The vaccine booster shot and pent up US consumer spending could prove to be a double-edged sword for Risk-FX and Gold
MARKETS
Concurrent selling in equities and government bonds is not proving long-lasting following last week's downdraft in both asset classes. However, it would be premature to dismiss last week's rates vol-induced risk sell-off price action as a one-off.
The prospects for a rapid recovery in US consumer spending are increasing after the White House announced on Tuesday that it would have enough vaccines for every adult by the end of May, two months earlier than previously reported. Still, so are the markets inflation expectations. And despite vaccine optimism trying to provide a booster shot to risk sentiment, it could prove to be a double-edged sword when inflation kicks in as expected, more so if it then forces the Feds hand.
FOREX
Treasuries' sell-off has not benefited the dollar significantly or consistently. It seems the global reflation drive rather than a return of US' exceptionalism' after most G10 bond markets sold off as much or more than the US rates is the driving factor.
GOLD
Gold recovered from its multi-month low and stretched to $1740 before the market took a breather. The positioning in XAUUSD is cleaner now; it currently sits at 60% of max long. The yellow metal could be poised for a retracement higher but faces headwinds in the form of the $1750 -1765 technical resistance zone and potentially higher real yields.
Gold rose on US dollar weakness, but the million-dollar question remains how much juice remains on the golden tank in the face of higher US yields. You don't have to be a bond market vigilante to realize higher US yields are only a matter of time.
I expect the market will continue to fade rallies into the critical 1760-65 range; if that gives way, it will likely be due to a weaker US dollar and or sagging US real yields on a FED push back.
Investors continued to grapple with inflation concerns; surprise API Oil build at a critical juncture, even the hard to love EURO is trading higher.
US stocks dropped Tuesday after Monday's sizzling rally ran headlong into the policy wall of worry as investors continued to grapple with inflation concerns and the eventual shifting tides around US Fed policy.
As expectations around the current fiscal stimulus package have gone from grossly underpriced several weeks ago to now priced for perfection. Investors are now turning worried about the perpetual stimulus machines of easy monetary policy and fiscal support throttling down. Indeed, last week's bond market volatility and the Fed policy curve's ongoing repricing perfectly illustrates just how chained to the rhythm of easy money policies the market has worryingly become.
In a rebalancing trend that started last month, high flying tech shares are the first to buckle when droplets of concerns hit the ground form the foreboding gathering of policy thunderheads roiling above. Investors strategy is to get out of the soup and get as far away from high valuation flyers as they possible can
It feels like we are in the eye of the storm before the process of intense policy repricing resumes along the Bond curve. Still, there are no US Bond auctions this week, and next week's auctions could see a more orderly outcome as the markets have had time to adjust, but I would not count my lucky stars just yet as the dreaded bond vigilantes are eager to pounce.
How much overheating and inflation will the Biden fiscal stimulus generate remains at the top of virtually every market conversation. And even though the market looks incredibly calmer but with growth and inflation dynamics as they are, one doesn't necessarily have to be a reflation revenger to think there will be further tests of the Fed resolve.
The Fed is systemically the quintessential Central Bank for global markets. Yet, they adopt the most laissez-faire stance on higher yields while enacting a very expansionary fiscal policy and even welcoming the higher yields. Indeed, this is critical in the broader market’s purview. If breakevens stabilize around current levels (in a 2-2.5% range) with real GDP growth perhaps clocking 7.5-8.5% this year, real yields will continue to climb.
The bar for the Fed stepping in to slow the move higher in yields has been raised because it is sanguine so far, and vigorous activity and inflation prints in Q2 will make bond-market intervention hard to justify. That suggests higher rates volatility, with the past week's experience telling us this will filter through equity, credit, and FX markets. If you haven't seen a policy unwinding tornado up close, this could be the year.
In the meantime, so long as the Fed retains its max-dovish stance, we should continue to inhabit the sweet zone revelling in the best of both worlds for equities as US vaccinations continue.
A robust economic recovery is well in sight, yet max policy support remains at full throttle on both the fiscal and monetary side. It should make it very difficult to sell this rally with a vengeance as investors are still riding on the cyclical bonanza.
OIL MARKET
US oil stockpiles rose last week, and product inventories fell sharply in a cause and effect of the cold snap that forced refiners to shut down Texas operations.
The unexpectedly large crude inventories build at a worrying time for oil bulls as major oil producers could agree to ease production cuts at a critical meeting this week amid concerns that demand will likely outstrip supply as the global vaccine-led recovery gathers a head of steam.
But as importantly, to ensure medium-term success and stability of the OPEC+ initiative and keep peace among members eager to take advantage of higher prices to replenish depleted budgetary coffers due to their fight against Covid -19, additional volumes need to be fed into the global energy machine.
The selloff in oil continues this morning, albeit at a less furious pace as worst-case scenarios are likely priced to perfection. But I think the recent buckle owes more to general concerns about the potential for this Thursday's OPEC+ meeting. It appears to represent some overdue caution going into the OPEC+ meeting as market participants continue to draw straws and attempt to gauge the likely rise in production.
In addition to the uncertainty surrounding the supply's magnitude coming down the OPEC pipeline, investor jitters manifest around speculation that OPEC+ discussions this week could be contentious.
Oil prices have posted substantial gains in recent weeks. Most recently, recent after fully pricing in US economic stimulus impacts, combined with more positive vaccine news.
However, building concerns point to some caveats and near-term pitfalls for oil prices as worries over faltering Asian demand as inventories remain elevated across the region, likely a direct cause and effect of extending mobility restriction in the area, and an uptick in OPEC+ supply could cap further gains over the short term.
FOREX
Equity markets are directionless after Monday gains, but with US yields easing and rowing back into calmer waters, there is seemingly less demand for safe-haven US dollars. And when the hard to love EUR puts in +80 pips headroom above the 1.2000 range base, you know the dollar just had a rough NY session.
AUD and NZD have risen alongside the recovery in risk appetite this week. The CAD continues to punch higher domestic data showed faster-than-expected economic growth, despite oil prices faltering a bit this week. Still, oil prices have exceeded virtually all market expectations and are always on course to move higher as more parts of the global economy reopen for business.
So long as the Fed retains its max-dovish stance with the super dove duo of Powell and Yellen steering the US policy aircraft carriers, its challenging to buy the dollar and sell gold at the bottom of the ranges.
The Malaysian Ringgit
A drop in the US dollar versus G-10 currencies would typically find an echo in the Malaysian ringgit. However, concerns over the velocity of last week US yield rise, near term uncertainly over oil prices. The possibility of the PBoC delicately throttling down on policy support is a worrying sign for Asia FX growth prospects. I suspect the ringgit may continue to "mark time" ahead of the OPEC meeting, as local traders will be looking for some oil price directional clues later in the week.