President Biden began selling his infrastructure proposals today, and by all accounts it went over exceedingly well. Investors first applauded then gobbled the array of equity market delectables on offer, spurred on by the once-in-a-generation spending splurge that continues to the tune of a $2 trillion ticket price. Bullishly, that would convert into 20,000 miles of rebuilt roads and a glossy catalogue of other ventures intended to create millions of jobs in the short run while strengthening America’s competitive domestic and foreign ambitions in the long run.
Whatever suggestion there was about "everything being in the price" should be put to bed as, by the looks of the price action, there’s still a long catalyst runway on the reopening and vaccine narrative. And that’s not to to mention the arrival of those stimulus checks that should feed directly into corporate profits, which isn’t necessarily reflected in earnings yet.
Markets remain incredibly resilient, despite worries around rebalances. Rotation into value continues to take hold; Europe outperforming, banks exceeding tech, and momentum strategies seeing value enter the composite, and providing an extremely powerful passive tailwind.
Vaccine rollouts drive the narrative even with the EU lagging, with investors' view that this is a function of time.
The bullish cocktail of fiscal stimulus and pent up (consumer) spending will propel economic growth powerfully, and the US consumer confidence data provided an excellent reminder of this.
I think pockets of froth exist in some reopening names (namely airlines) but it’s difficult to fight this momentum en masse. Therefore, relative trades remain the most prudent (long, strong balance sheets). As things stand in Europe, the prospect of a meaningful summer travel recovery looks questionable.
Real yields rallying has boosted the cyclical and reflationary theme aggressively this week – led by banks – but commodities are having difficulty shrugging off the USD strength for now.
I would still watch the USD development and maintain the view that yield moves trajectory is a potential headwind for equities, rather than absolute levels. However, 2% seems to be the "consensus" headline level on the US 10yr yield that investors are looking at to reassess allocations. So, with that level becoming more factored into the price, investors are well on their way to calibrating their US real rate playbook for growth stocks.
Still, let's not forget the US rates debate remains at the forefront of all conversations and could eventually be the ultimate rally capper.
But with investors quickly pivoting the Archegoes "hair-on-fire" headlines, the fact that stocks remain at record highs even with the US yields ripping higher suggests, at some level, the Fed messaging is hearing an echo in the market with investors buying into their AIT mantra, which anchors short end rates but allows bond yields to rise and encourages more banks to lend.
Finally– and not to put a wet blanket on things – passing a bipartisan bill is likely to be difficult as Republicans are saying higher taxes would be a non-starter, and the same goes for moderate Democrat Joe Manchin.
We’re in the midst of a very rough patch of oil as the short-lived bounce from the Suez Canal blockage has given way to another demand hit after France announced it was stepping back into the lockdown abyss. And the fragile demand recovery is begging more questions than answers around the new virus variants that are raising alarm bells around the globe.
And while the market remains medium-term optimistic, it's hard not to stay short-term defensive in the face of more lockdowns – especially at this stage of the game where oil traders thought they would be mounting a solid offence, not putting up a defensive front.
But the market is finding some legs on first blush to the glossy US infrastructure plans, so perhaps this could be the springboard – or at least a plank – for prices to build a base… hopefully.
Still, traders need to position for OPEC what-ifs that, in the past, have been overly charitable at the cost of missing the opportunity to reintroduce some latent supply while it can, before that becomes much more difficult in 2022 when shale producers could be in better financial positions.
But at the heart of it all, the rally was mainly on the back of OPEC+ production cuts – or rather the fact that they agreed to hold production steady in April instead of ramping up production as the market had anticipated. So, I suspect the oil market is experiencing a bit of reality check these days as the super-cycle bulls might be giving way to the power of spare capacity as the thought of more barrels coming back continues to provide the medium-term supply headwind.
Month-end distortions make it difficult to get an accurate read on the events of the past 24 hours, so here I'm merely commenting on the lay of the land after trading the GBPUSD higher month-end signal last night (long GBPUSD 1.37277). For the record, I'm doubled down short GBP at 1.38062 (s/l 1.3831).
The EUR struggles for direction this morning amid mixed signals relating to the economic outlook but weighted down by France moving back into lockdown. The only thing is that short EURUSD has come a long way and, as we approach a critical NFP, rather than chasing the current trend, US interday bulls might prefer to change tack and sell rallies into 1.1800, so a short-term correction could be on the cards.
The Malaysian Ringgit
With oil prices plummeting overnight due to France moving into lockdown, the Malaysian ringgit remains defensive. And with reopening sectors taking another hit after the government extended mobility restrictions in some areas – including KL after spot Covid-19 outbreaks – the near term purview isn't great at the moment.
With UST 10 year yields still above 1.70 and the dollar sailing on an even keel, gold seems to have been a significant beneficiary of month-end rebalancing.
Going into quarter-end, it is worth highlighting that gold has underperformed US 10-year bonds by 5% and US equities by around 15-20%. So, if there was a need to rebalance portfolios, it’s likely to be gold buying at current levels – and probably what’s behind today's move.
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Market shifts from tantrum to tolerance as investors grow increasingly comfortable with growth driving up yields.