Tech Stocks Driving Equity Benchmarks Lower

The dollar remains the biggest winner from rising yield differentials with USD/JPY holding at nine month high. Brent crude shot up 2% early Monday passing the $70 threshold for the first time since the pandemic began after Yemen’s Houthi forces fired missiles on a Saudi Aramco facility. Investors await the final vote for Biden’s $1.9 trillion pandemic relief package, although the passing of the bill seems widely priced in.

Financial markets are becoming ever more exciting. Many forces are at play and investors are trying to digest a mutltitude of information. Hence, we should expect volatility to remain elevated over the upcoming days and probably weeks.

There are reasons to be positive about a robust rebound in global growth prospects. The US economy added 379,000 jobs in February, well above markets expectations of 200,000. Data released over the weekend showed China’s export growth soared to the highest levels in over two decades. Despite the figures being distorted by the low base in 2020, the sharp recovery in exports represents strong global demand. The rollout of Covid19 jabs and fall in global cases are also a source of optimism.

Given this background and the anticipated $1.9 trillion in new US stimulus, investors are growing increasingly optimistic about corporate earnings. Many households and corporations are sitting on large piles of cash which will be deployed in the upcoming months. Hence analysts are increasing their earnings estimates for companies in the S&P 500 by wide ranges.

According to FactSet, S&P 500 companies are projected to report a 21.5% rise in EPS for Q1 2021, almost a 5% increase from end of year estimates. However, the S&P 500 is failing to make new highs and the Tech-heavy Nasdaq Composite has dropped nearly 10% from its record highs, briefly entering correction territory. This tells us that even if the economy is set to boom in 2021, the performance of stocks will be extremely bumpy.

The most loved stocks in 2020 are turning out to be the most hated in 2021. Tesla, Zoom Video Communications and Peloton are just a few examples. Those benefiting the most are in the financials, materials and industrial sectors. It sounds kind of boring to invest in these sectors for new investors, but with rising interest rates, higher inflation expectations and extremely rich valuations the rotation out of growth into value may persist for several months.

Those waiting to be rescued by the Federal Reserve might be disappointed unless we see financial conditions tightening. A 30% or 50% drop in Tesla won’t force Powell’s hand. In fact, Fed officials might like to see those richly valued stocks come down a bit to prevent bubbles in equity markets. As long as this is occurring in a way that is not disruptive to the overall economy, yields may continue to be allowed to go higher without intervention.

Given this environment expect the most crowded trades in 2020 to become the laggards this year, and the rotation which started in November 2020 to continue for longer than expected.

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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.

Sovereign Bond Selloff Resumes After A Short Break

Japan’s Nikkei 225 and Hong Kong’s HSI dropped nearly 3% with the rest of the Asian stock indices all in the red, while US stock futures show no signs of recovery. All three major indices are indicating a negative start led by Tech stocks. In currencies, the dollar ticked higher against its major peers with USDJPY climbing to a seven-month high above 107.

With US inflation expectations over the next five years reaching a 13-year high and long term-borrowing costs on the rise, central banks face tough challenges comforting investors. Financial conditions are tightening despite the monetary policy being loose and policymakers clearly signaling no intention of raising interest rates anytime soon. The Federal Reserve may need to step up their game by targeting purchases of long-dated bonds to prevent yields from going higher, but so far there are no signs of them implementing this strategy. All eyes will be on Fed Chair Jerome Powell today for any signals of possible changes to monetary policy such as yield curve control.

The sovereign bond selloff is not confined to the US. UK 10-year gilts rose more than 10 basis points to 0.8% after Finance Minister Rishi Sunak announced the country’s 2021 budget. And despite the Eurozone being well behind in vaccinating their population and in terms of their economic recovery, bonds also sold off in Germany, France, Italy and Spain. That tells us it is not just economic fundamentals impacting bond prices, but there seems to be a domino effect caused by rising yields in the US.

Energy and Financials were the only sectors ending in the green on the S&P 500 yesterday. The shift to those value sectors will likely resume along with industrials and basic materials after the passing of Biden’s $1.9 trillion pandemic relief bill.

Oil is another asset class firmly on the radar of many traders. Prices rose for a second straight session after Brent crude tested a two-week low of $62.38 on Tuesday. While the record drop in US gasoline inventories lent prices some support, its today’s OPEC+ meeting that will dictate direction over the short-term. If Saudi Arabia chooses not to continue with its unilateral one million b/d output cut and the group increases production by another 500k b/d, we will end up with 1.5 million b/d additional output. That seems to be the base case scenario for many traders.

Given that recent price moves have been driven more by speculative trading than market fundamentals, any disappointment may lead to a sharp selloff. For prices to remain near their pre-pandemic levels or higher, we need to see a positive surprise. That could occur by keeping the group’s output unchanged or if we get a gradual rollback of Saudi Arabia’s unilateral cuts. It is hard to predict the next move of the cartel due to the various opinions within the group’s members, and that is what makes it an exciting event to watch.

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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.

Markets Breathe A Sigh Of Relief

US 10-year Treasury yields climbed to a high of 1.61% on Thursday, representing a 70-basis point rally from the beginning of the year or a 77% gain. Japan’s central bank-controlled 10-year JGB yield has risen seven-fold this year, reaching a five-year high of 0.18% last week. Similar moves have been seen in Germany, the UK, Australia and many other developed countries worldwide.

The good news about this volatile move in global sovereign debt is investors are finally realising that we have come closer to the post-pandemic era. The trend in Covid-19 new cases, hospitalisation and deaths have been on a downtrend for six weeks, and this should justify the optimistic outlook. However, for markets, it is a different story.

Last week, the 5% drop in the Nasdaq Composite was a reminder of what happened in October 2018 when investors suddenly freaked out over rising bond yields. Back then, the bond market selloff pushed long-dated yields to a more than seven-year high of 3.25% in response to the Federal Reserve’s tighter monetary policy. As a result, within three months US equities entered a bear market, which is technically defined as a 20% fall from recent highs.

In October 2018, the price to earnings ratio for the Nasdaq was around 25x, while today we are sitting at 35x. This suggests that a 2% threshold on the US 10-year yield may have the same effect as 3.25% back in 2018. The difference this time is that the rise in bond yields is not being driven by tightening monetary policy but market expectations. While central banks say there is no tightening in policy, investors do not seem to buy it.

Fed Chairman Jerome Powell indicated last week that inflation would remain below target through 2023, and a spike in prices this Spring wouldn’t warrant a policy response as policymakers only see it as a temporary one due to the economy reopening and jump in demand. The ECB’s Christine Lagarde also signaled last week that the central bank is closely monitoring the recent spike in Eurozone yields andthe Reserve Bank of Australia took action today, by doubling down their bond purchases to keep yields in control.

Now, the question becomes will investors keep selling government debt and send yields even higher, or will they align with the guidance of central banks. This is going to be critical for the next move in global stock markets.

The slide is global bond yields today is sending equities higher in Asia and Europe. US equity futures are also signaling a strong start for the week. Going forward, economic data will be monitored closely and will have much more impact on markets’ direction compared to last year, which was primarily driven by fiscal and monetary action. Expect exceptionally good news on the economic front to become bad news for equity markets as the prospect of faster inflation will continue driving the belief that monetary policy will be tightened earlier than expected. This means Friday’s US employment report will be of great importance for traders and investors.

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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 Bull Run Still Has Legs Despite Inflation Concerns

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.

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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.

Are Higher Bond Yields Spoiling The Risk Rally?

Consumers across the States decided not to keep stimulus checks in their bank accounts but rather spend them on electronics, appliances, furniture and online. Almost every major category in the retail sales report showed a significant increase. The 5.3% growth in January is the largest monthly rise since June, when the US began recovering from strict lockdowns.

Looking at the trend in coronavirus cases and vaccine distribution, we should expect the economic recovery to gather steam over the coming months. Add to this a big, bold fiscal stimulus plan that should speed up the recovery.

According to the FOMC minutes of last month’s monetary policy meeting released overnight, officials are not expected to scale down their asset purchases anytime soon. Achieving the goal of maximum employment will take some time and policymakers don’t seem to be in a rush to shift away from their current crisis mode. However, inflation is the trickier part in setting policy. Producer prices surged in January, rising 1.3% from December and this marked the largest monthly gain in more than a decade. So far, the Fed do not seem that worried about rising prices and they see such moves as temporary and not having a lasting effect.

The combination of robust economic recovery expectations backed by loose monetary policies and supportive fiscal measures should point to further gains in risk assets. But one factor seems to be spoiling the party, and that is rising bond yields. Those on the US 10-year Treasury reached a high of 1.33% on Wednesday before paring some of its gains later in the afternoon and is sitting at 1.28% at the time of writing. The longer term 30-year yield has seen a similar spike over recent weeks, touching 2.11% yesterday. The recent rally seen in yields reflects mainly two things. One is we are finally beating the virus and hence we are headed for strong economic activity. The second part which worries many investors is that inflation may return at a faster pace than previously anticipated.

“Going forward, investors need to keep a close eye on how long term yields behave from here.”

A steady slow increase may not necessarily disrupt the uptrend in equities but will likely force rotation from highly priced stocks, typically in the tech sector, to more reasonably priced cyclical ones. But another sharp spike in bond yields, in which the 10-year approaches 1.75% in a short time frame could pose a big risk to the bullish trend in the overall equity market.

While the greenback is also benefiting from rising bond yields, the magnitude of the dollar’s rise has been limited so far, with the dollar index, DXY, strengthening 0.7% over the past two days. The inverse correlation between risk-on and the dollar will be tested over the coming weeks, especially if yield differentials continue to widen further between the US and the rest of the developed economies.

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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.

Brent Crude Passes $63 As Risk-On Sentiment Soars

The robust recovery in oil prices and industrial metals over the past couple of months is driving the idea of a new commodities supercycle in which prices remain above-trend for many years to come.

At the time of writing, Brent Crude is trading at $63.70, a level last seen on January 22. Rising tensions in the Middle East is one of the justifications for the spike in prices as a Saudi-led coalition said it had intercepted an explosive-laden drone fired by Yemen’s Houthi rebels. However, these kinds of incidents normally have a short-lived impact on prices as risk premiums evaporate quickly.

The main factors contributing to the rally are an abating pandemic with vaccine rollouts allowing countries to gradually ease lockdowns, improving outlook for business activity, prospects of the $1.9 trillion US stimulus package and the disciplined supply curbs from OPEC+ members led by Saudi Arabia. US shale companies are very satisfied with current prices and may ramp up their production significantly in near future, but in the next few days freezing weather conditions will make it hard to do this, which means supply will be tight.

“Unlike most other commodities, the supply side of the equation is pushing oil prices higher and from a technical perspective, crude is sitting at its most overbought price in more than two decades with the 14-day RSI near 84.”

The tighter oil market conditions have led the Brent April future contract to trade at $4.30 premium to those of December delivery. This suggests global oil inventories will be depleted at a faster pace than anticipated by OPEC or the IEA. OPEC has proved many times in the past that it can put a floor on prices and once again it has succeeded with its new allies. Now the question is whether OPEC+ responds to the shifting dynamics by increasing output or continue to hold supply a little further before acting. The risks are that the oil market becomes even tighter and prices surge further, allowing US shale and non-OPEC producers to ramp up production and capture more of the market share.

Despite prices being in extremely overbought territory, we may see further strong gains if OPEC+ do not take action to raise output in the next few weeks. However, the higher prices go from here the steeper the correction could be. The last time the RSI traded near 80 was back in October 2018, in which prices fell from a high of $86.70 to $50, or a peak to trough move of over 41%.

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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.

Equity Bulls Take A Short Break

US and European futures contracts are also directionless as investors assess whether to take some profits after decent gains or continue riding February’s uptrend. Meanwhile in Asia, there is little activity with markets in China, Japan and South Korea closed for holidays.

Inflation data has become the most-watched economic indicator given all the arguments around its longer-term projections and its impact on financial markets. Yesterday’s US core consumer prices showed little reason to be worried as prices remained flat in January compared to December.

While rising inflation may be problematic, it doesn’t seem to be a considerable risk at the moment. Even if prices begin to rise towards and above 2% gradually, this isn’t going to scare equity bulls. Fed Chair Jerome Powell made it clear yesterday that monetary policy will remain loose until the economy reaches maximum employment. He also wants inflation to reach 2% before even thinking of tapering policy.

Long term bond yields eased significantly with the US 30-year Treasury yields dropping nine basis points from Monday’s high of 2% and the 10-year yield declined six basis points from its high. As long as yields do not rise sharply and economic data along with corporate earnings continue to improve, there doesn’t seem to be a lot to worry for equity investors.

However, they need to display some discipline in their trading decisions and not just follow the herd. Some parts of the equity market are running hot, especially those driven by Reddit traders. Cannabis companies are the latest stocks on Reddit’s radar and that’s driving many in the sector beyond any justified valuations. Investors need to be aware of those stocks that are totally disconnected from their fundamentals. There’s no harm in taking profits out for those who were already exposed to the sector or managed to get in early.

The current environment will continue to support further gains for the broader market as few care about overstretched valuations in a near zero interest rate regime. However, markets do not move in straight lines and a 5% to 10% correction could happen any time soon. Building downside protection and taking some profits may be something to consider in the short term

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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.

Reflation Trade Pushes Equities To New Records

US 10-year Treasury yields also hit a post-pandemic high of 1.19%, while Brent Crude reached a new milestone of $60 per barrel.

Slowing coronavirus infections, continued rollout of vaccines, and anticipation of President Biden’s $1.9 trillion rescue package is keeping the bull market well and truly alive. Several risk sentiment indicators climbed to their highest levels since the pandemic stunned global economies and financial markets.

Contrarian investors may look at breakeven inflation rates and point to the risk of higher expected prices due to fiscal stimulus and monetary policies. Indeed, these rates, which are indicating 2.2% average inflation over the next 10 years, are a considerable risk and we may see them moving higher over the next several months. However, this risk will not materialise until further in the future as the Federal Reserve is unlikely to taper asset purchases before next year, while keeping interest rates at very low levels until early 2023.

Treasury secretary Janet Yellen boldly stated on Sunday that the US could see full employment by next year if Congress passed the proposed stimulus package. Assuming this is an unemployment rate of around 4.1% according to longer-run median projections by the Federal Reserve, that makes her estimate 0.9% below the Fed’s December projection. While she admits the size of the stimulus package risks overheating the economy, the main issue to tackle now is unemployment and the suffering of small businesses.

There is no doubt that valuations are becoming extremely overstretched, especially in the Tech sector. Wild moves in other risk assets such as crypto currencies are also an indication of excessive risk taking. I don’t know whether we are in a bubble territory yet, but we are certainly close to it. Having said that, I still expect to see further rallies in equities in the near future. The reason is that investors are willing to discount inflation risks well into the future, while monetary policymakers are continuing to be supportive. Another factor supporting higher equities is earnings. So far, 81% of S&P 500 companies reported a positive EPS surprise for the final quarter of 2020 and this could actually lead to positive earnings growth for the quarter compared to the fourth quarter of 2019.

Valuations will be a chapter to deal with later. Investors will need to closely monitor when monetary policymakers in the US and the rest of the world signal that they are turning the music down. That would be the time for exit. Until then, bulls are likely to continue enjoying the ride.

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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.

Have The Rules Changed For Trading The US Dollar?

Global expansionary monetary and fiscal policies led by the US along with new record high equity markets swayed investors from the safety of the world’s reserve currency towards high beta emerging market and developed market currencies.

Factors that have dragged on the US currency since late March 2020 remain in play as monetary and fiscal policies are likely to stay loose throughout 2021. In fact, we are likely to get another bold Covid-19 relief package from the US, while low interest rates are going nowhere in the medium term. However, the dollar is up 1.5% year-to-date despite the massive, short speculative positions.

This recovery rally has caught many traders by surprise and some are questioning whether the rules have changed. Whether the dollar’s strength is to be short-lived or a longer-lasting theme remains to be seen. But fundamentals now appear to be on its side.

From an economic growth perspective, the US is in a better position than Europe. The extended lockdowns in several European economies will likely lead to negative growth in the first quarter of 2021, while Washington is moving fast towards stimulating the economy following four per cent growth in the final quarter of 2020. This narrative won’t change with the EU rolling out vaccines at a slower pace compared to the US.

US 10-year Treasury bond yields are back again near March 2020 highs having gained more than 13% from late January. The spread between US and German 10-year yields has been widening since early August and has now reached 159 basis points. Further extension suggests additional relative strength on the dollar’s side.

The US ADP employment report showed private payrolls increased 174,000 in January, after dropping 78,000 in December and came in well above expectations of 50,000. The service industry is also showing signs of recovery with the non-manufacturing ISM increasing to a two-year high at 58.7. The ISM index’s employment component reached an 11-month high of 55.2, indicating that vaccine distribution is playing a substantial role in boosting employers’ confidence.

If these two data releases are any guide, we would expect to see a positive surprise in Friday’s non-farm payrolls report. This release will be a crucial test for the US dollar to see whether it is genuinely reacting positively to strong data and vice versa.

Another interesting aspect to monitor is the daily chart on the dollar’s index. The DXY has completed an inverse head-and-shoulders pattern on the daily chart and broke above the neckline resistance of 91. Staying above this level for couple of more days suggests further gains towards 92.8.

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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.

Retail Traders Switch To Silver Following Attack On Hedge Funds

Instead, it was the battle between retail investors and hedge funds that burst out of nowhere that took control of markets, and now everyone is wondering how this could end up.

Following successful attacks against short-sellers on game retailer GameStop and other heavily shorted stocks like AMC, Nokia, Blackberry and Bed Bath & Beyond, retail traders’ next target has become silver. The precious metal rose to $28.99, a six month high, in early Asia trade and is up 6% at the time of writing.

iShare Silver Trust, the world’s largest silver-backed exchange-traded fund, recorded a one-day inflow of almost $1 billion on Friday and is likely to see more inflows today as more traders become familiar with the trade. Miners of silver were the biggest beneficiaries of the latest Reddit’s users’ recommendation, who are betting this time against large banks. However, the targeting of Wall Street may be misplaced as most big banks hold short positions in the silver futures markets to hedge their physical holdings. If their short positions lose value, their physical holdings gain, hence from a price perspective they are neutral.

Influencing the price of silver will not be as easy as a single small or medium-sized single equity. Silver’s market cap is in the range of $1.4 trillion to $1.6 trillion as opposed to GameStop’s $1.5 billion before becoming the target of retail investors and a large proportion of the market is off-exchange. However, it will be interesting to see the small players’ power and how much further they can push prices.

There is no doubt the power of collective retail investors has taken the market by surprise as this is a phenomenon we are experiencing for the first time. In the short-term, they have changed the rules of the game and caused a lot of pain to hedge funds who were obliged to raise cash, forcibly sell other long holdings and close out short positions at hefty losses to meet margin requirements.

Retail traders who are just following the herd and join the party late may accumulate huge losses and need to be more rational in their decisions. The new phenomenon may keep going for some time, but the longer it stays the more mispricing will occur in assets and possibly lead to huge damage on the broader market. The S&P 500 experienced its worst week since October despite earnings coming in well above expectations. Given that risk taking and leverage have reached unprecedented levels, any disorderly deleveraging event could trigger steep selloffs in US and global equities.

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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.

US Equity Futures Jump As Biden Pushes Through A $1.9 Trillion Stimulus Program

Some investors remain concerned about the surge and mutation in Covid-19, but it’s the fiscal and monetary policies along with earnings that will determine the next move in equities.

Expectations of substantial fiscal aid are keeping the bulls in control despite Republicans saying the $1.9 trillion package is too costly. This would make bipartisan support the relief package uncertain. However, with Democrats now in control of the Senate, they could pass the plan with a simple majority.

The next question investors are probably asking is what implications these fiscal measures would have on monetary policy. The Fed loose policy has been a critical contributor to the equity rally, and any signs of tightening prematurely will rattle financial markets.

Rising inflation is already one of the hottest topics for 2021, and some economists raised the prospects of the Federal Reserve reducing asset purchases. The first two-day monetary policy meeting of the year occurs on Tuesday, followed by a statement and a press conference from Jerome Powell on Wednesday. While inflation could be a medium to long term challenge the Fed will face, we do not expect scaling back of asset purchases anytime soon. Policymakers want to avoid tightening financial conditions at any cost when the economic activity remains depressed. Hence, do not expect a repeat of the 2013 “taper tantrum” which sent 10-year bond yields almost a full 1 percentage points higher in three months and dragged the S&P 500 6% in six weeks following the announcement. Any policy mistake could be extremely costly at this stage, especially that valuations are overstretched.

This week is also the busiest in earnings announcements. More than 100 S&P 500 companies are set to report earnings including big tech names Apple, Microsoft, Tesla, and Neflix. According to Factset 86% of S&P 500 companies have reported a positive EPS surprise and 82% reported a positive revenue surprise. If this trend continues throughout this week, we could easily see new record highs for all three major US indices.

On the US economic data front, investors will be watching out for US fourth quarter GDP number, personal consumption expenditure, new and pending home sales, durable goods, initial jobless claims and consumer confidence. However, expect economic data to have a minor influence on markets with the big themes of fiscal, monetary, and earnings to dominate over the upcoming days.

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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.

 

Markets Celebrate The Peaceful Presidential Transition With New Record High

All three major US indices climbed to new records on President Biden’s swearing in, with the S&P 500 posting its best Inauguration Day gains since President Reagan second term in 1985. While markets are optimistic that a massive US economic relief will be approved by the Senate sometime soon, it wasn’t the only reason helping risk assets. Despite many warnings of armed protests at state capitols across the country, the lack of violence on Wednesday helped revive risk appetite. With this additional equity risk premium diminished, we are likely to see stock markets make more new highs in the weeks to come.

The Greenback fell against most high beta currencies on Wednesday and has continued its slide today. Commodity currencies benefited the most from the better risk sentiment, with the Canadian Dollar outperforming after the Bank of Canada kept policy unchanged, defying expectations of a micro rate cut. The Australian Dollar also approached its yearly highs following better than expected employment data released overnight. Meanwhile, the Euro failed to catch up with the trend due to expectations of more economic pain as the new variant of coronavirus will likely lead to extended and additional lockdowns. Investor’s and trader’s focus will shift to the ECB meeting later today.

Short term risks are mounting in the Eurozone given the extended lockdowns in the region and the Italian political mess. Chances of another contraction in GDP this quarter are higher than when the central bank last met in December. However, the longer-term outlook is brighter as European countries are stepping up vaccine purchases and increasing production. With more vaccine products hitting the market in 2021 there is optimism that a strong recovery will take hold in the second half of the year.

Trying to find a balance between short term risks and longer-term optimism is kind of tricky and there’s little monetary policy can do to revive economic growth. The biggest concern is likely to be the stronger Euro which could keep headline inflation suppressed. Overall, we do not expect any changes on the policy front and the big test is likely to be Christine Lagarde’s communication to the market, and what messages she will send to curb further strength in the single currency.

In commodity markets, oil gave up some of yesterday’s gains after American Petroleum Institute data showed inventories increased 2.6 million barrels last week versus expectations of 1.2 million drop. A one-time increase in data should not have a substantial effect on prices, but if it persists over the next couple of weeks, that could be a warning signal that triggers profit-taking. So far, it is the supply side of the equation that’s moving prices; however if demand falls further, problems may arise for OPEC+ who are doing their best to keep the equation balanced.

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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.

A Cautious Start To A Busy Week

Asian stocks traded mixed today despite data showing that China’s economy bounced back strongly in the final quarter of 2020. The world’s second-largest economy reported 6.5% growth in Q4, well above estimates of 6.1%. Industrial production also beat expectations in December rising 7.3%, but retail sales could not catch up with the trend, growing only 4.6% versus analysts’ forecast of 5.5%.

Overall, China is the only major economy to achieve a rapid turnaround and this is essentially due to the measures taken to control the pandemic. Whether the country will continue to achieve rapid growth in the following quarters, depends largely on the changing pandemic dynamics both internally and overseas.

US equity futures are dipping lower following two consecutive days of declines. Data on Friday showing retail sales declining 0.7% in December was a warning signal to equity bulls, given consumer spending in the US makes up about two-thirds of the country’s economic output.

The $1.9 trillion anticipated fiscal stimulus from Biden’s administration was the key support to risk assets and allowed Wall Street to remain disconnected from Main Street. However, the new President’s pledge on wealthy individuals and corporations to pay their “fair share” in the form of taxes was unsettling. Markets knew that Biden wanted to raise taxes sometime in the future but taking such a step in the current environment will likely trigger a significant selloff if approved by the Senate.

US markets are closed today due to Martin Luther King holiday, hence we are not seeing big moves in FX. Expect volatility to ramp up heading into Biden’s inauguration on Wednesday, especially if riots turn violent.

Elsewhere investors will keep a close eye on earnings from Morgan Stanley and Bank of America after bank shares took a hit on Friday. Intel, Netflix and Procter & Gamble are also on the earnings calendar this week.

Investors will learn on Thursday how the European Central Bank responds to extended lockdowns on the continent. While we do not expect to see any changes to interest rates, the bond purchasing program may be expanded further. Any increase in asset purchases or verbal intervention associated with the Euro’s strength may put additional pressure on the single currency.

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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.

Once Again, Fiscal Stimulus Takes Centre Stage

Trump became the first US President to be impeached twice, a little more than a year since his first. While he will most likely continue to serve the remaining six days of his term, his political future is now uncertain with a high possibility that he is barred from running for the presidency again if he is found guilty of incitement of insurrection.

Global equity markets inched slightly higher on the (second) impeachment day with US stocks continuing to hover near their record highs. Political noise is apparently of the least concern to investors who are looking forward to strong economic growth in 2021 and another big stimulus package from the new US administration.

According to Biden aides, the President-elect is set to reveal his plans for a COVID-19 relief package later today, which is likely to be somewhere near $2 trillion. The package will include significant funding for vaccine distribution, an extension to eviction moratorium, support for the unemployed, government aid and another sizable direct payment to American families. The latter is likely to be the trickiest part as most Republicans and some Democrats are against going too big. On the other hand, opting for a small package will disappoint investors and lead to profit-taking in equity markets. Finding the right balance will not be easy.

While political instability in Washington has so far been ignored, there remains a risk of profit-taking if violence on inauguration day escalates, especially as markets are almost priced to perfection. With valuations extremely overstretched, some investors need an excuse to book their profits and 20 January may provide this.

Another risk investors need to keep an eye on is how high bond yields go from here. The good news is we are not yet seeing significant inflationary pressure reflecting in data. US consumer prices rose 0.4% in December and when excluding volatile food and energy components, prices only rose 0.1%. Overall, rising inflation will be one of the hottest topics in 2021, but it’s too early for the Fed to announce any tapering of asset purchases. Any signs of this may bring an end to the Dollar’s decline as higher yields begin to attract Dollar inflows and make equities valuations harder to justify. This will be a topic to explore in detail later in the year. However, it will be interesting if the Fed’s Chair Jerome Powell provides any hints on this topic later today on a webinar hosted by Princeton University.

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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.

Global Stocks Retreat From Record Highs, Dollar Extends Gains

Last week President-elect Joe Biden promised a hefty stimulus rollout worth trillions of Dollars, which we will learn more about on Thursday when details are announced. That had greater influence on markets than the surprising 140,000 job losses in December that we saw in Friday’s Non-Farm Payrolls report.

Expect markets to continue ignoring the political turmoil in Washington as Democrats, with the support of some Republicans move toward impeachment proceedings against President Donald Trump as soon as today.

What cannot be ignored is the rise in US government bond yields. Last week alone, US 10-year Treasury yields rose 20% making a high of 1.125%. This move in bond yields will likely prompt investors to re-think their strategies for 2021, especially if we see a bigger upside move in the weeks and months ahead.

The equity rally seems to have paused at the start of the week. Futures of all three US major indices are pointing towards a pullback today after all reached new records on Friday. While it is extremely difficult to call for a correction in the current environment in which a synchronised combination of fiscal and monetary policies is taking place, investors need to start thinking about protecting their portfolios.

What we are experiencing in equity markets might not be a bubble similar to the one in late 1999, but there is no doubt that valuations are extremely overstretched. Negative real interest rates have encouraged this massive flood into almost all asset classes, particularly growth stocks, low rated corporate debt and even cryptocurrencies as of late.

The higher bond yields go from here the more difficult it becomes justifying a P/E multiple of 40 on the Nasdaq 100 or a 1.5% dividend yield on the S&P 500. If the Federal Reserve does not take steps to increase purchases of longer-term maturities, we could have 10-year yields well above 1.5% by year end. This means US inflation data is likely to become the most watched indicator over the coming months. According to US 10-year break-even rates, markets now expect inflation to be above 2% on average. While the Fed does not seem in a hurry to raise interest rates, shifting economic dynamics may force them to act sooner rather than later.

Shorting the Dollar was the most recommended trade in currency markets heading into 2021. However, rising yields could now lead to a rethinking of this strategy. If the yield curve becomes steeper and differentials become much wider, expect to see a strong recovery in the Dollar despite the new billions in expected stimulus. According to the latest CFTC data, we are already seeing a trimming of long positions in major currencies against the greenback.

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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.

 

Global Stocks Shrug Off Chaos In Washington

For many, such scenes can only be seen in Hollywood movies, but Trump supporters turned it into reality after invading the US Capitol in Washington. One would expect the violent and chaotic scenes that temporarily interrupted the ratification of President-elect Joe Biden’s victory in the 2020 election to lead to a selloff in risk assets, but it turned out to have little impact on investors’ decisions.

In fact, the scenes that played out in real-time across global cable television did nothing to alter expectations of the near to mid-term political and economic outlook. What really matters for investors is the Democrat’s victory in the two runoff races in Georgia. With a 50–50 split in the Senate between Republicans and Democrats and Vice President Kamala Harris casting a tiebreaker, the Democratic party is now in control of the Presidency, House and Senate forming what has been called a “blue wave”.

President-elect Joe Biden will push hard on reviving stimulus and that is why we are seeing small caps and cyclical stocks outperforming growth. Yields on US 10-year Treasuries are up 13 basis points from Monday’s close, hovering around 1.05%, the highest level since March. Meanwhile, the Dollar remains stuck near 3-year lows as rising debt levels, along with low interest rates, are expected to keep putting downward pressure on the Greenback.

The reflation trade is now in full swing and is likely to continue for some time. However, the Tech sector, which may suffer under a Biden administration who has pledged to raise corporate taxes and antitrust regulation, fared better than expected closing down just 0.6% yesterday. Nasdaq Composite futures are up 0.9% at the time of writing, following a sharp initial selloff of some 2% yesterday as FANG stocks all closed lower. While taxes may go higher, it will not likely be any time soon as the economy remains weak and it will be difficult to justify a tax hike to the Democrat centrists in the current environment. The biggest risk for richly valued growth stocks is not taxes, but interest rates and as long as they remain contained, I do not expect a steep fall in the tech sector. However, small, value and cyclical stocks are likely to continue outperforming growth in the upcoming few months if the world is believed to be cured from the coronavirus by year-end.


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.

Dollar kicks off 2021 on the backfoot, Gold shines

Low interest rates and an improving economic outlook following vaccines rollout has led to further short selling in the US Dollar, particularly against the Euro and Chinese Yuan.

China’s Renminbi strengthened 1% in early Monday trade, with USD/CNY crossing below 6.50 for the first time since June 2018. That has erased all Chinese currency losses since the US-China trade war kicked off officially in July 2018.  The strength in the Chinese Renminbi came despite slowing manufacturing activity. The Caixin/Markit manufacturing PMI slipped 1.9 points in December to 53.0. However, activity in the world’s second-largest economy remains in expansionary mode, while developed economies continue to impose lockdowns to control the virus spread.

Another supporting source for the currency comes from China’s Foreign Exchange Trade System which announced a reduction in the US Dollar’s weighting in the currency basket to 18.79% from 21.59%, while increasing the Euro’s weighting to 18.15% from 17.40%. The absence of any intervention from the PBOC or state banks would suggest further gains in the upcoming weeks with a possible retest of the 2018 lows of 6.24.

Tuesday’s Georgia Senate runoff elections will be critical for the US Dollar as a Democrat win of the two Senate seats could potentially unleash a lot more stimulus which simply suggests more pain for the Greenback.

Gold is also starting the new year with a bang as the precious metal has surged more than 1.2% and hit a high of $1925. Multiple factors are likely to continue lending support for Gold in the upcoming months. The pandemic will not disappear in a matter of weeks with tougher lockdowns also expected as Covid cases continue to rise. Hence central banks will need to keep policy loose by expanding their balance sheets. And given we are starting 2021 with extraordinarily rich valuations in equity markets, Gold is a must-have asset in portfolios. I think it’s only a matter of time before we cross back above $2,000 and I won’t be surprised if new highs are recorded in the first quarter of 2021.

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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.

Trump delivers a late Christmas gift

Passing the two packages means a partial government shutdown is avoided and millions of unemployed Americans will receive direct payments and other forms of assistance after two federal unemployment programs expired on Saturday.

We can finally breathe a big sigh of relief and say that chaos over the stimulus bill is over. A selloff has been averted and this could provide one last boost to risk assets in the last four trading days of the year. However, investors shouldn’t get over-excited as most of it is probably already priced in.

The launch of mass vaccinations throughout Europe yesterday is also bringing some hope that we are one step closer towards the end of the pandemic. Currency markets are reflecting the upbeat mood with the safe haven dollar declining against most major peers. The Euro, the best performing major currency in 2020 having gained 9% year-to-date, is up 0.2% in early trade. The second-best performing currency, the Australian dollar is also up by 0.2%, trading near a two and half year high. Meanwhile, Sterling has failed to break above 1.36 following last week’s trade agreement as there is still no decision on how much access Britain’s financial services firms will get in the EU. Expect currencies to trade in narrow ranges as many traders are in holiday mode.

Gold is another asset that initially rose sharply after the signing of the pandemic aid bill but has given up most of its gains in late Asia trade. A weaker dollar should provide further support to the precious metal, so for prices to hold above $1,900 we will need the greenback to continue weakening from here. Hedging against inflation risk has been the number one factor contributing to gold’s strength and we probably won’t see this until the second half of 2021. However, any signs of building price pressures could send up gold back above $2,000 in the medium term.

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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.

Markets little moved by Trumps refusal to sign the stimulus bill

While he did not say he will veto the legislation, Trump demanded an increase in direct payments to Americans from $600 in the current bill to $2,000.

The $900 billion pandemic relief package that will deliver cash to individuals and businesses along with much-needed resources to vaccinate the country seemed to be a done deal 24 hours ago. Trump’s top administration official Treasury Secretary Mnuchin praised the package on Tuesday, saying it is critical for American workers, families and businesses.

US futures initially fell on the news but were quick to recover, with all three major indices sitting slightly below the flatline at the time of writing. The market reaction reflects the belief that the bill will be amended and signed in a couple of weeks. Alternatively, the Democrats are willing to offer an increase in stimulus cheques in a separate bill.

The new highly contagious coronavirus strain, which first appeared in the UK and canceled Christmas plans for millions, maybe of more considerable risk to sentiment. That depends widely on the trajectory it will take in the coming days and weeks as scientists scramble to fully understand the new variant.  Currently, there are more questions than answers. Will the mutated virus stop vaccines from working? How far will it spread? Is it more deadly? Does it spread more in the younger population? Until we get answers to these questions, it is difficult to know its impact on the economy.

Despite these challenges ahead, there has so far been little demand for the safe haven Dollar on Wednesday. The USD has declined against most major currencies with GBPUSD back above 1.34. The EU and UK have reached the final stages of the negotiations, and with Sterling still hovering around current levels traders are leaning towards a positive outcome for a Brexit deal. Expect conflicting headlines to drive more volatility in Sterling until we get the final result. The magnitude of the downside remains much higher than the upside given what is currently priced in.

In commodity markets, oil is feeling most of the pressure from the new coronavirus variant. Brent has fallen more than 5.5% in three days and is currently trading below $50. If the new strain leads to more lockdowns and travel restrictions, we can see more short-term pain. However, the medium-term outlook relies on the distribution speed and effectiveness of the vaccine. At current price levels it seems most of the positive news has already been baked in and it now requires solid data to support further upside.

Gold is another commodity to keep an eye on as we approach year-end. If asset managers want to book some profits and reduce risk in portfolios, gold is likely to receive some significant inflows in the final days of 2020. Overall, we remain positive on the yellow metal as long as real yields continue trading in negative territory, which is likely to be the scenario in the year ahead.

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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.

US Vaccine Roll Out Lifts Risk Assets

The Pfizer-BioNTech vaccine has also arrived in Canada as several countries continue to authorise the emergency use of the vaccine, including Arab states such as Bahrain and Kuwait.

While the pandemic is far from over with many countries continuing to impose restrictions, investors are finally seeing the light at the end of the dark tunnel. What is being delivered today in the US is more than just a vaccine but hope that life will soon return to normal.

Wall Street is expected to kick off the day in the green following the first down week in three. The Dow Jones Industrial Average futures were up 150 points and the S&P 500 inched 0.5% higher at the time of writing. Meanwhile, the Dollar has given up most of Friday’s gains with the DXY index trading at 90.80.

US Stimulus

Following months of stalled negotiations, the bipartisan $908 billion stimulus proposal is likely to be put on the table of Congress today. Liability protection for businesses and state and local government aid remain the key sticking points. However, there have been reports that the stimulus relief plan may be split into two packages to ensure small businesses, the unemployed and the sectors most impacted by the pandemic receive funding before year-end. At this stage, any form of stimulus aid is going to be perceived as risk positive.

Brexit deal is not dead yet

Sterling rose against its major peers early Monday after the UK and EU agreed to carry on post-Brexit trade talks after crossing the Sunday deadline. The unresolved issues remain the same, namely EU fishing rights in British water and agreement on non-regression clauses.

Traders seem optimistic that a deal will be achieved before the end of the transition period. However, this assumption may be costly, as a no-deal scenario remains highly possible. Expect volatility to increase over the next few days as we approach 31 December, because after this date the UK would automatically fall back into the rules of the World Trade Organization if there is no deal.

The Bank of England will also be under pressure when monetary policymakers meet on Thursday. If there’s no deal by then, expect the central bank to signal sub-zero interest rates and further increase the asset purchase program. This is likely to put some pressure on the Pound.

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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.