Stock markets continue to recover on the buy the dip basis after Fed Chair Jerome Powell mitigated market fears of any near or medium-term policy capitulation.
If you want to get into the Fed’s soul, it’s most evident through the lens of Jay Powell's current mantra: "The job is not done". Powell's view is that having been neck-deep in the Covid warfare trenches, now is not the time to start waving the victory flag and allow the rates market to sabotage the recovery.
The past week has seen massive sector dispersion driven by the sharp rise in yields. On the one hand, the cyclical part of the market exposed to the re-opening narrative kept marching higher. On the other hand, headline indices and tech were under pressure given growing valuation concerns. Tech stocks are susceptible to rising yields because their value rests most heavily on future earnings, which get discounted more negatively when bond yields go up.
While the bid to the re-opening story could continue as the market doesn't seem nearly long enough energy and financials, tech could be due for a tactical bounce should bond yields stabilize or head lower.
Risk tends to suffer as yields move higher and/or break new ground, but quickly recovers when they back off and start treading on terrain that has already been staked out.
In the near-term, retail behaviour will continue to drive a large segment of the stock market recovery bus as they have done so since the vaccine efficacy results hit the first days of November.
Should there be more days like Tuesday – which presumably was painful for retail investors with ARK ETFs, TSLA and Bitcoin all trading down – it could again trigger the fear of another broader market capitulation.
However, with the market beginning to digest the recent back-up in yields and Fed policy on autopilot, it still feels like any significant pullback on the index will run into "buy the dip" mode as the SPX psychological barrier at 4K is some way off, so risk is consequently more comfortable.
On a positive note, according to prime brokerage sources, institutional money is still underweight as most prime brokerage clients have only added exposure very slowly after the late January de-grossing.
Crude oil continues to soar as the market remains on full throttle bullish bias. Even the unwind of a once-in-a-century cold snap in Texas, intense negotiations ahead of the next OPEC meeting or higher US yields impart zero negative influence as reflation effects are finding an echo in speculative flows that remain full-on pedal to the metal.
The global economy is moving in the right direction. This year is likely to see the biggest ever jump in oil demand which provides all you need to know on the demand side as the vaccination effect will amplify the natural Covid curve flattening effect from lockdowns.
In rounding out a perfect day for the bull, Chair Powell continues to deliver policy on maximum overdrive, all but guaranteeing the US will continue to carry the baton as the world's supreme oil consumer.
The real story in G10 is that high beta and commodity currencies are going up and funding currencies are going down. It’s proving excruciatingly painful for dollar bulls to fade these moves as that later part of the rally was supported by rising domestic rates.
Although the yield back up this week was more of a globally synchronized event, my main scenario still expects yields to be led by the US this year – especially with the enormous fiscal US package likely to be finalized in the coming weeks which should at some level offers support to the USD.
And while Powell will be one of the last doves to turn, he could become a turncoat much quicker than expected if the vaccines fulfil their promise of US glory days ahead.
GBP is punching above its baseline weight thanks to high vaccination rates and sterling reserve demand from central banks and M&A activity as post-Brexit inflows continue to pick up. AUD should be in demand due to commodity appeal; it also has the corona of the gigantic BHP and RIO dividends payable in early March and April (US dividends converted to AUD).
NZD is among the best-performing G10 currencies year to date, clocking a rally of about 4% in nominal trade-weighted terms since the Nov. 11 meeting. The bullish FX market reaction to an unchanged policy shows a willingness to view the glass as half full.
Against the EUR, there’s a battle of bulls and bears in the FX market about whether to sell the USD during a global upswing based on its safe-haven personality, or to buy the USD due to rising US yields and accelerating US growth.
The MYR continues to trade in very tight ranges more prone to flowing US rates and the broader US dollar sentiment than soaring crude prices for the time being. My feeling is that investors want to see some economic progress on the ground before committing full bore back into the long ringgit trade.
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow