US equities rose Thursday, the S&P up another 1.1% heading into the close. It was again led by tech stocks, the NASDAQ ending up 2.6%. US10Y yields were up 1bp to 1.53%. In contrast, European yields fell, with German 10Y yields down 1.9bp, after the ECB unexpectedly announced an increase in its PEPP purchases in light of the recent selloff.
Global markets continued to revel in the afterglow of President Biden pulling off one of the most significant legislative accomplishments of all time, securing a $1.9 trn spending bill that will undoubtedly help spur the global economy as the market, for now, pivots from Curvemageddon meltdown to a stimulus-induced melt-up mode, albeit one of the quietest melt-ups I can remember.
Still, stocks turned a lot perkier and faster than anyone had expected, especially with 10-year bond yields holding above 1.5% and threatening to move higher in a cause and effect reaction to the very same catalyst that’s possibly triggering the rallying cry; the 1.9 US trillion stimulus package which prompts the questions: What's going on?
The tech market’s sentiment will be forever changeable to the vagaries of US yields. For now, its receding inflation worries have calmed frayed nerves and bolstered confidence in longer duration tech assets.
The ECB might have stumbled again on the exact nature of its communication to the bond market. However, for equity investors, the overall message was that central banks are still prepared to act. That's a powerful force for the growth names; such is the effective weighting of the S&P to tech than any tech-driven rally necessarily drags the index higher.
There doesn't seem to be a "whole lot of love" or conviction behind this move, keeping folks on the sideline. The NY morning rally is explained more by a lack of selling after the ECB clearly stated it would push back against higher yields.
But with yields nudging higher and stocks falling into the close, it suggests there will likely remain some hesitation ahead of the FOMC next week. Indeed, we're heading into a very volatile period, with the March 16-17 FOMC meeting looming as a trigger for a renewed selloff in US rates (see the FED and DOTS explainer below).
But stick with the higher yields trade. Economic data, including realized inflation, is likely to continue strengthening from here. China’s total social, financial data has yet to show a deceleration that could signal the last stage of the base metal’s reflation. And the recent correction in NASDAQ has already pulled forward some of the rerating risks on the back of higher rates.
It should be an absorbing day in Asia after yesterday’s equity bounce, driven mainly by mainland China, which got a boost from better credit growth numbers and Premier Li's speech to end the NPC sticking to the script that we're not going to see a rapid change in China's policy direction. However, there’s not a lot of conviction in this bounce. While the US/China situation seems to be seeing an organized re-engagement via the meeting in Alaska next week, but the tone could be chilly. If the Washington Post is correct, then it's about to get worse with President Biden reportedly planning to bump a bill to counter China's economic influence ahead of his well-flagged infrastructure bill.
FED and DOTS
Fed members will be updating their outlooks at next week's FOMC meeting (March 17), which will now include a $1.9tn fiscal stimulus package. In December, there were 5 dots for liftoff by 2023, and while economists are debating whether 2-3 dots are to join them, which would keep the median dots at no hike, it’s a close call. But 4 dots showing liftoff would bring the median dot to a hike in 2023; this could be the sort of hint the market would take as an approaching taper signal. And while the odds of this happening are pretty low, even if it doesn't happen at this meeting it’s still just a matter of time.
After a few days of consolidation post-OPEC+, there’s been a strong rebound in oil prices driven by gasoline and refined products signalling that economic recovery moves are in full swing. Indeed, oil prices roar to the sound of ringing gas pump counters as, according to the US Department of Transportation, more and more folks take the highways ahead of what’s likely to be the biggest pent up driving season on record as the US could reach her immunity from Covid-19 by summer vacation time.
The market remains tight, and global supplies will continue to draw until OPEC+ members change their output stance. Backwardation continues to generate positive carry for holding length further along the curve.
After the street, en masse, went long EURUSD into ECB, there’s been some profit-taking towards 1.2000. However, the move higher on the EURUSD is more about what US CPI said about absentee inflation than the jumbled messaging from the ECB. This trade is still very much US rates play but is now becoming more about how the FOMC will play their cards.
The real USD story still awaits the Fed to play their card. Will the Fed continue to "walk the dovish talk' with its USD negative implications? Or will the Fed "walk back" from their dovish commitments when and if it becomes clear that the fiscal and vaccine led recovery is kicking into full gear?
Indeed, where is the line that separates the dollar bulls from bears over the next 6 to 12 months? Until then, FX traders will continue to travel the path of least resistance, focusing on pure beta currency reflation trades like the NOK and CAD.
That said, the cat and mouse game between the Fed and the market will continue for months.
There’s been a significant reversal in EM sentiment that’s benefited the ringgit through both the higher commodity channel and the stronger yuan coaxing Asia FX along on the back of improving China risk sentiment. Whether the latter sticks could be open for debate, but one asset that’s not is higher oil prices that continue to lead the charge for oil betas like the MYR, CAD, and NOK, which are all trading firmer this morning.
There’s been a rapid reversal in USD sentiment over the last four weeks. For the first time since mid-June 2020, the average USD positioning is net long USD, with short positions remaining only in USDCNH and USDINR, albeit marginally, according to the latest USDAsia positioning survey from Reuters. This has been driven by the move higher in US bond yields, and it's a broad-based risk-off move rather than a specific view on any of the countries in the survey.
Even though we’ve had a reversal of fortunes in ASIA FX as US yields stopped climbing, the survey suggests that USDAsia should continue to track US yields higher if that does become the case.
Gold is getting no joy above $1,730, as suggested yesterday; regardless of where the dollar shifts, we need to see a break below the psychological 1.5% UST 10Y level to test where near-term resistance stands at the Fibonacci level of $1,743. Until then, the elephant in the room remains ETF liquidation.
The gold price may have found a floor here and will be comfortable for a bit, but if US yields start to pick up ahead of steam or the FOMC surprises by hinting at taper (25% chance), it could be lights out above $1,700.
If you don't think the US economy will surge and 10-year yields won't rise to 1.85-2.25 as predicted by Wall street, buy gold and lots of it. But really, you’re swimming against the current on this one, I'm afraid.
But I will leave you with one quote I like to use from my old trading boss back in the day: "When all the experts and forecasts agree — something else is going to happen."
For more market insights, follow me on Twitter: @Steveinnes123
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