Investors continue to run the gauntlet of higher yields, less compelling valuations and month-end seasonality but improving Covid-19 trends and robust economic data allow investors to turn their attention to updates on reopening timelines – especially from the UK and the US as cries for a quicker end to mobility restrictions grow more vocal.
The market is moving higher this morning as the rip in US rates takes a small pause, with the 10-year yield back below 1.30%. Whether yesterday was a speed bump or a turning point remains to be seen. It certainly doesn’t seem to be a contrarian to say US rates have room to move higher.
The market turned decidedly more defence as similar themes continue to bubble below the surface with the reopen and reflation trade outperforming.
In contrast, investors continued to retreat from expensive tech names that have powered the market higher this year as the rates debate remains heated.
Interestingly yields are a bit softer today after what was generally acknowledged to be a solid day for economic data in the US which could have triggered an adverse markets reaction to decreased stimulus urgency or higher yields on surging activity signs.
But the FOMC minutes continue to douse Fixed Income fires and push back the timetable for tapering while signalling no sense of policy urgency as the minutes show a united Federal Reserve committee expecting it will “likely to take some time” to achieve the “substantial progress” goal on guidance.
And if the market wanted improved economic data, they most certainly shouldn’t be disappointed by the massive beat on US retail sales. But talk about putting fuel on the fixed income fire.
If you were worried about inflation, too, then on top of the US January retail sales beat, US January PPI data was well ahead of expectations with the core year-on-year number at +2.0%, against forecasts for +1.0%, and after +1.1%.
Still, rates didn’t go flying off the fixed handle income sold off quite sharply in a knee-jerk response, but it bounced back just as sharply.
Oil prices continue to rally
Even Saudi Arabia can’t stop the rally in crude oil prices after announcing its plans to ease supply cuts now that the market is back in balance. Crude oil sold off on the headline but was then drawn back higher by enormous open interest on the march 21 WTI 60 strike which expired Tuesday.
I don’t think the markets were overly shocked about the Saudi rollback amid the roaring recovery in global demand, good news on the Covid-19 vaccine roll-out, and the extremely healthy oil price.
For trader concern, the keen takeaway seems that OPEC+ is happy with crude prices at these levels over the medium term.
The API data pointed to another large inventory draw. Still, the build-in gasoline is raising a few eyebrows as the polar vortex condition could be keeping enough folks off the road to most off heating demands.
Oil prices did cool slightly on this news, but nothing should be considered a rally stopper even under normal conditions. With oil prices trading tangentially to the US vaccination distribution curve, it’s easy to argue that the Texas storm has triggered a virtuous circle of events for oil market and has likely taken oil prices to a level where markets were eventually heading but just a little bit quicker than expected.
Some reposts suggest that it could take as long as 3 to 4 weeks for Texas oil production to recover fully.
And in that timeline, the US will inoculate 30-40 million more citizens just in time to partake in family annual Spring Break road trips when there is a typical gasoline surge.
So even when Texas production resumes, there might not be too much of a dip to be had as the market bits from Spring Break travels the refiner’s build-up to summer driving season amid a further flatting of the curve due to the vaccine roll-out impact.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi