Stock markets continue to recover on the buy the dip basis after US Federal Reserve Chair Jerome Powell mitigated market fears of any near or medium-term policy capitulation.
If you want to get into the Fed’s soul, then it is most evident through the lens of Jay Powell’s current mantra: “The job is not done”. Powell’s view is that having been neck-deep in the Covid-19 warfare trenches, now is not the time to start waving the victory flag and allow the rates market to sabotage the recovery.
The past week has seen massive sector dispersion driven by the sharp rise in yields.
On the one hand, the cyclical part of the market exposed to the re-opening narrative kept marching higher. On the other hand, headline indices and tech stocks were under pressure given growing valuation concerns. Tech stocks are susceptible to rising yields because their value rests most heavily on future earnings, which get discounted more negatively when bond yields go up.
While the bid to the re-opening story could continue as the market doesn’t seem nearly long enough energy, financials and materials, Tech could be due for a tactical bounce should bond yields stabilize or head lower.
In the near-term, retail behaviour will continue to drive a large segment of the stock markets recovery bus as they have done so since the vaccine efficacy results hit the first days of November.
Should there be more days like Tuesday, which presumably was painful for retail investors with ARK ETFs, TSLA and Bitcoin all trading down, it could again trigger the fear of another broader market capitulation.
However, with the market beginning to digest the recent back up in yields and Fed policy on autopilot, it still feels like any significant pullback on the Index will run into “buy the dip” mode.
Oil continues to soar
Crude oil continues to soar as the market remains on full throttle bullish bias. Even the unwind of a once in a century cold snap in Texas, intense negotiations ahead of the next OPEC meeting or higher US yields are imprinting much of negative influence as reflation effects are finding an echo in speculative flows that remain full-on pedal to the metal as the global economy is moving in the right direction.
This year is likely to see the biggest ever jump in oil demand as the vaccination effect will amplify the natural Covid-19 curve flattening data from lockdowns.
In rounding out a perfect day for the bulls, Chair Powell continues to deliver policy on maximum overdrive, all but guaranteeing the US will continue to carry the baton as the world’s supreme oil consumer.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi