Sometimes you have to throw conventional wisdom out the door and just let the good times roll.
The about-face drifts lower in US rates after the booming ISM and payrolls is not merely a function to a substantial short positioning feeling of gradually being squeezed, although it’s a significant factor. Make no mistake, this is a global equity market that’s turning exceptionally comfortable with growth driving up yields, supported by a Fed which is in absolutely no hurry to tap the brakes.
The question is: does it get better than this, or are we nearing peak optimism? Or, with US stocks remaining in "kid in a candy store” mode, are we gliding on a sugar rush tailwind from a once in a generation type stimulus effect.
The inability for yields to move higher is a clear signal of extended positioning, but the "drift" should not be mistaken to indicate that the global recovery narrative has come to an end.
The distribution of vaccines in China and Europe is improving quickly where the catalyst runway is lengthy. Many adults have recently become eligible in the US, which means they will achieve maximum efficacy in May after two doses.
Therefore, the market may be willing to wait for at least a couple of months to see how population inoculation passes through into economic activity before retesting the FOMC resolve. Any delay in the taper or a pushback in the FOMC rate hike cycle could be viewed as an opportunity to add risk.
I'm not sure the street is overly surprised by the level; however, both the velocity and timing may be flabbergasting to most.
In what’s typically a low risking period ahead of earnings, the pace and absolute levels of the move have likely forced active managers into the game who were relatively quiet in March ahead of quarter-end (this is according to several Prime Brokers I'm well connected too). Sometimes the fear of missing the boat becomes too overwhelming and all of a sudden the chase is on.
And with the VIX – a popular measure of the expectation of volatility based on S&P 500 index options – falling this week, it’s encouraging more algo and systemic traders into action.
All of this comes as concerns about everything from a looming tax hike to the pace of the economic recovery and rising inflation have traders concerned that the current calm in the stock market will be short-lived.
The US dollar is also beginning to roll over and, as one should expect, risk assets rebounde, led by EM equities and large-cap tech, while EU equities finally break out through pre-Covid highs. A weaker US dollar is one of the ultimate global risk soothsayers.
Positioning is much cleaner, although the market remains directionally long oil. However, the sudden calm and drop in volatility have attracted passive investors back to the fray as the market structure around prompt spreads start to tighten and the dollar begins to roll over.
These are essential quant signals that put a systematic bid under the market and the primary reason my fund loaded up on oil on dips yesterday. The bullish backwardation suggests traders expect supplies to tighten again, consistent with what should be the strong driving season where traders are starting to think the current bullish estimates might be a tad low.
Traders are trying to hash out a near-term sweet spot around Brent $63 to provide a springboard for the build-up to a pent-up summer travel boom in the US where gasoline demand should soar, and a further pick up in the air travel could assuage jet fuel concerns.
Still, the conflicting signals around OPEC+ supply coming back to market amid spiking coronavirus case numbers in India, parts of Canada and Tokyo backtracking into the Lockdown Abyss – together with reports linking the UK's Covid-19 vaccine workhorse to the higher frequency of blood clots – continues to hold the bulls at bay.
However, the eery calm cuts both ways in my view. Sure, there remains an expectation that demand will accelerate through this year, but the broad agreement that OPEC+ releasing barrels into this demand makes sense; the suggestion of oil prices in the $60s to low $70s on production normalisation vs current high excess production capacity is a logical outcome. Hence range trade beckons, with $60 the possible buy and $70 is the sell.
The fall in US yields amid the return of global growth exceptionalism though the EU recovery catch-up channel has put a bid under the EUR.
Although surging EM assets and lower USDJPY have led to the weaker US dollar charge, EU equities finally breaking through pre-Covid highs raised more than a few eyebrows.
The stars could be starting to align for the struggling ringgit of late as the US yields contiued to ebb and oil finally shows some semblance of calm, attempting to form a base around Brent $63.
However, the offset is a hint of disquiet on local bond markets as, with the BNM’s next policy move likely higher than lower, investors are backing off MGS duration. Not to mention as oil goes higher its starts to stir local reflation concerns, which also points to a repricing in domestic yields.
Gold continues to track higher after the release of FOMC minutes as both the US dollar and US yields trade softer in the wake of the Fed’s balanced outlook, which has temporarily assuaged concerns about higher yields.
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