Asia Market: The bond beat goes on

Market Analysis / 5 Min Read
Stephen Innes / 31 Mar 2021

Market highlights 

  • Stocks remain at record highs, despite US yields ripping higher
  • Rough patch endures for oil
  • USD capitalising on rising bond yields and thoughts of US exceptionalism; EUR pushed to fresh YTD lows
  • With US yields continuing to make new highs and equities holding up, it doesn't feel like a great environment for gold


US equities slipped again Tuesday, the S&P down 0.3% despite a rebound in financial stocks. US10Y yields ultimately finished the session steady at 1.71% after moving as high as 1.77% during the NY session – the highest level since January 2020. European yields were higher, Germany up 3.2bps. Oil fell back 1.6%.

Over the past 24 hours, both Germany and Canada have restricted the AstraZeneca vaccine's use, to be used on people over 60 in Germany and over 55 in Canada. In both countries, the decision reflects concerns over blood clot side-effects in young people. This is notable locally, given Australia's dependence on the AstraZeneca jab.

The beat on US consumer confidence in March was up 19.3pts, a near-record monthly jump, to 109.7. This acted as a double-edged sword for pockets of the market as the combination of stimulus and robust data support equity prices. However, tech faces some challenges if the "risk-on" signal continues to manifest into higher real yields, suggesting investors need to calibrate their US real rate playbook for growth as the US rates debate remains at the forefront of all conversations. 

The street uniformly believes US data is at an inflexion point, and Friday's payrolls will be the beginning of a sharp acceleration on the US jobs markets. However, the constant discussion at every virtual market corner remains concerned about intense bond market reactions to robust incoming data and inflation risks beyond the base effects, which see traders challenge the Fed’s dovish view.

The more robust data could drive US yields furiously higher and hammer a massive wedge at the index level between financials, which tend to act better to higher yields, and the large-cap tech stocks that go on a buyers’ strike. 

But let's step back from the "hair on fire" view. The fact that stocks remain at record highs despite US yields ripping higher suggests, at some level, that investors are buying into the Fed AIT, which anchors short end rates but allows bond yields to rise, encouraging more banks to lend.

Oil Markets

The rough patch of oil endures as the short-lived bounce from the Suez Canal blockage has given way to a mighty US dollar and Covid-19 resurgence, raising more questions than answers around how quickly global demand will recover. 

And rubbing salt in the wounds today, the American Petroleum Institute reported a bearish to consensus increase of 3.910 million barrels of crude oil in the US crude oil inventories for the week ending March 26.

Indeed, the higher US yields and more potent USD combination apply vice-type pressure on all commodities today, and oil was no exception. Gold was down precipitously overnight. And regardless of what kind of bull spin I've been trying to justify stepping in front of the move, the bullish signals remain far and few as we stay on a bumpy path for oil prices compounded by the market's depth (liquidity) continuing to wilt.

We've come a long way on the US dollar and yields move, so we could see a bit of profit-taking ahead of the US ADP and especially NFP later this week, which could give commodities and oil market some room to breath. 

There’s also some disquiet after US President Biden's comments urging the continuation of mask mandates, along with the US CDC Director's warning on a fourth wave, threaten to bring some of the recent weeks' European lockdown anxiety state-side which is rounding out the revolving carousel for risk for oil prices over the short term. 

Over the past 24 hours, both Germany and Canada have restricted using the AstraZeneca vaccine for seniors, which does little to change the sad moon music. 

Still, the focus is very much on the OPEC+ meetings on 31-Mar/1-Apr with the widespread expectation being a roll-over for at least another month of the bulk of the production quotas. 

OPEC+ needs to continue to present a unified front. However, markets are starting to sense that the divergent view from the two largest producers in the OPEC+ group could become a problem at some point, even if they can paper over their differences in the near term. But traders are in desperate need for a helping hand from OPEC this week. 

May 21 Brent expiry is on tap, which may be adding to some downside risk as folks opt to close out as opposed to roll and carry.

Currency Markets

The USD, which has recently capitalised on weaker equities and risk aversion, is now capitalising on rising bond yields and thoughts of US exceptionalism.

The EUR pushed to fresh YTD lows overnight against the stronger USD, with dovish ECB rhetoric also playing its part. FX traders continue to show a strong tendency to stay long USD vs vulnerable low-yielders where a dovish central bank is likely to keep rate divergence in play.

The weaker JPY overnight shows this latest push higher in the USD is about yields, not risk appetite. USDJPY moved back above 110 and remained the favoured vehicle in FX to capture moves in US yields.

EM currencies are heading lower, especially for higher yielders USDTRY and USDINR. INR's regional outperformance this year amid solid equity inflows should be tested in the context of sharply rising Covid-19 cases, and the much-improved service-sector activity could be walking back more than a few steps after Mumbai imposed a nighttime curfew.

The Malaysian Ringgit 

Higher US yields continue to act like a wrecking ball, crashing any semblance of positive ringgit sentiment. And Malaysia getting removed from the FTSE Watchlist did little to stem the tide, likely because foreign bond investors have turned into better sellers of bonds than local bond buyers. 

Oil prices slipped again overnight, which will do little to assuage the bearish view. 

Gold Markets

Gold is not managing to bounce much with the selloff having accelerated through the previous support at $1,700. With US yields continuing to make new highs and equities holding up, this doesn't feel like a great environment for gold.

I would expect gold to benefit from any selloff in equities and for the metal to be a little better supported around the $1,680-1,660 area, which marks the month and year's lows.

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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