US equities were little changed overnight after another big sell-off in fixed income markets.
The re-open and reflation trade continues to outperform, and its no surprise to see banks and energy in the lead. However, the long growth and momentum trade is fading. There was plenty of red on the tape as those sector investors are getting antsy about higher US yields.
Investors remain reassured by expectations of another round of US stimulus and ongoing support from the Federal Reserve.
Critical in the narrative is that the House Democrats must keep pedal to the metal on the reflationary bus as the market hopes for a swift and sizeable fiscal package is equally on maximum overdrive.
US Fed rhetoric has been keen to downplay tapering talk, and the FOMC minutes from the January meeting are likely to repeat this tone.
Retail sales will be this week’s US marquee data released later today. And it would be a considerable understatement to say there’s a concern in some corners about the US consumer. An upbeat US retail sales data could provide the all-encompassing “proof is in the pudding” investors need to take the next massive leap of faith.
Structural inflation remains flat
Structural reflation remains the most likely path forward as populations are increasingly inoculated and US fiscal stimulus expectations crescendo into March.
Meanwhile, central bank policy normalization will likely become the next theme of focus in sequencing events as US Fed chair Jerome Powell has done too well a job of lulling the market into a sense of complacency, ironically planting the seeds for a taper tantrum scenario.
At what point will rising yields upset the apple cart?
But with 10-year yields above 1.3 % and WTI above $60 now acting as a recovery drag, the risk outlook is becoming more treacherous and could be why the S&P 500 is floundering this morning.
It’s difficult to tell if we have reached any significant inflexion points but its certainly starting to feel that the rip higher in US bond yields at least on the margins could be a match in the stimulus powder barrel That being said it remains to be seen if how any real drags will hinder the raging bull driving equity market sentiment these days.
The move in rates has been swift and ferocious as the market has rightfully shifted focus back towards improving data, progressing vaccinations, fiscal stimulus in the US, and a Fed intent on reflating the US economy.
Inflation expectations can act as a positive impulse for equities but are nearing levels where they became a headwind or at minimum cause investors to pause for a more in-depth look at all the reflationary headline noise.
For the most part, stocks are shrugging this off, perhaps viewing the recent yield jump as an extension of the reflation theme, while lifting all boats tied to economic growth and stocks that look attractive to global price pressure points. At the same time, retail traders continue to ride the wave of speculative bliss on virtually every momentum asset spurred on by social media influencers.
Looking at the market flow and a thinly bid yield curve Treasuries are far from considered cheap at this level as no one wants to stand in the way of higher yields suggesting the move has much further to run. At some point, the markets could eventually notice that yields do not reflect a cyclical uptick but rather a central bank policy pivots.
Oil rises on freezing weather
The ongoing power crisis in parts of the US continues to support oil, with freezing weather boosting energy demand and disrupting supply in key producing regions. Kind of the perfect storm for oil bulls if you may.
Crude prices hang on to Monday’s rally as the US cold snap continues to play havoc with domestic energy markets. By its nature, snow in Texas is a temporary thing, and it will reverse as quickly as the weather patterns change.
Today, however, oil is trading lower via a stronger US dollar which is gaining a head of steam with US yields ripping higher and both are stepping up to challenge the bullish reflation momentum.
This is one of the worst Mother Nature catastrophes I can ever remember while catching the oil complex wrong-footed at the supply levels. Many of Texas’s refiners remain shut and putting things in perspective, it’s at the double the number closed during hurricane Harvey (roughly 5mbd) implying a colossal gasoline and diesel fuel loss while setting the stage for a healthy gear up for the summer driving season as refining margins have soared.
Although the storm is turning into a human catastrophe, it provides another two or possibly three “look through” weeks as the markets continue to increasingly view the Covid-19 northern hemisphere winter of despair through the rear window.
The focus will soon shift to the OPEC+ meeting taking place in early March. It will be necessary for the group to continue to present a unified front and convey the impression that it is still enforcing supply discipline.
I suspect behind-closed-door discussions will focus on adding more oil back into the market without upsetting the proverbial apple cart. Higher oil prices in themselves can be a drag in the global growth narrative, especially for the substantial consumption engines in Asia (India +China+ Korea). Right now, they are only getting a fraction of relief via the weaker US dollar.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi