Equities leapt out of the gate and kept sprinting on Monday as confidence returned to the stock market, with robust US manufacturing data adding to the buoyant mood. And with the Fed content to frame the rise in US Treasury yields as a pleasing echo of rising economic optimism, bond markets take a breather.
It's amazing what a weekend time-out can do to right the ship as bond markets rowed back into calmer waters on Monday, ballasted by the J&J one-shot vaccine providing a huge green flashing light at the end of the reopening tunnel. That meant investors were more than content to spend Monday revelling in the upbeat recovery mood music.
And why not? After all, having a third Covid-19 vaccine option should, in the main, reduce the time it takes for the US to reach herd immunity.
But, at the end of the day, it's the stimulus-fuelled consumer spending spree feeding through to corporate earning that remains the critical delivery driver for equities. In contrast, higher yields appear to be the speed bump in that bullish feedback loop. But it should be noted that stocks have performed pretty well in rising rate environments; better growth usually means better earnings.
Stocks should continue to move higher to the beat of the US consumers’ capacity to spend their way out of this recession. That impulse is enormous and dwarfs any yield rise on the back of the proposed $422 billion in stimulus checks; also, big-ticket retail items along with housing and servicing sectors could be on the receiving end of the 1.5 trillion shopping bonanza on the back of pent up savings that US consumers have squirrelled away throughout lockdowns.
Meanwhile, by the numbers, forward earnings expectations are set to increase about 20% this year, compared to that 3% or so headwind for a 50bp rate jump. As such, earnings should more than offset near-term rate headwinds, albeit with multiple air pockets in that uptrend.
Constructive oil market fundamentals have blown slightly off course ahead of the OPEC+ meeting on Thursday as oil prices took to the plunge pool overnight, with Brent back to the soft USD63 handle after trading as high as USD66.82 only last Thursday. Commodities were mostly weak overnight as the dollar regained a bit of ground. OPEC+ will meet this Thursday, and expectations are that, despite Saudi Arabia's call for caution, most members will push for an increase in output.
That OPEC+ meeting is shaping up to be one of the most interesting in some time, with Saudi Arabia urging producers to remain "extremely cautious". Simultaneously, most other public comments suggest that pressure is rising both within OPEC+ and outside for a production increase.
It will be difficult for Saudi's cautious stance to prevail, but size matters with the group set to bat around upping meaningful production increases. Markets sense that supply is in the offing; traders aren’t sure where on the bullish vs the bearish scale it will come in (500K vs 1.5 Mil bpd). So, typically, the pre-OPEC meeting price hedge would lean to the worst-case scenario.
The USD is somewhat stronger this morning despite a notably "risk-on" mood in equity markets, underlining the difficulty of deciphering the colour changes in USD's mood ring.
As bond markets take a breather, risk appetite is improving, but growth currencies remain a bit depressed after the bond market tumult. The selloff in US real yields last week likely breached "speed limits" that FX markets are still struggling to ignore.
Central bank rhetoric and, in some cases, action around higher bond yields has become a more significant part of the FX narrative. So far, the Fed has been content to frame the rise in US treasury yields as a pleasing echo of rising economic optimism, which continues to support the US dollar.
The RBA so far is the big story as they ripped bond prices higher and found a way to push the currency lower. To me, the RBA's procyclical bond-buying amid a massive global rebound is like Mexico intervening to sell USDMXN during times of risk aversion: it works at first but has a diminishing effect. And if the macro factors driving yield higher don't decrease, the big question will be when is it time for the RBA to throw in the towel and let the market’s self-correcting mechanisms take over?
In any case, the Australian dollar is trading steady.
A more stable US dollar, lower oil prices and an unexpected deeper slide on Malaysian February Manufacturing PMI weighed on the ringgit and local equity market sentiment. Indeed, the dreary PMI print underscores Malaysia's challenges as it seeks a sustainable recovery from the shattering Covid-19 pandemic blow.
Gold continues to struggle down over $200 since the start of 2021. If it fails to hold above $1,700 this week, the selloff may continue. Rising bond yields and the firmer USD have been obstacles, and overall economic conditions improve as Covid vaccines roll out. However, if real yields stabilise, gold should find support amid record debt and risk-off equity sentiment.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again