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.

Key Events This Week: US Inflation Still All The Rage?

Asian stock markets are pushing higher, with futures contracts for the Dow Jones index and the S&P 500 following suit.

“Hopes for more fiscal stimulus have been a bedrock for stock market bulls since last year, though now it could feed into heightened expectations that US inflation could come back with a vengeance, thanks to the trillions that the US government and the Fed have poured into the economy.”

Here are some other key events and economic data that markets will be eyeing this week:

  • Monday, 8 March: BOE Governor Andrew Bailey speech; Germany industrial production
  • Tuesday, 9 March: Eurozone GDP (final reading); Germany external trade
  • Wednesday, 10 March: US inflation
  • Thursday, 11 March: ECB rate decision (President Christine Lagarde comments)
  • Friday, 12 March: UK GDP and industrial production; Eurozone industrial production; US consumer sentiment and producers price index

Key themes

  • US inflation expectations meets reality

Surging Treasury yields have spelt turmoil for global financial markets in recent weeks. As the story among investors goes, faster US inflation should bring forward the Fed’s eventual raising of interest rates. Such expectations prompted traders to ditch US Treasuries, which in turn sent yields soaring and also roiled global equities, especially more expensive tech stocks.

The Nasdaq 100 has endured three consecutive weeks of declines. However, it did manage to avoid a technical correction, which would have been 10% down from its record high in February, thanks to the buy-the-dip market action on Friday.

“More selling of tech stocks could make precarious the Nasdaq 100 minis’ position above the 100-day simple moving average (SMA). The asset could then break below last Friday’s 12,212 support level, which was also a key region on several occasions in Q4 2020. To the upside, the 12,750 support-turned-resistance level is also one to watch for the immediate term.”

At the time of writing, futures for Nasdaq 100 are tipping into the red and resting on their 100-day SMA.

“Much could depend on how Treasury yields fare in light of the imminent fiscal stimulus injection, and also around the mid-week release of the US February consumer prices index.”

Should both events point to US inflation making a roaring return, that could exert more downward pressure on the Nasdaq 100. However, a softer-than-expected CPI could dampen yields and offer tech stocks some breathing space.

Investors would also have to juxtapose Wednesday’s backward-looking CPI with Friday’s forward-looking US consumer sentiment data. Should Americans be found raring to spend once more to overcome lockdown fatigue, that could translate into heightened inflation expectations and another surge in Treasury yields, while prompting further losses in the Tech sector.

  • Will BOE, ECB react to rising yields?

With Fed members entering their blackout period ahead of the mid-March FOMC meeting, investors will be looking to the commentary by BOE Governor Andrew Bailey on Monday, as well as Thursday’s speech by ECB President Christine Lagarde after the European Central Bank’s policy meeting.

Global central bankers have been growing concerned that rising bond yields could tighten financial conditions, which could ultimately disrupt their respective economic recoveries.

“Should either central bank official successfully dampen their respective bond yields and widen the gap with Treasury yields, that could weigh on their respective currencies while lending a further boost to the dollar index (DXY).”

Note that the euro and the pound are the first and third largest constituents respectively on the DXY. Combined, the euro and sterling account for nearly 70% of the dollar index.

And should the GDP and industrial production readings from either side of the English Channel disappoint markets this week, that could further buffer support for the greenback which has been enjoying a resurgence of late, thanks to rising Treasury yields and also last Friday’s better-than-expected jobs report.

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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.

Week In Review: Bond Selloff, Oil Soars, Blowout NFP

As markets roared back life, it felt like investors shrugged off the threat of rising Treasury Yields with the “buy the dip” theme in full force. This was reflected in the FTSE100, STOXX Europe 50, S&P 500, and especially the Nasdaq 100 which soared back above its 50-day simple moving average.

However, the rally across global stocks was short-lived with equity bears making an unwelcome return as the bond market selloff left investors jittery.

In our technical outlook, we covered the EURUSD and questioned the likelihood of prices breaching the 1.20 support level. An appreciating dollar eventually dragged the currency pair lower with prices trading around 1.1923 as of writing.

It was a big week for oil markets due to the OPEC+ announcement on its output decision. Buying sentiment towards the commodity jumped after OPEC and Russia decided against injecting more crude oil into the markets. The decision to keep the powder dry in the face of persistent uncertainty elevated oil prices more than 5% higher on Thursday.

With Saudi Arabia also maintaining its voluntary extra cut of 1 million barrels per day for another month, the supply-side dynamics remain in favour of bulls.

Let us not forget about Fed Chair Jerome Powell’s appearance at a Wall Street Journal summit on Thursday.

“Investors who were expecting Powell to soothe concerns over the bond market drama were left empty-handed after he simply dropped a gentle word of caution.”

It was another painful week for gold thanks to an appreciating dollar and rising US bond yields. As markets became increasingly jittery about the prospects of economic growth leading to higher inflation, this massaged expectations around the Federal Reserve raising interest rates. Given gold’s zero yielding nature, this development offered nothing but bad news.

On Friday, a sense of optimism swept across financial markets after US payrolls smashed market expectations.

“The US economy added 379,000 jobs in February, blowing out expectations for a 200,000 gain. January’s figure also was revised, from 49,000 to 166,000.”

In regards to the unemployment rate, this remained unchanged at 6.3% while average hourly earnings m/m hit the 0.2% forecasts.

Overall, this is an encouraging jobs report that will most likely fuel expectations around the US economy rebounding faster than expected.

“The key question is whether this goods news is actually bad news for markets?”

Treasury yields are already pushing higher, surpassing the February 26th peak – ultimately weighing on US equity futures. If yields continue to rise in the week ahead, stock markets could be instore for another rough and rocky ride downhill.

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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.

Faster Inflation Is All The Rage

From another OPEC+ surprise which spurred oil prices higher, and the prospects of $1.9 trillion in US fiscal stimulus being approved by the weekend, such a concoction of events are expected to ramp up price pressures which could ultimately commit the Fed into altering its policy settings sooner than expected.

10-year Treasury yields are making another run for the 1.60% line, with that surge in turn roiling global equities, especially the more expensive tech stocks. The Nasdaq 100 is a mere quarter of one percentage point away from technically entering a correction, while the S&P 500 and the Dow Jones index fell over 1% respectively on Thursday. Asian stocks and US futures are pointing firmly south at the time of writing.

Over in commodities, spot gold is languishing below the psychologically-important $1700 level to hit its lowest levels since June, while oil benchmarks are set to post three consecutive days of gains.

Powell sees no trouble yet in yields

Powell mostly reiterated his same points about the US economy still being “a long way” from reaching the Fed’s goals, although he did note that the steep climb in bond yields “caught his attention”. That was hardly the disciplinarian’s tone that some segments of the markets had hoped for, expecting the Fed Chair to try and rein in rising yields. Instead, markets pounced on the greater leeway to test the Fed, with more Treasuries being offloaded that sent yields soaring by as much as 10 basis points following his speech.

Clearly investors are having a hard time buying into Powell’s current version of events. With the Covid-19 vaccine allowing for economic activity to be restored, coupled with fresh injections of fiscal stimulus in the pipeline, investors are holding on to the narrative that inflation could make a roaring comeback.

For the time being, Powell appears content to patiently watch bond markets from the sidelines, as opposed to blowing his whistle on market participants who have been getting more unruly in recent months.

“Such a stance is likely to leave the door open for further bouts of volatility in global financial markets, until the Fed sends a clear signal that enough is enough.”

OPEC+’s delights oil bulls again

OPEC+ shocked markets once more by choosing to stand pat on its output settings, only making slight tweaks to its current supply levels for April. Markets had been expecting the cartel to restore at least 500,000 bpd back into oil markets, a figure which could have risen to 1.5 million bpd, seeing as how OPEC+ members have become more comfortable with current price levels. Instead, only Russia and Kazakhstan were given exemptions to loosen the taps by a combined 150,000 bpd.

Just as Treasury markets are testing the Fed, so too is OPEC+ testing the resilience of the US shale industry, betting that producers Stateside are no longer in a position to fully capitalize on the oil price recovery. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, went so far as to declare, “Drill, baby, drill is gone forever”.

“Oil bulls are also receiving additional support from China’s just-announced 2021 growth target of over 6%, which should buffer the global demand recovery for the commodity.”

While it remains to be seen whether US shale can upend OPEC’s efforts to eradicate the global oversupply once more, the prospects of $70/bbl Brent is becoming likelier in light of the latest OPEC+ decision. Higher oil prices in turn are set to fuel expectations for faster US inflation, which may then hasten the Fed’s tapering and eventual rate hike.

US jobs report to offer more inflation clues

Today, the February US non-farm payrolls data is expected to show 198,000 jobs added, although the unemployment rate is set to remain at 6.3%. This data print is set to inform investors about the pace of the jobs market recovery, and whether expectations for the inflation overshoot are fully warranted.

“A better-than-expected NFP print could embolden 10-year yields to breach the 1.60% mark once more while tipping the Nasdaq into correction territory.”

Then, should the US Senate approve President Joe Biden’s US$1.9 trillion fiscal stimulus package this weekend, that could trigger more volatility in global markets at the onset of the new trading week, as investors continue raising their expectations for an overheating US economy.

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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.

All Eyes On Jerome

This is the last chance to hear from the Fed before it enters the two-week blackout period this weekend ahead of its 17 march FOMC meeting. The tone set today will in all likelihood determine risk sentiment for the next two weeks at least.

Although many retail traders especially, and also Wall Street equity traders too can switch off at the first mention of bonds, fixed income and yield curves, the debt market continues to drive the global investment environment, including risk-taking in FX markets. (Whisper it quietly but bond traders are always convinced that their market leads the way, acting as the best indicator and predictor of economic conditions, which other markets then follow…)

“So, does Powell continue to hold the view that the rise in long-term rates is proportionate with an improving economic outlook?”

Little concern of the recent sharp moves would probably trigger another spike in yields as the bond market tried to find the “right level”, while also seeing more dollar short covering. Or does the Fed Chair follow in Brainard’s footsteps that we mentioned yesterday and comment that he is monitoring events in the Treasury market, which might be enough to calm things down, which would probably result in the dollar softening.

USD/JPY toppy

US stocks have opened up very modestly in the green while the dollar is trading above 91 on the DXY.

Notably USD/JPY continues to travel north at a rate of knots, now touching levels not seen since July of last year. That month’s high at 108.16 looks to be the next target, although momentum indicators are now stretched, and the pair is trading way through its Bollinger and Keltner bands. Support lies at the 61.8% retracement of the move down from the June 2020 high around 107.01.

Oil volatile into OPEC+ meeting

Oil is climbing as key OPEC+ members are highlighting the ongoing uncertainty around the global recovery. They have urged “caution” and “vigilance” while also mentioning that they should “keep their powder” dry in a sign that markets presume means they will not flood the market with more output.

“The concern is that Russia may ask for an increase bigger than the 500k bpd for 1 April and ultimately pressure others, as they believe the conditions in the market are good.”

The 20-day SMA acted as good support in Brent just above $62.50 and with momentum now turning slightly higher, oil bulls will hope to push on to the recent cycle highs.

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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.

OPEC+ Has A 1.5 Million BPD Decision Due Today

At the time of writing, Brent futures have already gained over 24% so far this year and are trading around their highest levels since January 2020.

Meanwhile, US crude finds itself above the $60/bbl psychologically-important level, with WTI futures having added 26% on a year-to-date basis. Crude prices were lifted back above $60 after it was reported Wednesday that US gasoline inventories posted a record drop last week.

Both Brent and Crude are edging higher at the time of writing, as markets eagerly await this crucial decision by OPEC+.

Recap of OPEC+ decisions since pandemic

Indeed, oil benchmarks have staged a remarkable comeback since the price war between Saudi Arabia and Russia in March 2020 amid the throes of the pandemic, thanks to some key supply interventions by the alliance:

  • April 2020: OPEC+ reaches historic deal to slash output by a record 9.7 million bpd beginning May 2020, or equivalent to around 10% of global supply.
  • July 2020: to restore some 2 million bpd starting August 2020 through year-end amid green shoots of the global economic recovery.
  • December 2020: to raise output by another 500,000 bpd in January 2021, as opposed to the previously intended 2 million bpd, given the resurgence of Covid-19 cases and tighter virus-curbing measures in major economies.
  • January 2021: Saudi Arabia surprised oil markets by voluntarily withholding 1 million bpd of its supplies for February and March, at a time when talks were expected to instead deliver another 500,000 bpd increase.

What to expect from today’s OPEC+ meeting

As things stand ahead, OPEC+ still has some 7 million bpd that it’s withholding from markets, and up to 1.5 million of it could be restored starting next month.

Here are the main two aspects of today’s OPEC+ decision that are gripping markets:

  1. Traders are already expecting the alliance to raise April’s output levels by at least 500,000 bpd, with members now having grown comfortable with current prices which have been restored to pre-pandemic levels. The likes of Russia and the UAE have been supporting such a move.
  2. Arguably, the bigger talking point pertains to what will happen to Saudi Arabia’s additional cuts of 1 million bpd. How much of that 1 million in withheld barrels will be pumped back out starting April – all in one go? Or will they be cautiously pushed back out over the coming months?

“That quantum of the supply hike could determine the extent of oil market’s reaction in the immediate aftermath of today’s OPEC+ decision. In other words, the larger the incoming supply next month, the bigger the moderation in prices.”

To be clear, this isn’t to suggest we could see oil prices capitulate this week. The global demand recovery appears robust enough to absorb more incoming barrels of oil in April. Even by OPEC’s own estimates released this week, should the cartel push out 2.4 million bpd between February and June, the global oversupply can still be erased by August.

Nevertheless, today’s decision is set to have a major bearing on how oil benchmarks perform going forward.

“A full 1.5 million bpd being flooded back into global markets starting April could drag Brent back to sub-$60 levels once more, while a supply hike closer to the 500k bpd figure could push Brent closer to $70.”

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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.

Market Yo-Yos

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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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: BTD, FOMO, TINA…

Even with China’s top bank regulator saying he is “very worried” about risks emerging from bubbles in global financial markets (and the nation’s property sector), today’s wobble in Asian stocks has not been seen in other markets with US indices opening mixed, after their best performance in almost nine months to kick off March.

“The S&P500 has been very well supported by its 50-day moving average so far this year. Prices have touched that indicator twice intraday and bounced strongly in the following sessions.”

If bulls can get beyond last week’s high, then more new record peaks can be reached, with good support now holding around 3,800.

Buck consolidation

The dollar is mixed against its major peers, with the DXY edging back from four-week highs. Last week’s rebound in the greenback eased near-term downside risks and perhaps indicates a period of consolidation in FX generally until directional risks become clearer.

“It seems the dollar doomsday scenarios of many on Wall Street have been premature, though it is unlikely that the world’s reserve currency can rally significantly in the medium-term.”

Notably, the dollar has rallied really strongly against the safe haven majors JPY and CHF. USD/JPY, well known for its correlation to US bond yields, is approaching 107 and USD/CHF has tried to break above 0.92. These currencies remain key laggards as markets take the chance to unwind CHF long positions especially, built through the pandemic period.

RBA stands firm

The aussie is the top performing major after the RBA left its policy message unchanged earlier today. There was extra focus on rising bond yields, but the bank showed little discomfort with their recent rise, even though it has heavily intervened recently to counter the bond selloff. The RBA refrained from touching its forward guidance out to 2025 with recovery prospects in Australia brightening.

After last week’s steep drop from 0.80, AUD/USD bas bounced back off the 50-day moving average and 0.77 support. Prices are now teetering at the previous January highs and need to close above 0.7820 to have a chance of getting to the February highs.

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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.

Technical Outlook: EURUSD Poised To Breach 1.20

It has weakened against the dollar and Japanese yen but gained some ground against the New Zewland dollar. Over the past few weeks, the EURUSD has found itself within a very wide range with resistance at 1.2200 and support at 1.2000. Given how prices have cut below the 100 Simple Moving Average and pressing down fiercely against the 1.2000, the path of least resistance certainly points south.

The technicals swing in favour of bears on the daily timeframe. Prices are trading well below the 20 & 50 Simple Moving Average while the MACD trades to the downside. A solid daily close below 1.2000 could inspire a decline towards 1.9500 and 1.1920. Should 1.2000 prove to be reliable support, a rebound back towards 1.2050 and 1.2130 could be on the table.

Although the technicals are turning increasingly bearish, the fundamentals could still throw a proverbial wrench in the works for sellers. Later this morning, the Eurozone inflation reading and Germany’s unemployment rate will be published. Markets are expecting inflation to hold steady at 0.9% while the core reading is forecast to cool from 1.4% to 1.1%. The unemployment rate in Europe’s largest economy to projected to hold steady at 6%, unchanged from January.

Back to the technicals…

It is a different story on the weekly charts for the EURUSD. Prices respecting a bullish weekly channel and there have been consistently higher highs and lows. This is bull territory with bears under threat if prices trade back above 1.2150. A strong weekly close below 1.2000 could give the thumbs up for sellers to target 1.1900 and 1.1700.

1.20 pivotal on monthly timeframe

It is safe to say that the EURUSD remains bullish on the monthly timeframe. Prices are trading above the 100 SMA while the Relative Strength Index has yet to hit overbought levels above 70.00. If 1.2000 can hold the fort and keep bears out, prices could rebound back towards 1.2348. However, a solid monthly close below 1.2000 is likely to spell trouble for the bullish trend with the next key point of interest around 1.1600.

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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.

Nasdaq 100 Soars Back Above 50-SMA

Sure enough, tech stocks have roared back with a vengeance, sending the Nasdaq 100 back above its 50-day simple moving average (SMA) once more, after enduring a bruising selloff last week.

On Monday, the tech-heavy index surged 2.89% to register its best day since 4 November, the day after the US presidential elections. This tech benchmark also fared better than the S&P 500 (+2.38%) and the Dow Jones index (+1.95%) yesterday, as investors restored the 2021 gains for the Nasdaq 100. The information technology sector was also the best-performing sector on the S&P 500 yesterday, powering this benchmark for US stocks to its best day since June!

And fans of Big Tech also seized on the opportunity to pump these megacaps higher:

  • Facebook: +2.83%
  • Apple: +5.39%
  • Amazon: +1.72%
  • Alphabet: +2.36%
  • Tesla: +6.36%

Why the tech comeback?

With tech stocks bearing the brunt of the stocks selloff last week to post its worst week since October, Monday’s price action suggests that the “buy the dip” mantra is still alive and kicking.

Also, investors appear to have shrugged off the threat of rising Treasury yields, at least for now. This is set to be a risk that market participants will have to be mindful off, until there is certainty as to when the Fed signals that they’ll be easing up on their asset-purchasing programme.

“Despite the recent market volatility, the fundamentally bullish case for stocks remains intact.”

The US economic recovery that’s further enabled by more fiscal stimulus and the continued spread of the Covid-19 vaccine should spell more upside for equities, as long as the Fed doesn’t signal a premature letting up of its policy support.

Tech still expected to lag other sectors

Still, it’s important to note that investors had been rotating away from the more expensive tech stocks and increased their exposure to other sectors that stand to benefit from more injections of US fiscal stimulus. Such a shift becomes more obvious when comparing the Nasdaq 100’s year-to-date gain of 3.06%, compared to the S&P 500’s advance of 3.88% for the same period.

Should the reflation trade keep up, the tech sector is expected to continue relinquishing its leadership in propelling US equities higher, a role it had performed to great effect since the height of the pandemic.

“It’s high time for value and cyclical stocks to lead the pack and ride on the tailwinds of the economic recovery.”

How are US tech stocks set to perform on Tuesday?

With 10-year Treasury yields appearing to have stabilized just above the 1.40% level, stock market bulls are set to take advantage of the relative calm. After all, the VIX index, which is also know as Wall Street’s “fear” gauge, has moderated closer towards the 20 mark on Monday, having notably breached the 30 line in the latter parts of last week.

“At the time of writing, the Nasdaq 100 futures are relatively steady, which hints at a slight pause for tech stocks when US markets open today; perhaps a breather after yesterday’s runup.”

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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.

Technical Outlook: G10 Currencies In Focus

“Today, our focus will be directed towards the G10 space and our weapon of choice…technical analysis.”

Dollar rebound or dead cat bounce?

Last Friday, we questioned whether the Dollar was experiencing a dead cat bounce.

After flirting around the 50-day simple moving average (SMA) for weeks, the Dollar Index pushed higher thanks to rising US Treasury yields. Prices are trading marginally below the 91.00 level while the MACD is flat. Interestingly, the Relative Strength Index (RSI) is venturing towards 70.00 – overbought territory. A solid close above 91.00 could open a path towards 91.60 and 92.00. A decline back below 90.50 may invite a selloff towards 90.00 and 89.30.

Pound experiencing a technical pullback?

“Sterling collapsed like a house of cards last week after punching above 1.4200 for the first time since April 2018.”

It looks like a pullback could be in play but this will depend on how prices behave below 1.4000. Sustained weakness under this resistance could encourage a steeper decline towards 1.3830 and 1.3760. Should 1.4200 prove to be unreliable resistance, prices may rebound towards 1.4140 and 1.4200.

Euro poised for further downside

A lot is going on with the EURUSD.

Prices are trading below the 50 SMA but above the 100 SMA. The MACD is flat but the recent selloff suggests another decline on the horizon. A solid daily close below 1.2050 could trigger a decline towards 1.2000 and 1.9050. For bulls to jump back into the game, a strong daily close above 1.2130 will be required.

AUDUSD respects bullish channel

As the title says, the AUDUSD remains in a bullish channel on the daily timeframe. However, prices have cut below the previous higher low of 0.7724, offering an opportunity for bears to re-enter the scene. If prices are unable to break above 0.7820, this may result in a decline towards 0.7660 and 0.7563.

EURGBP capped under 0.8700?

Is the EURGBP in the process of a technical rebound or a dead cat bounce? After rebounding from the 0.8538 level last week, prices failed to secure a daily close above 0.8700.

Where the EURGBP trades in the medium to long term may depend on whether the current range can be broken. Sustained weakness under 0.8700 may trigger a decline towards 0.8596 and 0.8538. Should bulls take prices back above 0.8700, the next key level of interest may be found around 0.8780.

USDJPY eyes 107.00

The USDJPY is firmly bullish on the daily charts. Bulls remain in the control as long as the 105.838 higher low proves to be reliable support. Prices are trading above the 20 Simple Moving Average (SMA) while the MACD trades to the upside. A weaker Dollar or intraday breakout above 106.80 could elevate the USDJPY towards 107.00 in the week 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.

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.

Key Events This Week: Has The Fed Had Enough Of Rising US Yields?

The S&P 500, the Dow Jones, and the Nasdaq 100 indices all posted weekly declines, as 10-year US Treasury yields posted a one-year high and even breached the psychologically-important 1.60 mark before moderating on Friday.

“At the time of writing, the futures contracts for all three US benchmark stock indices are jumping higher.”

Still, given the surging yields so far in 2021, Fed officials will have ample opportunity to calm the markets down as they come out in full force with their respectively scheduled speeches this week:

Monday, 1 March:

  • New York Fed President John Williams
  • Atlanta Fed President Raphael Bostic
  • Cleveland Fed President Loretta Mester
  • Minneapolis Fed President Neel Kashkari

    Tuesday, 2 March:

  • Fed Governor Lael Brainard
  • San Francisco Fed President Mary Daly

Wednesday, 3 March:

  • Philadelphia Fed President Patrick Harker
  • Chicago Fed President Charles Evans

Thursday, 4 March:

  • Fed Chair Jerome Powell

Besides the scheduled speeches by Fed officials, global investors will have plenty of economic events to keep them occupied this week:

  • Monday, 1 March: US ISM manufacturing; Markit manufacturing PMI for Germany, Eurozone, UK
  • Tuesday, 2 March: RBA policy decision; Eurozone inflation; Germany unemployment
  • Wednesday, 3 March: Chancellor of the Exchequer Rishi Sunak presents UK budget; China’s Caixin services PMI; Fed Beige Book
  • Thursday, 4 March: OPEC+ meeting; US weekly jobless claims; Eurozone retail sales and unemployment
  • Friday, 5 March: US non-farm payrolls; China kicks off National People’s Congress

Key themes

It remains to be seen how market participants digest the cross-currents surrounding these key factors that are weighing on market sentiment:

  • US fiscal stimulus hopes

Over the weekend, the US House of Representatives passed President Joe Biden’s $1.9 trillion fiscal stimulus plan. The proposal now goes to the Senate, with just 2 weeks left before the March 14th deadline for when existing unemployment benefits expires. The Biden administration aims to approve those $1400 checks to American households by then.

Expectations for more US fiscal stimulus had been a major pillar for stock market bulls, although a lot of that optimism has already been baked into prices.

“It remains to be seen whether fiscal stimulus optimism is enough to push US stocks higher and overcome the threat of the Fed pulling back its support for global financial markets due to improving US economic conditions.”

  • Rising US yields

As investors sell off US Treasuries, yields have been sharply rising.

“Ultimately, those yields could hit a height when treasuries become attractive again and investors could then rotate funds back into US Treasuries, at the expense of stocks.”

Investors are now mulling where that level would be, and trying to pre-empt such a scenario, which has contributed to the increased market volatility of late.

  • Fed speak

The last thing the US central bank needs is to have the ongoing US economic recovery upended by a financial crisis. Investors will be closely monitoring whether Fed officials can still tolerate these higher Treasury yields, or when they could step in to calm things down in the markets.

So far, the Fed speak has had little success dampening market expectations that policymakers will prematurely ease up on their bond-purchasing programme.

“Once the Fed gets serious about keeping yields under control, they might eventually intervene with stronger rhetoric, or even via overt policy measures, which could then dampen the volatility in bonds.”

  • US economic data

Should more of this week’s US economic data releases exceed market expectations, that could boost investors’ expectations that the improving US economic conditions would force the Fed to taper its asset-purchasing programme sooner rather than later.

“However, signs of more marked improvements in the US economy could also spur value stocks higher while dampening growth stocks, a divergence which is becoming more notable with the climb in energy and financial stocks while the tech sector languishes.”

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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.

Week In Review: Tech Slumps, Yields Soar, Dollar Rebounds

“Markets were growing increasingly concerned about the prospects of economic growth leading to higher inflation and resulting in the Federal Reserve tightening monetary policy conditions.”

These fears heavily influenced bond markets, global stocks, currencies, and even commodities during the trading week.

On Monday, we covered the Pound which at the time was the best performing G10 currency year-to-date. A healthy combination of positive vaccine news, falling Covid-19 cases, improving economic data, reduction in Brexit uncertainty and hawkish Bank of England have sweetened appetite towards Sterling.

Although the GBPUSD later tumbled after rallying to 1.4240, this had little to do with a change in sentiment towards the Pound but an appreciating Dollar. Sustained weakness below 1.4200 may open a path towards 1.3820 in the short term.

Earlier in the week, I bet tech stocks caught your attention after the Nasdaq 100 collapsed like a house of cards? The Index recorded its longest streak since October thanks to the great reflation trade.

“In a nutshell, market players are expecting the US economy to outperform as it continues its post-pandemic recovery which may result in faster inflation and the Fed pulling back its support for financial markets.”

Can you believe the dollar was depressed around the 90.00 levels mid-week? Rising hopes around the $1.9 trillion stimulus package boosting growth and leading to inflationary pressures weighed on the greenback. However, soaring bond yields later offered bulls a lifeline with prices trading back above 90.50 as of writing.

The tech-led slump remained the main focus as rising inflation concerns triggered a sell-off in the bond markets. Given how higher yields had the potential to dent the tech “darlings” and reduce the present value of future profits, the Nasdaq got no love.

“Our stock of the week was Nvidia which released its fiscal fourth-quarter results for 2021 after US markets closed on Wednesday. The chipmaker posted strong fourth-quarter results with revenues hitting $5.00 billion, versus the $4.2 billion forecasts and earnings hitting $3.10 per share versus the $2.81 expected.”

For those who are wondering why stocks feel despite the positive earnings, this was based around the CEO Jensen Huang downplaying the cryptocurrency play. He stated that he does not expect the company’s business of selling processors to miners to grow extremely large.

“Since we are talking about cryptos, it was a horrible week for Bitcoin. After peaking above $57,500 on Monday…prices slumped towards $44,000.”

Do you remember the Reddit Gang? Well, they were back in action this week, sending their favoured stocks soaring higher. GameStop is up almost 200% this week while AMC has gained roughly 40%.

As the week slowly came to an end positive vaccine news boosted risk appetite. The US FDA released its report on the Johnson & Johnson single-shot vaccine and found it “safe and effective”. Such encouraging news boosted global sentiment and supported risk appetite. However, this was not fully reflected in stock markets.

“It is becoming increasingly clear that the surge in Treasury yields has sent shockwaves across global markets.”

This has hit appetite for equities while boosting the dollar. Looking at commodities, Gold is set to post its second straight monthly decline while Oil is finding comfort above $60 ahead of the OPEC+ meeting on March 4th.

For more information on the OPEC+meeting on March 4th, check out the “MARKETS EXTRA” Podcast: What do OPEC+ and “Guardians of the Galaxy” have in common?

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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.

Yields Surge Triggers Market Drama

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.”

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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.

Positive Vaccine News Helping Risk

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.

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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.

The Return Of The Reddit Gang

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.

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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.

Stocks Stable, Yields Rocketing

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.

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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.