Wednesday afternoon. On Nov. 30, the 10-year was yielding 2.74 percent.

Markets Thursday are looking forward to the 1 p.m. auction of $13 billion in 30-year bonds. Weekly jobless claims are reported at 8:30 a.m., and wholesale trade is at 10 a.m.

The Bank of England is also expected to make an announcement after its interest rate meeting, ahead of the U.S. market open.

Gold fell 1.8 percent to $1,382.50, while silver tumbled 5.1 percent to $28.2240 per ounce, as traders took profits and the improved outlook for the global economy dimmed the precious metals safe haven status. Oil lost 0.8 percent per barrel to $88.69, but copper was a winner, up more than 1 percent.

Commodities also reacted to concerns that Chinese growth will slow as interest rates rise. Traders also said the lightening in positions could be the result of anticipated changes in position limits rules, expected to be announced next week, as required by the Dodd-Frank Act.

"Palladium is up 80 percent this year. Silver is up 70 percent and gold is up 25 percent. It's December - two weeks before Christmas. You take your profits. We don't think it's the end of the trend. It's the end of the year. You clean up your books," said Jordan Kotick, global head of technical analysis at Barclay's Capital.

The rising rates will not necessarily derail the stock market, as some traders fear, Kotick said. Stocks, unlike precious metals, have not run up strong gains this year. "It's not a growth story. It's a slow trickle of confidence. It's a slow walk to normality for the markets." It also signals an improving appetite for risk, he said.

The dollaredged up just slightly against the euro Wednesday but gained 0.6 percent against the yen. The dollar's direction has been locked in a trade counter to the move in risk assets, and its strengthening as rates rise has acted as a weight against stock market gains.

"The big sell off in U.S. Treasurys has been mirrored in Germany. For that reason, the dollar is not getting as big a bang," said Chandler, adding that Japanese and U.K. rates have also been on the rise.

The Dow Wednesday was up 13 to 11,372, and the S&P 500 was up 4 points at 1228. Financials were the best performers, up 1.8 percent. Citigroup gained after Treasury Tuesday announced the sale of the rest of its equity stake in the banking company. J.P. Morgan and Bank of America also gained Wednesday. Traders watch financials as an undervalued sector that should benefit if investors believe the recovery is kicking into a higher gear.

Chandler is also watching China, where CPI and other data is expected Friday. The Chinese canceled a 3-year bond auction, and Chandler believes they may be on the verge of increasing interest rates. The market anticipates a move by China over the weekend, but Chandler says he thinks it may be as soon as Friday.

- Follow me on Twitter @pattidomm.

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