Daily Market Analysis

The surge in Treasury yields sent shockwaves across broader markets on Thursday, with 10-year yields briefly breaching the 1.60 mark to hit a new one-year high before moderating. At the time of writing, 10-year yields remain some 40 basis points higher on a month-to-date basis.

The steep ascent in yields is prompting investors to cast serious doubt over their exposure to equities, especially for tech stocks. The Nasdaq Composite index has seen its February gains whittled down to 0.37%, with US equity futures pointing to further declines at the Friday open.

Asian benchmark indices are ending the month on a downer, while the rising yields are giving reason for the dollar index (DXY) to keep its head above the 90 psychological level for the time being. The VIX index, also known as Wall Street’s fear gauge also shot above the 30 mark shortly before the US session ended.

Markets paying little heed to the Fed’s narrative

Investors clearly have a hard time buying into the Fed speak insisting that its too early to talk about tapering. Despite repeated attempts this week by Fed Chair Jerome Powell and other Fed presidents to reframe the narrative, saying that the rising yields are indicative of a rosier economic outlook, investors are instead interpreting the economic data through the US monetary policy lens.

While cognizant of the Fed’s desire to avoid the same policy missteps following the global financial crisis over a decade ago, markets however are of the opinion that improving US economic conditions will cajole the central bank into tightening their policy settings sooner than expected. Fed funds futures are already pointing to an interest rate hike that’s brought forward to end-2022.

The better-than-expected economic prints released this week, including the weekly initial jobless claims, January durable goods orders, and February consumer confidence, are only adding fuel to expectations that the Fed will have to bring its tapering plans forward, despite policymakers’ insistence otherwise. And with President Joe Biden’s $1.9 trillion fiscal stimulus programme still in the pipeline, investors are ramping up the chances of an overheating US economy that’s accompanied by the desired inflation overshoot, which in turn shortens the runway till the Fed’s eventual pullback.

With such a debate raging in the markets, we can expect to see more volatile days ahead until markets can reach a greater consensus and a firmer understanding over the Fed’s next policy steps, which should in turn offer a new equilibrium for Treasury yields.

Gold set to post second straight monthly decline

Spot gold is on course to register its 6th monthly loss from the past seven, with rising Treasury yields dealing a blow to the non-yielding precious metal. Bullions year-to-date losses stand at 6.7% at the time of writing.

Despite the threat of rising inflation, investors are clearly willing to ditch gold in favour of other assets that can better ride on the economic recovery’s coattails, as well as the subsequent inflation overshoot. Gold ETFs have shed their holdings by more than 2 million ounces so far this year.

Gold bulls will have all to do in attempting to break the precious metal out of its current downtrend, barring any Fed intervention in quelling the yields surge.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stocks are mixed this morning after the very volatile trading day in the US yesterday, with equities ending mostly higher. Developments in bond yields continue to dominate risk appetite and also sector rotation which my colleague, Hussein, highlighted earlier today. Cyclical stocks outperformed defensives and value made its eighth straight day outperforming growth.

The US FDA released its report on the Johnson & Johnson single-shot vaccine and found it “safe and effective”. Interestingly, the vaccine has also been tested in Brazil and South Africa where other strains are dominating and yet it remained effective. The J&J drug is expected to now get approval on Saturday which means the market has more positive news to feast on. With more fiscal support on the way, warmer weather and falling Covid-19 cases are lifting market spirits once more.

Dollar down n’out?

Today’s rise in bond yields is being seen by the market as driven by “good” economic factors so the move higher through resistance at the 2019 low (1.43%) today is not detrimental for risk assets. Correspondingly, it is not benefiting the dollar which looks to have broken down decisively through 90. The safe haven JPY and CHF are the laggards and dollar bears are now eyeing up the cycle lows around 89.16 with the neckline failing to offer concrete support.

This afternoon’s calendar sees US jobless claims, a revision of US GDP and US durable goods in focus. The jobless numbers might spark some intraday volatility, but reflation and global trends seem to be foremost in the minds of traders. Several Fed members will speak later tonight though they are unlikely to say anything new with the Fed remaining very patient about removing monetary policy accommodation.

EUR/USD breakout

The world’s most traded pair has been fairly quiet these past few weeks but today has seen a sharp move higher with a break above 1.2190. This further suggests that the reflation narrative is still counterbalancing higher US yields as a driver for the greenback. Next stop for the bulls if they can consolidate this advance will be this year’s highs which printed at the start of the year around 1.2350.

The poor vaccine rollout has been holding back the single currency, but we did get confirmation yesterday that the German economy will avoid a technical double-dip recession with the current quarter’s contraction.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Inflation threats and rising bond yields have been the dominant market topics over the past several weeks. Many investors fear the latest selloff in bonds and rise in long term interest rates will put an end to the fastest and strongest bull market in history.

Significantly, it is not only the US which is seeing bond yields rise. Long term yields in Germany, Japan, China and many other major markets are all fast approaching pre-pandemic levels. While this may indicate that inflation is returning, it also suggests investors are gaining confidence in the economic recovery and corporate earnings growth.

Corporate earnings are expected to recover at a much faster pace than previous crises, thanks to the trillions of dollars being pumped into the global economy and several investment banks have started revising their earnings forecasts higher for 2021. That could offset the negative aspects of rising long-term interest rates.

Federal Reserve Chairman Jerome Powell assured the markets over the past two days testimony to Congress that an interest rates increase is nowhere near. He continues to see price pressures as muted and says the economy is a long way from the Fed’s employment goals. Hence, easy monetary policy will continue beyond this year, even if some inflation metrics surprise to the upside over the coming months.

Given those factors, I assume the bull run is likely to continue for Q1 and Q2, but not necessarily in a straight line.

Despite the assurances from Chair Powell, equity investors will need to keep a close eye on long-term yields. The energy, industrial, material and financial sectors are the ones to benefit most from the reflationary environment and may be positively correlated to the rise in bond yields. But the technology sector that currently makes up 38% of the S&P 500 market cap is at risk if yields move much higher.

The rising interest rate environment makes it less appealing for investors to increase their proportion of growth stocks in their portfolios. They are already expensive compared to historic metrics and many stocks within the sector are trading at extremely high multiples. It’s now time to become more selective and focus on quality companies with reasonable price tags within the Tech industry.

The choppy movement in Tech stocks over the past two days has been a kind of warning signal. Investors highly exposed to this growth sector may need to build some downside protection.

LISTEN to the "MARKETS EXTRA" Podcast: Will the Fed trigger a “taper tantrum” or “taper rally”?

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

If you thought that the meme-stock mania was dead and buried, think again.

The army of day traders on r/WallStreetBets are back, sending their favoured stocks soaring higher on Wednesday:

• GameStop: +104% (it added an additional 83% in the after-market session, flirting with the $200 mark).
   
• AMC Entertainment: +18% (up another 22% in late trading)
   
• Koss: +55% (as much as +82.5% in late trading)
   
• Express Inc: +41% (climbed an extra 26% in late trading)
   
• Naked Brand Group: +31% (as much as +10% in late trading)

Such gains are in stark contrast to how benchmark US indices fared on the same day:

• Dow Jones index: +1.35%
• S&P 500: +1.14%
• Nasdaq 100: +0.81%

Although these meme stocks remain a long way off from the dizzying heights registered in late January (GameStop peaked at $483 on 28 January), before crashing back down to earth in early February, such mind-blowing price swings have not deterred these retail traders from attempting to launch prices into the stratosphere once more. And the catalyst appears to be the same chatter on Reddit that’s fueling yet another “stonk” frenzy.

Sure, Bloomberg reported on Tuesday that GameStop’s Chief Financial Officer Jim Bell is resigning after less than two years on the job, reportedly due to differences on how the company should reposition itself. But such a C-suite shuffle, in itself, wouldn’t typically warrant a doubling of the stock price, much less trigger a wave of buying in the other meme stocks.

It remains to be seen whether this latest spurt can match the January peaks for these stocks that are beloved by day traders, and whether another capitulation awaits on the other side. Both are likely outcomes.

Although r/WallStreetBets is filled with screenshots of those who have made massive returns, there are also enough reports (and even a separate, dedicated section on WallStreetBets) telling of traders who suffered deep losses from the earlier episode.

And now, with the added scrutiny of US lawmakers who exactly a week ago conducted a hearing on this GameStop saga before the House Financial Services Committee, the wider investing and trading community will also be eager to find out whether regulators are able to stomach more of such volatility.

As I had mused in my January 29th note, it’s how they respond that would determine the next chapter in this saga.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

The Fed Chair’s repeat yesterday of looser for longer policy irrespective of the improving economic outlook has modestly soothed market fears. Mr Powell’s high wire balancing act between acknowledging the upsides ahead while keeping the punchbowl full is seeing bond yields push to new cycle highs with the 10-year US Treasury hitting 1.42%. Next very big resistance stands around 1.43% which is the 2019 low and a major retracement marker of the 2018/2020 decline.

Meanwhile, stocks are mixed after the fun and games yesterday! The tech-heavy Nasdaq was down close to 4% at one point before Powell stepped in to help the index retrace and finish down only 0.5% with the S&P500 down 1.8% before finishing in the green. Of course, rising yields dent the allure of riskier assets, especially those high-growth tech companies that are not expected to reach the peak of their earnings potential for many years. That cost of waiting for companies’ earning growth increases, so we are perhaps at a critical juncture for certain stocks.

The dollar is slightly better bid today trading above 90 on the DXY. If all the market talk about inflation  is slightly premature and we should dismiss concerns about excessive inflationary pressures, then the next bumper Biden fiscal package should keep expectations supported. Together with an immovable Fed, this means the greenback may continue to struggle as real rates are moribund.

Sterling rockets higher and triggers stops

We said yesterday how GBP likes to overextend and boy it looks to have done that overnight when liquidity was at its thinnest. Cable spiked higher to 1.4241 while EUR/GBP dropped to a low of 0.8538. The Boris “Highway out of Hell” plan is gaining traction with a full reopening of the UK now firmly in sight. Money markets have also reacted to this potential normalisation with traders now piling into bets that will pay out if the Bank of England raises interest rates for the first time since 2018. Quite unthinkable just six months ago, NIRP (sub-zero rates) might well be a mere footnote in history.

Technically, we haven’t quite made it to the April 2018 high at 1.4377 and the daily candlestick does look like a bearish pin bar at the time of writing – this is essentially a sharp reversal and clear rejection of price. Overbought momentum signals haven’t as yet kept sterling subdued but the bulls will want to keep prices above 1.40 at least if they want to build on all this upside and head further north to the mid-1.40s.

Kiwi leads major gains

Overnight, the RBNZ didn’t really surprise markets as they kept their dovish message and signalled the need for extended monetary support. However, they upgraded their GDP and employment forecasts and the market has taken this positively, especially as the bank appeared to be slightly less dovish than its antipodean brother, the RBA in its forward guidance.

NZD/USD has broken to new highs this week having pushed above the year-to-date high around 0.73. Traders now have the July 2017 highs in their sights around 0.7558, with support now resting at last month’s high at 0.7315.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.