US equities tracked sideways again as markets remained metaphorically stuck in a clingy sweet spot as confidence in post-pandemic recovery’s strength keeps risky assets supported.
Still, the run of poor US economic data continues to fog up the looking glass. Nevertheless, that weak financial data prevents the US Fed and the White House from delivering anything short of full-throttle overdrive policy support with lots more ” charcoal in the snow” to come.
Tempering risk sentiment overnight US 10-year yields recovered yesterday’s fall, rising 3bps to 1.16% as investors perhaps realized despite Chair Powell doing an admirable and useful job of pouring ice water on rising US yields, the asymmetric risk is firmly in the other direction approaching the next tranche of the fiscal stimulus.
Even more so after a soft 30-year US bond auction that saw long term investors back off and unlike the 10-year auction results begin to acknowledge that the anticipated economic recovery will have consequences and the potential to lift yields much higher than they are today.
Investors anticipate US re-opening
Investors hotly anticipate the US reopening – and the economic recovery could come faster than expected. But in-demand stocks are already priced for perfection amid a relatively strong recovery as most of the easy trades around the traditional cyclical sectors (financials, industrials, materials, and energy) levered to the US reopening driven by the reflationary fiscal and monetary actions have been consumed.
Indeed, it feels like all the easy trades have been had, and now the real” through the looking glass” work begins trading off the back of economic data.
Global markets continue to trade mixed echoing that sombre data view as participation remains muted, suggesting that investors need a bit more cajoling by more all clear economic smoke signal on the horizon before getting back in the saddle.
But this is not to suggest the next phase of the stock market upswing will force investors to find shiny needles in a haystack of stocks. There are still significant opportunities among single-name consumer stocks around travel & leisure, retail, restaurants.
But we are just not entirely there, as lingering lockdown and vaccine rollout doubts continue to dot news wire. With vaccination rollout on turbo boost and the current lockdown abatement doing what it is supposed to do by taming the virus spread, there is a solid chance that reported Covid-19 cases could shift close to zero in Q2 amid an early Covid-19 fiscal package plus a multi-year infrastructure package later in the year providing double lift off.
As a result, the economic mood music should attune higher in March, and the recovery could be set to surge in Q2.
Oil prices slide
After two downward corrections from Brent’s mid $61’s on two consecutive days, it suggests the markets got positioned a bit peaky especially after the IEA delivered a reality check and revised down its global oil demand forecast for 2021 and warned the market recovery is fragile.
The oil market is a very sentiment-driven beast. There might be a growing sense that commentary and analysis got slightly too far over its skis as the price corrects upwards even though the data does not suggest a significant change in the near-term outlook. As such the IEA release provided the market with a vital sensibility check.
But in reality, this is a supply-led rally that largely hinges on a restrained OPEC+ until demand fully recovers.
To have a bullish view of the oil complex, it needs to centre on OPEC + supply discipline in a world awash with spare capacity and extensive inventories. These are the kind of assumptions that could end in tears should supply return faster and trigger a swift and painful correction.
The importance of OPEC+ on the bullish viewfinder also means the group’s March 4 meeting takes on an even higher level of significance than usual.
It will be necessary for members to put political differences aside and remain focused on delivering the coordinated action that the market needs. Simultaneously, only drip-feeding the market with supply until demand returns gradually to normal. But given this meeting could be a dangerous supply beast; it might also cap oil prices until early March.
Forex markets shrug off Fed’s statement
Slightly higher US yields, a rotation shaky US stock market and lower oil prices hit the forex market’s darlings – the commodity currencies overnight.
Currency markets were completely non-reactive to US Fed Chair Powell’s watering down any taper thought, which makes sense given the FX market focus is on the post bond market reaction to the US stimulus package where the asymmetric risk is in the other direction from where Chair Powell is trying to herd the market ahead of the next US stimulus tranche.
Gold remains under pressure
Gold remains mired in a world of cross-currents. While London as usually found a few golden nuggets in Chair Powell’s dovish retort, but with the US dollar sailing on an even keel these days, there was little fresh impetus to push bullion higher.
And with the pop on US yields after a shaky 30-year bond auction, traders then began to factor the risk for higher yields around the next tranche of the US stimulus package. And to fog the view even more, oil prices fell overnight watering down the inflation premium.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi