The recent retreat in bond yields has fuelled demand for riskier assets, but market sentiment in general is certainly precarious with much intraday volatility for traders to enjoy or contend with. Regular discussions about stock market bubbles compete with fund managers desperate not to miss out on the unending gains. Are they too high and too fast?
It seems that we are currently in the middle of a crossfire between a highly positive macro situation, and some excesses that have cropped up here and there in certain parts of the market.
Fed action on its way?
While the “topic du jour”, rising bond yields take a breather this week, we did get some important comments from Fed governor Brainard overnight. The lady considered as a potential next chairwoman of the Fed echoed the words of ECB President Lagarde last week which implied that the Fed does very much care about the moves in the bond market and dislikes the speed with which yields tightened. Recall we did write about this last week too, suggesting we all keep an eye out for central bank reaction to any sharp moves.
So, while this doesn’t indicate imminent Fed action, the message points to a response if we see another swift upward leg. What does this mean for markets?
Ultimately, some form of yield curve control which means bond yields are kept unnaturally low for an extended period…which bolsters stocks bulls. Watch this space!
USD still consolidating
The US Senate is expected to take up President Biden’s $1.9 trillion pandemic package today with the Democrats aiming to get it signed into law before 14 March when some current jobless benefits expire. Notably, US states recorded a sharp decline in new infections and hospitalisations with Texas sweepingly rolling back many coronavirus restrictions.
The dollar is generally mixed so far today holding below the 91.60 February high, with ADP employment numbers disappointing ahead of NFP on Friday. Has the dollar correction run its course from last week’s low? Losses are expected over the long term, but we may see some sideways trade in the next few sessions ahead of the jobs numbers at least.
Rishi’s swifter recovery
UK Chancellor Rishi Sunak has laid out his finance plan to help the country recover from the devastation of the pandemic.
The Office for Budget Responsibility forecast a quicker and more sustained recovery than previously expected, while Sunak extended pay for furloughed workers until September and carried forward a home sale stamp duty cut until the end of June.
The leaked corporation tax rise to 25% from 19% was massaged by tiering, which the Chancellor says will only mean around 10% of big companies pay the new rate. A Chancellor usually sounds upbeat when dishing out his Budget but in these exceptional circumstances, the stronger fiscal support does give the economy a head-start to the post-lockdown recovery. This could even come sooner than expected according to Scotland’s Sturgeon.
GBP/USD made a push above 1.40 earlier today before easing back. Yesterday’s low of 1.3858 looks like a clear support line in the sand below the 20-day SMA which has acted as a decent guide for higher prices over the last few months.
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