US equities were stronger overnight as a massive relief rally on the oversold NASDAQ unfolded due to a reprieve on the bond market rout.
We thought it was going to get choppy but not to the tune of 4 % intraday moves. But even in recovery mode, it perfectly illustrates just how fragile sentiment has become driven by the absolute uncertainty throughout both interest rates and inflation outlooks.
In what may have amounted to a short-covering reversion of the past few days, growth and momentum stocks snapped back from oversold conditions as rates pulled back slightly.
Likewise, the NASDAQ has managed to bounce back resoundingly overnight, led by the same names that have been beaten up most over the past week. Still, I can’t say there is a ton of quality buying in these names, given the more immense macro forces are very much driving this market.
With short-term bond market positioning oversold, any reason to rally ahead of auctions is not surprising. However, a 4 per cent NASDAQ snap back rally is unquestionably a surprise given the macro powers in play.
One can easily paint a picture of this market rebound as complete dependant on rates with fast money and speculative momentum types chasing the moves. As whenever there are these dislocations, active investors remain hesitant to react.
All the while, some folks are making some pretty big assumptions about what the US Federal Reserve will do next week. But the more significant point is that you shouldn’t assume you know what the Fed will do or the cause and effect if they tried.
If investors are correct in anticipating better economic performance this year, and markets reflect that view, the trend for rates is up, and it probably isn’t over.
Rising inflation and growth expectations should push interest rates higher, triggering investors to sell bonds and gold along with other long-duration tech stocks sensitive to rising rates and buy more growth-sensitive investments.
Still, there are also two crater type events the market will need to navigate later today that, if successful, could cement a short-term bounce back: the CPI print and the US 10-year auction will be keenly in focus. If markets emerge unscathed from those events, it may continue to relieve some short-term pressure.
One of the things about inflation is that we keep hearing that there will be a boom once everyone gets a vaccination, but the street has a hard time finding it in the place you would most expect it, in the inflation data itself. The direction is right, but the level is still pretty anaemic.
This too shall pass
When robust US data comes along, the Treasury market should steepen as it adds inflation expectations. Investors need to get hold of that – the data is excellent, the Fed is leaving rates on hold for a very long time in market terms, consumers are getting mailed stimulus cheque, and the president is spending money.
And with every American about to be vaccinated by the end of the year, that should be the cause of celebration, and that’s something that the markets will eventually revel in once the rate rise start to slow a bit as we edge closer to 1.75-1.85 in the ten year US Treasury.
Oil slides further
Oil prices slid further on a build in crude oil inventories.
But I think it best to interpret the API data with a pinch of salt as it is unclear whether today’s reported stock build is a laggard effect of EIA’s large build printed last week or whether we will see another large build from the EIA tomorrow.
The catch-up plays to OPEC’s recent supply cuts have called it a day. The next leg of the oil price recovery will have to be carried more by real economic growth, as fiscal stimulus and vaccine optimism is reflected in the price.
Still, I don’t think improving economics is too big to ask with the US GDP forecast improving by the month, so I suspect oil prices will remain Teflon so long as OPEC keeps conditions tight.
And that is where the debate will always lie when OPEC brings more barrels to market?
Oil demand is gradually recovering but is well below pre-pandemic levels. So far, the price upswing has been supported by OPEC pursuit of a tight oil policy. But higher prices are not being universally well-received amid the economic recovery, even more given the considerable room for OPEC+ to unwind supply curbs.
I suspect even OPEC must be waking up and smelling coffee that too high oil prices are in themselves a possible threat to the outlook as product demand falters when prices rise to fast too quickly, especially since demand hasn’t caught up.
And with only a couple of weeks before the next Monthly OPEC meeting, the supply debate will pick up again, and it’s back to the oil market rinse cycle again.
But I wonder how many calls from world leaders are going on in the background, reminding OPEC that higher oil prices are most unwelcome at this juncture of the recovery.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi