US equities were stronger on Tuesday as a massive relief rally on the oversold NASDAQ unfolded due to a reprieve on the bond market rout.
We thought it was going to get choppy – but not to the tune of 4% intraday moves. But, even in recovery mode, it perfect illustrates just how fragile sentiment has become driven by the absolute uncertainty throughout both interest rate and inflation outlooks.
In what may have amounted to a short-covering reversion of the past few days, Growth & Momentum stocks snapped back from oversold conditions as rates pulled back slightly. Likewise, the NASDAQ has managed to bounce back resoundingly overnight, led by the same names that have been beaten up most over the past week. Still, I can't say there’s a ton of quality buying in these names, given the immense macro forces driving this market.
With short-term bond market positioning oversold, any reason to rally ahead of auctions is not surprising. However, a four percent NASDAQ snap-back rally is unquestionably a surprise given the macro powers in play.
One can easily paint a picture of this market rebound as completely dependent on rates, with fast money and speculative momentum types chasing the moves, as whenever there are these dislocations, active investors remain hesitant to react.
All the while, some folks are making some pretty big assumptions about what the Fed will do next week. But the more significant point is that you shouldn't assume you know what the Fed will do, or the cause and effect if they tried.
To assume that this current bout of yield curve steepening will be similar to the past three is probably reasonable – mind you, it’s still far from a guaranteed assumption.
If investors are correct in anticipating better economic performance this year and markets reflect that view, the trend for rates is up and it probably isn't over. Rising inflation and growth expectations should push interest rates higher, triggering investors to sell bonds and gold along with other long-duration tech stocks sensitive to rising rates and buy more growth-sensitive investments. Given the immense macro forces at play in the rates markets, a great day in NASDAQ is hardly a trend.
However, there are also two crater-type events the market will need to navigate later today that, if successful, could cement a short-term bounce back; the CPI print and the US 10y auction will be keenly in focus. If markets emerge unscathed from those events, it may continue to relieve some short-term pressure.
One of the things about inflation is that we keep hearing that there will be a boom once everyone gets a vaccination, but the street has a hard time finding it in the place you would most expect it: in the inflation data itself. The direction is right, but the level is still pretty anaemic. Maybe that changes tonight, or perhaps it doesn't?
This too shall pass
When robust US data comes along, the Treasury market should steepen as it adds to inflation expectations. Investors need to get hold of that – the data is excellent, the Fed is leaving rates on hold for a very long time in market terms, consumers are getting mailed stimulus cheque, and the President is spending money. And with every willing American scheduled to be vaccinated by the end of the year, that should be the cause of celebration and something the markets will eventually revel in once the rate rise starts to slow a bit as we edge closer to 1.75-1.85 in the ten years UST.
Oil prices slid further on a build in crude oil inventories of 12.792 million barrels for the week ending March 5. But I think it’s best to interpret the API data with a pinch of salt as it’s still unclear whether today's reported stock build is a laggard effect of EIA's large build printed last week or whether we’ll see another large build from the EIA tomorrow.
The catchup plays to OPEC’s recent supply cuts have called it a day. The next leg of the oil price recovery will have to be carried more and more by real economic growth, as fiscal stimulus and vaccine optimism is reflected in the price. Still, I don't think improving economics is too big to ask with the US GDP forecast improving by the month, so I suspect oil prices will remain Teflon so long as OPEC keeps conditions tight.
Oil demand is gradually recovering but is well below pre-pandemic levels. So far, the price upswing has been supported by OPEC’s pursuit of a tight oil policy. But higher prices are not being universally well-received amid the economic recovery – even more so given the considerable room for OPEC+ to unwind supply curbs.
I suspect even OPEC must be waking up and smelling coffee that too high oil prices are in themselves a possible threat to the outlook as product demand falters when prices rise too quickly, especially since demand hasn't caught up. And with only a couple of weeks ahead of the next monthly OPEC meeting, the supply debate will pick up again.
But I wonder how many calls from world leaders are going on in the background, reminding OPEC higher oil prices are most unwelcome at this juncture of the recovery? It was much easier to tell when Trump was in power; all it took was a tweet aimed at Saudi Arabia to send oil prices lower.
The USD is weaker this morning on a combination of lower US yields and mostly more robust equity markets. The saving grace for stocks may have been lower US yields, with 10Y Treasury yields now 8bp lower in the last 48 hours. It’s not clear what the catalyst was for the reversal lower in yields, but it has taken the USD lower in sympathy. My guess is with the market looking into the FOMC viewfinder, and today's ten-year auction and CPI print garnering more attention than usual in this extremely yield-sensitive USD market, short Bonds pared and along with them some long dollar profit-taking was the order of the day.
With next week’s FOMC squarely in the market's crosshairs, if the FED truly believes inflationary pressures are nowhere near what they seem, they should make it abundantly clear that they do not intend to raise rates anywhere near as early, as fast or to a level currently being priced by the street.
Asia FX sentiment is much more stable this morning, led by USDCNH after the PBoC Deputy Governor Chen Yulu reiterated that China will steadily and prudently push forward capital account convertibility and promote yuan internationalisation. This provided the succour to the US yield onslaught that had caught local Asia FX traders leaning the other way and thinking the PBoC was open to a weaker yuan.
After getting battered and bruised most of yesterday, touching above 4.13, the Malaysian ringgit improved in line with ASEAN peers on the back of softer US yields and FX risk-friendly comments from the PBoC. But this morning the local unit isn't getting much help from oil as prices have fallen as positions have gotten a bit too stretched.
The relief rally has extended on the back of softer US yields, and with ETF and Comex, speculative net length reduced by the tune of 12.5 mn oz year-to-date positioning is much cleaner. And a lot of physical supply coming to market is getting absorbed by real money allocators below USD 1,700. So, things might not be as bad as they seem.
According to gold wholesalers in Zurich, Indian demand has been incredibly robust and bars destined for the region have increased; the 5-percentage point reduction in import duty certainly helps. Still, the key has been demand elasticity, with rupee-denominated gold now at desirable levels.
China demand has recovered this year. Premiums are hovering around USD10 above London and, from what I currently understand, the authorities are yet to award import duties, but I'm hearing that local stocks are close to being depleted on a post-LNY buying bonanza.
The elephant in the room remains EFT selling as US bond yields move higher and investors sell gold in favour of cyclical stocks; gold price may have found a floor here and could be comfortable in the $1,700s range for a bit as physical demand remains stout.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again