US equities rose again overnight as a calmer session in bonds continued to lead the way.

While rates are only down a touch, it’s the fact that they have stopped charging ferociously higher, which seems to have been enough to calm frayed nerves, helped along with the US Congress passing the stimulus bill designed to alleviate poverty in the US.

The past two weeks have been extremely volatile for equities which have gotten challenged multiple times, driven by the initial spike in yields that led to a subsequent positioning unwind in long-duration growth. Indeed, US yields have acted like an anvil around inventors’ necks lately.

While certain parts of the market have performed very poorly (and could continue to lag), the re-opening/value trade has continued to do well complimented by dip-buying even in the mega-cap tech space.

So, for all the talk about a bubble in equities or an increase in yields prompting a wave of selling in risk assets, the actual performance has been quite damning for risk asset bears.

The US ten-year auction went off well, providing the more visible Alka Seltzer moment for the risk market as the resulting lower yields allow investors to breath easier.

But the recent calming in yields may also have to do with the commodities reflation taking a breather (copper down 7.6% from the recent peak, iron ore down 12.4%), taking some of the pressure off of nearer-term inflation risk premium that has been fueling steeper central bank paths. The easing of this pressure point has encouraged better bond market uptakes.

As the market moves past fiscal stimulus as a driver and as central banks try their best to stick to the script, look for economic data to take the driver seat increasingly.

If the last US payroll release is any indication, markets will likely not yet have seen the last of the rates reflation and can’t help but think that we are in for a very bumpy ride.

Looking at the bond yield forecast for 2021 from the likes of Goldman Sachs, UBS, and Deutsche Bank, who are predicting 10-year US yields topping between 1.85-2.25 % and even taking the more conservative route, it’s hard not to think we will continue iterate through this churning process as rates go higher.

Sure, it is scary when it happens too fast. Still, when the pace slows or yields back down, investors realize higher rates are fundamentally good economic news and a natural by-product of a rebound and start loading up on stocks again. I suspect we will ride the rates roller coaster for some time to come.

US crude oil inventories build-up

US crude inventories have built for the last two weeks due to the current imbalance in the US energy system, with many refining units still offline.

Given the powerful signals from the US re-opening narrative, it still suggests that the path of least resistance for oil prices is higher.

And with figures crunched, all combined, US commercial crude and product stocks are built by 1.3 million barrels on the week, with the large build in crude once again offset by a large product draw, leaving total oil stocks relatively flat.

But if refining outages persist, there is a risk of entering the driving season with seasonally low gasoline inventories, which will continue to put upward pressure on energy prices even more so as lockdowns get lifted.

But the latest market moves suggest we are nowhere out of the woods just yet. Investors’ main concern is the rebalancing of the market and the outlook for prices in the coming months remains tethered to OPEC+ cohesion.

It’s entirely possible that global demand could be 5-6mbd higher in the second half of the year than in 1Q, but that has to be seen in the context of roughly 8mbd of OPEC+ supply curbs still in place under the agreement.

And with Russian Deputy Prime Minister Alexander Novak saying Russia will increase output from April, the current agreement could start to look a bit dodgy.

Indeed, this hints that there are real risks that the agreement frays in the coming months as the group looks to bring back more supply – several member countries have histories of poor compliance with allocations and of pushing for higher supply sooner than the likes of Saudi Arabia with Russia leading the charge.

And as traders pivot to the April OPEC+ meeting, this debate will get louder and potentially more cantankerous, proving to be the ultimate rally capper in the weeks ahead.

US dollar a bit weaker

The US dollar is trading weaker as US yield pressures abate and risk sentiment improves squarely on the back of muted US inflation data.

But we remain very much in a broader range trade mentality as the FX market stays much more cautious on US yields. Many traders are still viewing this week cross-asset price action represents more of a reprieve than a reversal, a “dead cat bounce” if you will.

However, what could be more poignant for FX markets are comments from the Reserve Bank of Australia (RBA) which illustrate the battle central banks may face reaffirming their dovish patience.

The AUDUSD moved lower on this affirmation of a dovish stance but has since reversed that move. The difficulty remains that the growth outlook is improving in Australia and elsewhere. So, the guidance for unchanged policy on a multi-year horizon is proving hard to sell to markets.

Gold rebounds

Gold continues to rebound on lower US dollar and the easing in US yields.

At the same time, there is room for more gains if yields fall convincingly below US Treasury 10-y 1.50 % But with the US entering a solid macro phase in Q2 while the US Fed takes a hands-off approach to the steeper UST curve that will likely follow, suggesting this week’s move in gold could be little more than a reprieve than a reversal of fortunes.

And with the equity market doing well and yields abating, there will be less urgency for the FED to step in and pushback on the current steeper yield curve narrative.

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi