US equities had a mixed trading session overnight with the Dow Jones Index up while NASDAQ fell.
Investors are considering the tail risk consequence ahead of this week’s Treasury auction supply, with signs pointing in the direction that it could be another painful week for bonds. As a result, the US stock indexes diverge as the rotation theme picked up steam throughout the day.
While rising US bond yields are crushing the high valuation mega-cap tech stocks on the NASDAQ, improving activity data and positive vaccine news are making investors extremely comfortable lapping up value stocks, suggesting that not all equity counters are created equal for this phase of the economic recovery.
It’s still very much a stimulus-induced rally and rotation in US equities. Yet, until US yields stop rising, investors will continue to shun any longer duration assets, and tech stocks might continue to roil under the heat of higher rates.
In the eyes of the market, tech stocks’ long-term earnings power had become more and more valuable when discounted at lower and lower interest rates. Now that that shoe is getting put on the other foot, tech stocks are becoming less and less valuable when discounted by higher and higher interest rates and no different from 10-year bonds.
Now that sentiment and policy circumstances are changing, so will the calculus that props up both asset classes (bonds and tech). If inflation comes about – or, instead, looks a realistic possibility – you won’t see buyers of government bonds or tech stocks for dust.
Oil prices drop
Oil prices fell on Monday, hours after an early sharp price rise caused by a drone attack on Saudi oil infrastructure missed their mark.
There has also been a change in music’s mood over the past 24 hours as oil falls on the back of a stronger US dollar.
Traders also come to terms with some of the National People’s Congress (NPC) takeaways that revolved around less credit and stabilisation in Chinese markets’ leverage.
All the while, higher US yields continue to tighten financial conditions tempering the reflation trade, triggering more profit-taking from cross-asset players that were using oil as a speculative reflation hedge.
But fundamentals remain incredibly supportive, especially with Saudi Arabia in full control pursuing a tight oil policy. Brent is currently holding up above Brent $68 per barrel, suggesting speculators are likely dipping their toes back in after yesterdays chaos.
Meanwhile, the US production response to higher prices remains inelastic, with the Baker Hughes rig count reported up +1 only on Friday.
Perhaps more significant for oil in the medium term is growing evidence that the US and Iran may revisit the nuclear deal that fell apart when former President Trump unilaterally withdrew the US from the agreement. In a media interview, Moshen Razael (a potential Iranian presidential candidate and former leader of Iran’s Revolutionary Guard) said Iran would be ready to resume talks with the US and other Western powers if given a “clear signal” that US sanctions would be lifted within a year. Iranian leadership had previously indicated that no talks would occur until
If progress veers positive, Saudi Arabia will likely increase its production rather than lose market share to its geopolitical competitor.
US dollar gains support
Elevated US yields are the primary catalyst for market moves overnight, including the stronger US dollar. While not rising precipitously further overnight, US 10-Year Treasury yields remain lofty, hovering around 1.60% as the US makes further progress towards the massive fiscal stimulus. Fed rhetoric suggests it will stay on the sidelines amid the economic recovery.
For the USD, the repercussions are so far proving doubly supportive. Higher yields echo the narrative of US exceptionalism and USD yield advantage, while weaker equity markets provide the USD with a haven bid.
Gold under pressure
Up the stairs and down the express elevator scenario typifies the last two weeks in the gold market
The US economy is doing much better from a growth perspective than many had expected just two months ago. In particular, ‘hard’ activity data have surpassed consensus expectations lately and have been the driving force behind bond yields higher, much to gold investors’ chagrin.
The US yields traded to their peak for the year, and the dollar touched its highest in three months, sending gold prices reeling. The interest rate pressure is likely to be a more extensive and nearer-term factor rather than the positive force of expected inflation, suggesting gold may head lower when interest rates shoot up again.
This week’s US bond auction and supply present a clear and present danger for gold investors. Buckle in if the auction results tail poorly as it could be a reasonably steep drop for gold prices.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi