US equities were stronger Monday, the S&P up 0.7%, led by a rebound in tech stocks, and the NASDAQ up 1.2%. US10Y yields fell 4bps to 1.69%. European bond yields also fell, with German 10Y yields down 1.8bps after the ECB lifted its PEPP buying to EUR21.1bn last week (as flagged at the ECB meeting, up from EUR14bn a week earlier). Indeed, stock market investors had a little "PEPP" in their step overnight.
Also, and allowing for global risk assets to breath easier, US yields have eased ahead of crucial congressional testimony from both Federal Reserve Chair Powell and Secretary of the Treasury Janet Yellen. It’s widely expected they’ll “double down" on their dovish inflation views that any rise in prices was likely to be transient and unlikely to affect policy.
In the meantime, on the data front US February existing-home sales fell more significantly than expected (6.6% in February, versus forecasts for a 2.9% decline), possibly a by-product of the rise in long-end yields.
The cooling down of the US real estate market and lower oil prices have helped ease some inflation angst, causing US bond yields to slide a touch, allowing tech and other long-duration and interest rate-sensitive assets like gold to recover off recent lows.
In an oversold bond market, any weaker US economic data print will trigger a pullback in yields. Still, it also supports the "other side of the coin" view that the reopening will be more gradual and less inflationary than people think. When rates are going up, there’s an equal yet less vocal group that suggests, "sure, the liftoff will be inflationary, but we've priced that in now". After all, there’s a ton of slack and plenty of disinflationary forces to help offset the coming burst in demand for travel, tourism and real-life experiences.
Unquestionably, the post-virus boom narrative has taken a bit of a hit from several sources. Asia demand is still struggling and Europe is determined to find a way to get in another virus surge, consistently aiming at their own feet rather than their citizen's arms. Meanwhile in the US, the negative surprises from last weeks Industrial Production and Housing starts have tempered some of that “boomy “feeling. Although, I suspect the US data may be due to Texas's cold weather shutdown and the fall in housing starts being part and parcel to some pretty outrageous lumber prices.
The problem for risk markets is inflation which will be an ongoing debate for another 6-12 months, if not longer. So, expect to remain stuck in the rough and tumble inflation "lather, rinse and repeat" cycle as the rising tides of inflation ebb and flow.
Despite a further increase in DM sovereign bond yields, there’s been very little change in risk assets in the past few weeks. While this may be surprising on the surface – after all, yield-sensitive equity sectors like tech have seen quite some hefty underperformance – it goes to show the strength of cyclical equity sectors, which may have much more to run given the evolution of catalysts around stimulus and vaccine.
The massive implosion in the oil market of late emphasises how delicate the price recovery is at this stage amid the plenitude of competing forces and views over the market's evolution.
Sentiment continues to run cool as Europe seems determined to find a way to trigger another virus surge, consistently aiming at their own feet rather than their citizen's arms. To be fair to the incredibly inept vaccination effort on the other side of the pond, it might be as much about citizens keeping their arms in their sleeves as governments missing the mark after the AstraZeneca health scare.
Still, oil prices are finding some comfort from the latest TSA data, which is the clearest signpost folks are starting to move around more freely in the US. Air passenger numbers in the US continue to grow, with more than 1.5 million passengers travelling through airports on Sunday, according to the TSA; that’s the highest number of passengers since March 13 last year.
But after a violent and heavily subscribed WTI sell-off into expiration (March 22) where preliminary data points to a 180- million-barrel departure, one would think positions should be much cleaner after that massive cleansing of speculative froth. Still, oil prices are not recovering anywhere towards signalling a return of the bulls just yet. Indeed, this could be suggesting the upcoming OPEC meeting as being a possible overhanging risk beyond the current roll carry uncertainty. Still, it may take a while for USO fund type investors to return.
Despite a further increase in DM sovereign bond yields, we've seen very little change in risk assets in the past few weeks. While this may be surprising on the surface – after all, yield-sensitive equity sectors like tech have seen quite some hefty underperformance – it goes to show the strength of cyclical equity sectors. Indeed, resilience is also notable in other asset classes, for example risk-on G-10.
The EURUSD is trading a touch higher on the back of softer US yields that have allowed risk assets to breath a touch freer. Indeed, the EUR is steady this morning, though still not far off YTD lows, as the focus remains on the region's stuttering vaccine roll-out programme. But this story is becoming far too repetitive in the FX circus. With EURUSD continuing to hold the 1.1850-70 technical line in the sand, more speculative traders will be happy to buy euros in anticipation of easing European lockdowns early in Q2.
Also, European investors have a little "PEPP" in their step after the ECB confirmed more significant QE purchases, which helped reverse the dreary lockdown sentiment tide and supportive for the single currency.
On the Turkey front, the balance of risks for the TRY has shifted towards higher volatility. How much volatility vs "carry" are investors willing to ride where the haze of volatility could be the overriding factor?
The Malaysia ringgit continued to trade on the weaker side of 4.11 yesterday on softer oil prices amid EM risk-off ripples from the TRY sell-off. But with US yields softening a bit and the US dollar generally weaker across the board this morning, the MYR and local Asia FX should trade with a more positive beat today.
As the US yields story continues to evolve, so does the ebb and flow in gold sentiment. Lower US yields overnight triggered a pullback on some newfound US dollar optimism that’s favourable for bullion prices. Gold remains well supported above $1,720 near term pivot but needs sustained break higher before confronting the November 2020 lows near $1,765.
In the meantime, gold remains supported by the ongoing Covid-19 stimulus efforts. And while it might not be the best near-term speculative game in town, it’s still hard to argue against gold as a long-term portfolio diversifier again the abundance of the market unknowns.
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Today’s key charts focus on oil, where the recent rally has stalled amidst talk of a lift in sanctions and speculation of a production boost.