Investors are quickly rediscovering that not all stocks are created equal in a Covid recovery as expensive tech names sell to provide the source of funds for less expensive travel-related markers, along with energy and other inflation beneficiaries. But thankfully for society at large, there’s more optimism than fear today, with vaccines showing scientific results on the ground that validate efficacy and effectiveness over transmission, starting to lead the world back to normality.
At the index level, a promising start wouldn't be enough to hold US stocks in positive territory as equities eventually tracked lower Monday, the S&P down 0.5% with tech leading the decline: NASDAQ was down 2.3%. That came as the bond sell-off extended further; US10Y yields were up another 3bps to 1.37%. There was also a big move in Australian rates: 10Y yields up 17bps to 1.6% yesterday, lifting the spread to the US above 20bps and back to pre-RBA QE levels.
Tech investors continue to run the gauntlet of higher yields and less compelling valuations, but the bond market signal tells investors to trim some overweight tech. Since early 2018, a rise in the long bond yield has sent risk tremors through the stock market on four occasions: February 2018, October 2018, April 2019 and January 2020; during all four events, the turning point was the narrowing of earnings yield premium on tech stocks due to the rising 10-year US. As US bond yields continue to march higher, this continues to suggest the heavily weighted tech sector could be on the cusp of a very unpleasant near-term valuation test.
Tech-sector valuations have become extremely sensitive to changes in 10-year bond yields. So, for stock markets with a high-weighting to tech, such as in the US Index, the valuation impact from a rise in bond yields can be very steep.
Speaking overnight, ECB President Lagarde indicated the central bank is "closely monitoring" the recent sell-off, potentially suggesting that it’s not only investors experiencing some discomfort with higher yields; watch for a pick-up in PEPP purchases if that is the case.
The positive momentum continues in the oil complex, with investors unabashedly predisposed to a bullish view. So, the unwinding of the Texas cold snap effect and the prospects of some delicate negotiation ahead of the next OPEC+ meetings in early March are imparting little influence on price and giving way to the anticipated commodity reflation effect of Democrats pushing Biden's $1.9 trn stimulus through reconciliation and positive vaccine headlines.
There’s far more optimism than fear dotting the landscape today, with vaccines showing scientific results that validate efficacy and effectiveness and suggesting that vaccination will lead society back to normality in various phases, but quicker than expected only a month ago.
Several significant oil price revisions were announced overnight and may have contributed to the rally of over 3%. Among them, Goldman Sachs sees Brent at $70 in Q2 and $75 by year-end as stockpiles deplete; Socar's head of trading believes oil will hit $80 a barrel this year.
On the supply side, boots on the ground suggest the restart of oil facilities in Texas and the Midwestern states is slower than expected; some shale producers could take at least two weeks to restart.
The FX market is turning more efficient again, rewarding both more robust EU data and improved UK circumstances.
While the FX markets are still very complicated, with positive Covid -19 and reopening headlines competing with the implications of rising bond yields for various assets, some efficiencies are coming back to the scrim.
Sterling continues to leverage on a faster UK Covid rebound as markets continue to reward the currency against the backdrop of improved UK circumstances. Even though reopening the immediate steps is perhaps not as ambitious as possible, they are nonetheless a step in a positive direction.
EURUSD has retracted initial weakness in Asia, aided by a well ahead of the reopening curve and forecasted data points on the back of vastly improved conditions around the IFO survey for February.
The AUD and NZD continued their push higher overnight, buoyed by the reflation theme and rising commodity prices. The currencies have also been the beneficiary of rising domestic bond yields. And in the case of the AUD, despite uber dovish RBA forward guidance, traders continue to price a higher probability of an RBA rate hike, given the rapidly improving domestic state of affairs.
Global yields and curves resume higher. The dollar is lower, except for USDAsia as local currencies near the tipping point. US rates traders continue to reprice the FED curve, perhaps intimidating Asian central banks into a policy corner.
Despite the positive outlook and competitive yield differential, USDCNH is trading relatively firm again this morning. The PBoC is still trying to raise the QDII quota for institutions and studying the possibilities for individuals to buy foreign securities.
The Malaysian ringgit is currently in a tug of war between narrowing yield differentials with US bonds and surging oil prices. While Malaysia is losing some of its MGS appeals, the ringgit stands a great chance to benefit from export and commodity recovery as the world continues to reopen for business.
A strange sight to see the commodity locomotive racing at full steam, but with gold left back at the station. But correlations are looking more normal today after yesterday morning’s signal that gold was trading slightly higher in delayed response to USD weakness. A weaker US dollar remains one of the primary lift-off balloons.
Gold built on Friday's modest rally, clearing and holding above the USD1,800/oz level. USD weakness was likely the key factor behind gold's recovery.
Democrats may vote on the USD1.9tn relief package by the end of this week, with a Senate vote next week which should hold gold appeal as inflation concerns and reflation appeal suggest gold is a good hedge.
Bitcoin sliced through the psychologically crucial 50k level overnight, triggering the wrath of stops syndrome after US Treasury Secretary Yellen’s not so kind words about BTC efficiency as a mode of transaction.
But she's only a temporary game-stopper. Besides the enormous Middle East consortium interest in the Bitcoin ETF trading on the Toronto exchange that needs to hedge physical, if corporates start to add physical coins to the balance sheet this year, that is the game-changing panacea.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies