Risk sentiment is getting a small bounce this morning after the US House of Congress passes President Biden’s US$1.9 trillion stimulus bill amid central bank sabre-rattling.
While investors will forever be keeping an eye on the canary in the inflation coal mine, the sun always rises on a Monday. It is still fundamentally good news that the sell-offs economic underpinnings – increasing mobility, inflation, and US stimulus – are still intact, with global vaccinations rolling out faster than expected and the US Feb financial data looking good.
A brief intermission to the bond market onslaught Friday saw US 10-year yields ending up down 12bps to 1.40 %. The reversal in bond markets came amid a more alarming tone from some central bankers as they began to rattle the sabre in an attempt to fight off unwarranted market-implied tightening.
Still, it was a week where we ate a massive wedge of humble pie after the bond market served up a lesson in humility. This cyclically driven move does not change the more secular, lower-for-longer view. But it does require swagger as the left tail risks have reduced, whereby the chances of the gloomiest scenarios playing out are also much less.
The seemingly forgotten aspect is that inflation expectations indicate the Fed’s lower for longer being accepted. Without the “street cred” of lower for longer, tightening monetary policy would wantonly begin to be priced. Sure, there is a shift in the odds the Fed will move rates higher in 24 months. But the market has not budged in the next 12 months view.
Simply put, the market is not challenging the Fed’s willingness to hold rates lower for longer, just yet.
And perhaps the Fed views the move in bond yields as little more than the market’s self-correcting mechanism, given they are left with the unenviable task of orchestrating a 2021 taper without the tantrum. And pushing back might be misinterpreted as the Fed losing faith in its own ability to guide policy. As large as last weeks moves in yields was, it is still difficult to see the Fed change tact so quickly after the recent chorus welcoming the move higher, though more dysfunctional treasury auctions could justify some pushback response.
Risk-Sentiment, OPEC+ Meeting Pull Oil Lower
Oil prices are recovering this morning in line with most risk asset on the back of the US stimulus bill passing and as central banks continue to sabre rattle to ward off market-implied financial tightening.
The oil market has been hobbled partly by the domino effect of “risk-off” sentiment across broader markets. And by supply concerns ahead of next week’s OPEC+ meeting as reports surface, Russia is pushing for a production increase. At the same time, Saudi Arabia favours holding production steady.
It will be difficult for Saudi’s cautious stance to prevail in a higher oil price situation, but Saudi has flexibility concerning its unilateral 1million barrels per day cut. This was meant to apply for February and March, but Saudi may choose to delay the return of some or all of this production to keep prices high, even if the rest of OPEC+ favours a production increase.
The OPEC+ meeting on Mar 4 is an increasingly essential ingredient, and producers face the tricky task of sorting through the various moving parts to form a strategy that makes everyone happy. But let’s not beat around the bush; more supply needs to come onto the market to ensure OPEC+ meets incremental demand and keeps internal discipline ducks in a row.
While evidence of t a tighter oil market in 2021 prompted several brokers to make upward revisions to oil price targets, which helped push Brent to a 13-month last week. While it is true that the market is likely to be undersupplied this year, what is getting ignored is the fact that this deficit is entirely dependent on OPEC+ supply cuts.
The artificial shortage created by the OPEC+ agreement will help to accelerate the draw-down of global inventories. Still, the upside in Oil is likely to be capped by the ~9mb/d of spare capacity in OPEC+.
US dollar gains strength, but can it hold support?
At the beginning of the year and really up until just the last few days, the rates complex was priced for a perpetually and exceptionally dovish Fed. However, last week, there’s been ample evidence of investors getting stopped out of bullish currency bets as FX traders were caught far too short dollars against the backdrop of higher US yields, especially against commodity currency linkers.
However, most forecasts and trade recommendations’ basic premise hasn’t changed: the global cyclical rebound should result in broad Dollar weakness despite a strong US economy. And with most countries on the cusp of reopening, traders may soon start to fade the strong US dollar narrative from last week.
Not all systems go for gold (yet)
Precious metals fell into the close on Friday as the USD continued to rally despite lower yields, but gold is beginning to look oversold near term.
Still, the Commodity broad sell-off can weigh further on the bullion complex; silver may weaken if copper falls, so it is still not all systems go for gold at the moment.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi