Equities bolted out of the gate and kept sprinting on Monday as confidence returned to the stock market, with robust US manufacturing data adding to the buoyant mood.
And with the US Federal Reserve content to frame the rise in US Treasury yields as a pleasing echo of rising economic optimism, bond markets took a breather.
It’s amazing what a weekend time out can do to right the ship on an even keel as bond markets rowed back into calmer waters on Monday, ballasted by the J &J one-shot vaccine providing the huge green flashing light at the end of the reopening tunnel.
So, investors were more than content to spend Monday revelling in the upbeat recovery mood music.
And why not? After all, having a third Covid-19vaccine option in the main should reduce the time it takes the US to reach herd immunity.
But at the end of the day, it’s the stimulus fueled consumer spending spree feeding through to corporate earning that remains the critical delivery driver for equities.
In contrast, higher yields appear to be the speed bump in that bullish feedback loop. But it should be noted that stocks have performed pretty well in rising rate environments; better growth usually means better earnings.
Stocks should continue to move higher to the beat of the US consumer’s capacity to spend their way out of this recession. That impulse is enormous and dwarfs any yield rise effect on the back of the proposed $422 billion in stimulus checks.
Also, big-ticket retail items along with housing and servicing sectors could be on the receiving end of the US$1.5 trillion shopping bonanza as people splurge in all that pent up savings they have squirrelled away throughout lockdowns.
Oil markets: all eyes on the OPEC meeting
Constructive oil market fundamentals have blown slightly off course ahead of the OPEC + meeting on Thursday as oil prices took to the plunge pool overnight, with Brent back to the soft US$63 handle after trading as high as US$66.82 only last Thursday.
Commodities were mostly weak overnight as the dollar regained a bit of ground. OPEC+ will meet this Thursday, and expectations are that despite Saudi Arabia’s call for caution, most members will push for an increase in output.
The OPEC+ meeting this week is shaping up to be one of the most interesting in some time, with Saudi Arabia urging producers to remain “extremely cautious”.
Simultaneously, most other public comments suggest that pressure is rising both within OPEC+ and outside for a production increase.
It will be difficult for Saudi’s cautious stance to prevail, but size matters with the group set to bat around upping meaningful production increases. Markets sense that supply is in the offing; traders are not sure where on the bullish vs the bearish scale it will come in.
So typically, the pre-OPEC meeting price hedge would lean to the worst-case scenario.
US dollar a bit stronger
The US dollar is somewhat stronger this morning despite a notably “risk-on” mood in equity markets, underlining the difficulty of deciphering the colour changes in USD’s mood ring.
As bond markets take a breather, risk appetite is improving, but growth currencies remain a bit depressed after the bond market tumult. The sell-off in US real yields last week likely breached “speed limits” that FX markets are still struggling to ignore.
Central bank rhetoric and, in some cases, action around higher bond yields has become a more significant part of the FX narrative. So far, the Fed has been content to frame the rise in US Treasury yields as a pleasing echo of rising economic optimism, which continues to support the US dollar.
The Reserve Bank of Australia (RBA) so far is the big story as they ripped bond prices higher and found a way to push the currency lower.
To me, the RBA’s procyclical bond-buying amid a massive global rebound is like Mexico intervening to sell USDMXN during times of risk aversion: It works at first but has a diminishing effect.
And if the macro factors driving yield higher don’t decrease, the big question will be when it is time for the RBA to throw in the towel and let the market self-correcting mechanisms take over?
The Australian dollar is trading steady ahead of the RBA rate decision today.
Malaysian Ringgit under pressure
A more stable US dollar, lower oil prices and an unexpected deeper slide on Malaysia February Manufacturing PMI weighed on the ringgit and local equity market sentiment. Indeed, the dreary PMI print underscores Malaysia’s challenges as it seeks a sustainable recovery from the shattering COVID-19 pandemic blow.
Gold continues to struggle
Gold continues to struggle down over $200 since the start of 2021. If it fails to hold above $1,700 this week, the selloff may continue.
Rising bond yields and the firmer US dollar have been obstacles, and overall economic conditions have improved as Covid-19 vaccines roll out.
However, if real yields stabilise, gold should find support amid record debt and risk-off equity sentiment.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi