Risk Assets Resume Their Rise As Dollar Suffers Following Payrolls Miss

Over the past several weeks, a lot of economic data has surprised to the upside, including figures on consumer spending, business and consumer confidence, the housing market and manufacturing and services activity. That had led some economists to anticipate far more than a one million jobs to have been added. Indeed, if we exclude March 2020, this was the worst negative surprise in 24 years since the survey started.

While the trajectory continues to show improvement in the labour market, the US may not return to full employment by next year if the jobs recovery starts to show fragility. For investors, this is not necessarily bad news. In fact, it should be seen as positive for risk assets and negative for the US currency.

The US 10-year breakeven rate serves as an indication of the markets’ inflation expectations over the 10- year horizon and this reached a new eight year high of 2.49%. The latest spike in inflation expectations is now driven by two factors, the big surge in commodity prices and expectations of extended easy monetary policy. The Fed is now set to delay tapering of its asset purchases until the end of the year instead of the third quarter and that is why the S&P 500 and Dow Jones Industrial Average closed at new record highs despite the gloomy jobs report. The next big data point will be released on Wednesday with US inflation expected to have soared 3.6% compared to a year ago. However, this is due to base effects which means investors should monitor monthly changes instead to see if there are any signs of prices moving sharply higher.

When looking at base metals, prices are running hot with iron ore and copper continuing to record new highs. This should further benefit stocks in the mining industry, but also raises some doubts over the Federal Reserve statements which say inflation will be “transitory”.

Asian stocks rose today on expectations of lower rates for longer with European and US indices are also set for a positive start to the week. Meanwhile, the dollar continues to feel the pain from Friday’s disappointing jobs report with the dollar index (DXY) only 0.3% higher from where it started the year, having retreated 3.45% from the March peak.

Given the current environment, expect the selling of the DXY to resume with the first big test around 89.20. A break below this level will send the greenback to a three-year low. Unless we see a sharp correction in equities or a new surge in US bond yields, expect the dollar to remain under considerable pressure.

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Investors Awaiting US Jobs Report Before Making The Next Move

But the Dow Jones Industrial Average managed to advance to a new record high with the support of cyclical industries. European markets are also set for a subdued open following a mixed Asia session which saw Japanese stocks outperforming on their return from holiday, while shares in China and Australia dropped after Beijing announced a suspension of regular economic dialogue with Canberra.

US bond yields are back under pressure with 10-year yields falling for a fifth straight day, preventing the dollar from further rallies. Meanwhile in commodities, Brent is still attempting to break above $70 a barrel as crude stockpiles in the US fell more sharply than anticipated.

Key trends for equity investors haven’t changed a lot so far this year. Value and cyclical stocks remain the main beneficiaries from the reopening of economies, while growth and tech firms with overstretched valuations continue to suffer. In an expensive equity market and with anticipation of higher interest rates, value tends to benefit the most and investors are sticking to this narrative.

Surprisingly though, the bond market is still doing holding up despite all sorts of talk about an overheating economy and soaring inflation expectations. The 10-year breakeven inflation rate which measures expected inflation over the next 10 years reached 2.47% on Wednesday, the highest in eight years. Meanwhile five year breakeven rates approached 2.7%, the highest in a decade.

If Friday’s US jobs report comes out strong enough to force the Federal Reserve to announce tapering of asset purchases later this year, we could see the upward trajectory in long term bond yields resume after its latest pause. However, looking at recent economic data releases, it seems the economy is failing to surprise to the upside.

The employment component of the US PMI Manufacturing and Services indices both came in slightly above market expectations this week. Private payrolls rose by 742,000 jobs in April posting its biggest gain in seven months but still fell short of the 800,000 forecast. Today’s initial jobless claims will also provide more information about the recovery in the labour market. But it is Friday’s non-farm payrolls report that will determine how bond yields could move and possibly take the dollar in the same direction.

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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.

After A Challenging Month, Will The Dollar Recover?

According to the latest data from the Commodity Futures Trading Commission, the net short positions on the dollar reached $10.27 billion against its major peers. That is more than $2 billion net shorts added compared to a week earlier and the highest in six weeks.

The dollar’s decline followed three back-to-back monthly gains as data began to show the US economy recovering at an amazingly fast pace, leading to higher inflation expectations and bond yields suggesting sooner than anticipated tightening in monetary policy.

However, the Federal Reserve did not agree with the market’s view and remained committed to keeping monetary policy extremely loose last week at its policy meeting, setting a high bar for any start date to reduce the pace of its asset purchases. The Fed requires substantial further progress in reaching its employment goals before starting the tapering process. Given the US labour market remains 8.4 million jobs short of its pre-pandemic employment levels, it seems there’s still a long way to go.

Data on Friday revealed a surge in US personal spending, personal income, personal consumption expenditure and consumer sentiment. This was a reminder of how far the US economy is outperforming other developed nations, especially after the Eurozone’s first quarter GDP report showed the continent had fallen into a double dip recession.

Given the market is a forward-looking mechanism, it tends to incorporate all currently known information and anticipated events. The narrative now is that the rest of the global economy continues to struggle with the Covid-19 pandemic but will sooner rather than later catch up with the US. However, latest Covid developments in India, Brazil and Turkey should be a reminder not to take anything for granted. The divergence of the global economy may or may not narrow depending on how these issues play out.

This week’s economic data will likely show the ongoing recovery in the US in the hard hit services sector, after the activity index jumped to a record high in March. Manufacturing activity is also expected to continue booming. On Friday, we will learn how many jobs were added to the US economy in April after 916,000 Americans found jobs in March. If we see an uptick in US 10-year yields towards 1.7%, this should become supportive of the US dollar, otherwise the global reflation trade will continue to pressure the greenback.

Despite Fed Chair Jerome Powell continuing to insist that inflationary pressures are transitory in nature, if commodity prices continue to surge and push breakeven rates higher, the Fed will need to change its language. We are already seeing member’s views diverging from Powell, with Dallas Fed President Robert Kaplan saying on Friday that any signs of excessive risk-taking would suggest it is time to consider fewer bond purchases. An increasing amount of similar voices could completely change the narrative in the market from a global economy narrowing the gap with the US to a one of the US tightening policy first.

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Dovish Fed And Big Earnings Surprises Send US Stocks To New Records

The economy is firing on all cylinders with employment, consumer spending, manufacturing, services and the housing sector all exhibiting solid gains. Still, the Fed is steadfast in its attempt to achieve the Committee’s target of maximum employment and inflation at the rate of 2% over the long term.

The FOMC is not even considering talking about slowing the $120 billion in asset purchases per month, suggesting that any tapering will not likely occur before the end of the year at the earliest. While Powell admits the Fed’s policy is leading to some frothiness in capital markets, he doesn’t see systematic financial stability risk.

The key takeaway from yesterday’s FOMC meeting is that US monetary policy is going to remain extremely loose, no matter how hot some parts of the economy become.

While the Fed did not disappoint investors, equities barely moved after Powell’s speech as markets had expected very little action. Currently trading at around 30 times price to earnings, the S&P 500 needs more than just an easy monetary policy to keep bulls in charge.

The earnings season has been remarkable so far. Out of the 218 S&P 500 companies who have announced results, 85% have managed to beat profit estimates and 78% on revenue. Surprisingly though, the firms who managed to beat on the bottom line declined -0.2% on average on the day of their earnings announcement. Many stocks like Tesla, Microsoft and AMD are failing to gain traction following positive surprises. In fact, companies need to deliver substantial upside surprises to get investor’s attention. That’s what Alphabet, Apple and Facebook managed to deliver this week and they are the stocks driving equity benchmarks to new record highs.

The dollar remains the most unloved currency for the month falling to a nine-week low early today. The reflation trade is clearly ongoing bolstered by extremely loose monetary policy, and with another $1.8 trillion in spending announced by US President Joe Biden, the budget deficit has only way to go, and that’s up. However, the US remains the best performing developed economy and this will be reflected in today’s GDP report. For the dollar to regain strength, we need to see interest rates differentials widening again, but this is not happening at the moment.

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US Equity Futures Edge Higher In A Busy Week For Wall Street

Still, the S&P 500 index managed to close near its record highs as corporate earnings and economic data reassured investors that equities remain the best option for growing wealth. Futures today are indicating a slightly positive start for the S&P 500 and Dow Jones Industrial Average, while the Nasdaq composite is lagging.

In terms of last week’s economic data, the flash reading of the IHS Market US composite PMI rose to a record 62.2 in April from 59.7 in March and new home sales surged 20.7% last month to the highest level since 2006. The US economy is clearly firing on all cylinders with a Federal Reserve unwilling to withdraw support any time soon. That’s what we are likely to hear from Fed Chair Jerome Powell on Wednesday following a two-day FOMC policy meeting,

The US central bank is comfortable with the idea of inflation rising above 2% for some time until a wide-ranging recovery is achieved. So do not expect the Fed to scale back its bond-purchasing program or signal policy tightening in the near term despite the robust economic recovery. This will continue to be a positive factor for equities even though valuations may seem stretched.

On the earnings front, 84% of S&P 500 companies who have reported results for Q1 2021 have managed to beat analyst’s estimates despite the bar rising over the past several weeks. Earnings for tech giants Alphabet, Microsoft, Apple, Facebook and Amazon are all due this week. If the earnings surprises continue at such a magnitude, I wouldn’t be surprised to see another record high on the S&P 500, especially if US Treasury yields remain within this month’s trading range.

In currency markets, the dollar continues to underperform its major peers in what has been a poor start to the second quarter, after an exceptional performance at the beginning of the year. The dollar index is now flirting with the uptrend trajectory from January and a break below may signal further weakness from a technical perspective. Traders seem to believe that Europe and Asia will play catch up with the US and close the gap in terms of economic performance later this year.

The euro, Swiss franc and New Zealand dollar have all climbed more than 3% month-to-date against the greenback, and this week’s US GDP report and Federal Reserve meeting should provide traders some guidance.

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Earnings season to determine the fate of the bull market

According to the most recent BofA report, equity funds have attracted $576 billion over the past five months, exceeding inflows recorded over the past 12 years. Investors have been left with few choices as sovereign debt markets and most high grade corporate bonds have been offering a minimal or negative real return. This environment has led valuations to skyrocket with the most followed benchmark S&P 500 trading at 22.5 times forward earnings, well above its 10-year average of 15.9 times and the highest since the late 1990’s dotcom bubble.

The upcoming weeks will provide a reality check on whether this bull market still has the potential to creep higher or some profits needs to be cashed out. The earnings season is kicking off this week with major banks announcing first quarter results, a year after the Covid-19 pandemic halted the global economy. As analysts have become more optimistic, earnings expectations for S&P 500 companies have been rising over the past two months and are anticipated to grow 25% in the first quarter of 2021 compared to a year ago.

With bond yields continuing to move gradually higher, forward earnings need to be brought a little lower. So, either shares prices need to correct to the downside or earnings have to beat markets expectations. Given that most technical indicators are reflecting overbought signals on the S&P 500, it seems like earnings will need to beat expectations by a significant margin to justify another leg higher.

JP Morgan, Wells Fargo and Goldman Sachs will all be announcing results on Wednesday morning, followed by Bank of America and Citigroup on Thursday. Financials have been the second-best performing sector so far this year rising 19%, with the energy sector topping that with gains of 27% so far this year.

Currency traders will also be closely watching data out of the US this week. The dollar has fallen against its major peers as the US 10-year Treasury yield has dropped from its 14-month peak. US bond markets have clearly become the number one factor moving the dollar and traders need to watch out to see whether yields will begin rising again following the past week’s declines or possibly consolidate around current levels of 1.6% to 1.7%.

US consumer prices released on Tuesday will be in focus following the largest annual gains in producer prices in almost a decade. Traders need to ignore the year-on-year changes given the very low base due to the pandemic and concentrate on any monthly moves to determine the trajectory of prices due to fiscal and monetary policies, challenges in supply-chain and expected consumers’ pent-up demand.

Thursday’s retail sales report will also be significant as it should continue to reflect the divergence between consumers spending in the US and the rest of the developed economies.

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US Equities Aiming For New Record Highs As The Fed Sticks To Stimulus

That’s the conclusion from the latest minutes of the Federal Open Market Committee’s Meeting in March, which means we didn’t learn anything new. Asset purchases of $120 billion per month and interest rate kept close to zero will stay for some time.

Over the past several months, many economists and market participants have been worried about a surge in inflation, but the Fed doesn’t seem to be. According to the minutes, several market participants see the factors that contributed to low inflation during the previous expansion could again exert more downward pressure on inflation than expected. This suggests that any rise in prices due to supply disruptions and pent-up demand would prove to be transitory and not sustained over the longer term. This should be good news for risk assets, especially those equities in the growth sector that have recently underperformed the broader market.

US Treasury markets seem to have steadied following the sharp selloff since the beginning of the year. Yields on the 10-year bond have fallen more than 10 basis points from the March peak. However, it’s still not clear whether this is due to abating inflation fears or the rebalancing of portfolios at the end of the last quarter. We will know the answer within the next two to three weeks.

So far, it seems we are in a goldilocks situation. Economic data over the past few days have been very encouraging, corporate earnings are expected to improve significantly when results are announced over the upcoming days, more stimulus is set to arrive in the form of infrastructure spending and President Biden has begun negotiations on raising corporate taxes to 28% from 21%.

Given this environment, expect US stocks to continue outperforming non-US stocks at least in the short term, equities to outperform bonds and if corporate earnings surprise to the upside, this would pave the way for more record highs.

The dollar has been under pressure over the past few days with the dollar index dropping from a five-month high of 93.44 to a two-week low of 92.14 yesterday. The fall in the greenback is mainly driven by the recent drop in yields but looking at where the US economy stands compared to the rest of the developed economies, there is still room to see the dollar considerably higher from current levels.

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US Stocks To Resume Rally Following Upbeat Jobs Report

US equity futures also edged higher, extending their Friday gains with cyclical sectors likely to benefit the most from the strong rebound in the economy. Surprisingly though, we only saw limited moves in the Treasury market with yields on the 10-year benchmark remaining 6 basis points below last Tuesday’s high of 1.78%. The dollar also saw a muted reaction after an initial spike, but this could be largely due to the Easter holidays in the US and elsewhere.

Growth prospects, the risk of inflation and the pace of vaccinations remain the dominant factors moving financial markets. Investors seem to be frontrunning the Federal Reserve anticipating at least a 25-basis point rate hike by the end of next year. On Wednesday, minutes from the Fed’s last meeting will possibly shed further insight into the thinking of monetary policymakers. The March meeting occurred after the $1.9 trillion stimulus program passed but before the $2.25 trillion infrastructure proposal. While the “dot plot” representing interest rates projections did not signal any rate rises until 2024, seven out of eighteen officials were anticipating an earlier interest rate hike. If parts of Biden’s infrastructure proposal come to fruition in the next couple of months, we’re likely to see more policymakers joining the hawks.

Given the divergence between US economic growth and the rest of the developed world, expect the dollar’s uptrend to remain in play for the second quarter of the year. Short positions on the greenback are continuing to decline according to the latest CFTC positioning data which is another bullish signal. The worst performing G10 currencies so far this year like the euro, yen and Swiss franc are likely to feel most of the pain.

Gold, an asset heavily favoured by investors during the pandemic has seen steep declines over the past three months. The precious metal has dropped by more than 10% in the first quarter and has lost almost a fifth of its value since peaking in August 2020. It shouldn’t be that surprising to see the metal falling after a strong surge in US Treasury yields and hopes of a robust global economic recovery. However, gold remains a key asset in a well-diversified portfolio. After all, we have never witnessed stimulus in the amount seen over the past 12 months and there are high chances that inflationary pressures will keep real interest rates in negative territory for a prolonged period.

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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.

Is The Dollar Set To Continue Its Advance?

Trillions of dollars in stimulus packages, the Federal Reserve holding interest rates near zero, unlimited purchases of US Treasuries, rising US debt and deficit levels, improvement in pandemic management, and money continuing to flow to risk assets were all thought to be reasons for the dollar to weaken further this year.

Almost three months into the new year, the dollar has gained 1% against the Australian dollar, 3% against the euro, more than 5% against the yen and swiss franc, and the pound has given back almost all its gains for the year. With the dollar now sitting at a four-month high against a basket of its peers, the popular view of a weaker US currency is now being put to a big test.

The dollar index has just breached its 200-day moving average for the first time since May 2020. If it manages to hold above this long-term moving average for a couple of days, it will provide more signals to continue its advance.

While higher debt levels should be considered a negative factor for a currency, investors are instead focusing on growth expectations. US economic growth is now expected to outpace its developed peers for several quarters and such an outcome is attracting inflows rather than outflows into the economy.

Interest rate differentials between the US and German 10-year bonds are continuing to widen and have climbed back to pre-pandemic levels of 2%. This is becoming more attractive to carry trades which borrow in euros and invest in US dollars. The further the spread widens, the more it should lead to money flowing out of the Euro area into the US.

The most obvious fundamental reason for the stronger dollar against the euro is the battle against the virus. The US has vaccinated 39% of its population according to the New York Times Vaccination Tracker, compared to a range of 13-14% in Europe’s four largest economies of Germany, France, Italy, and Spain. The slower vaccination rate in Europe is leading to a renewed surge in Covid infections and this is expected to translate into the delayed reopening of economic activity. This narrative will only change if the EU manages to sort out its vaccination program, but so far it seems to be well behind the US and hence the market expects the dollar to continue to march higher.

One of the key positive sides of a stronger dollar is more imports will flow to the US from the rest of the world. This should help boost exports from the Eurozone and emerging markets. On the contrary, a stronger dollar will dampen demand for emerging markets (EM) commodities and make their dollar-denominated debt challenging to service, especially with rising longer-term interest rates. So far, this risk seems insignificant but another sharp spike in yields and the dollar will increase the probability of a sovereign debt crisis in the EM world.

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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.

Turkish Lira Plunge Felt In Japan

The Turkish Lira tumbled 14% against the dollar as trading kicked off in Asia to become one of the worst performing emerging market currencies against the greenback this year. The reverberations were felt in Asian markets, particularly in Japan where the Nikkei 225 fell 2%. While there should not be a strong link between the Turkish Lira and Japanese equity markets, it is believed that retail traders in Japan hold significant leveraged long positions in the Lira as a carry trade. Hence, they have to cover these positions by selling equities in local markets.

Elsewhere, Asian stocks traded mixed with China’s Shanghai Composite and Shenzhen Component slightly up, while Hong Kong’s Hang Seng and South Korea’s Kospi have fallen into negative territory. This indicates the Turkish Lira slump will only have a limited impact on other high yielding emerging markets with no risk of wider contagion.

US equity futures are struggling for direction with the S&P 500 spending most of the Asian session between red and green. However, the Nasdaq 100 has gained following a six-basis point fall in US 10-year Treasury yields. Global investors will again be testing the appetite for US debt auctions following a rally of more than 60% in US 10-year yields over just seven weeks. A further spike in yields will bring more volatility and continued rotation into value stocks from growth stocks.

Long term interest rates may have risen for good reason as investors anticipate a strong US economic recovery ahead that could last for several years and brings with it inflation. However, this could also be the biggest threat for risk assets that have been benefiting from an extremely low interest rate environment since the beginning of the Covid-19 pandemic. Despite the recent surge in long term interest rates, they are still considered low when compared to historic averages and that’s why some high asset prices may still be justified at current levels with the Nasdaq 100 having fallen 7% from February’s peak. However, the higher the long-term interest rates go, the more difficult it becomes to justify these valuations.

Companies with the ability to pass on higher prices to customers are likely to be the ones that benefit most and should be overweighted in portfolios. These could be in the industrial, material, financials and commodity sectors.

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The Fed’s Greenlight To Resume Risk Taking

Economic growth, employment and inflation were all revised sharply higher for 2021, but interest rates are projected to remain at zero for the next two years.

The S&P 500 reversed early declines of 0.4% to close 0.3% higher at a new record of 3,974. Yields on the US 10-year Treasury remained elevated as Powell didn’t see the urge of taking action or talking down long-term interest rates. Meanwhile, the dollar was the biggest loser of the event, falling against most of its major peers.

Given this kind of environment, the ingredients for higher equity markets remain in place. You have a rapid economic recovery coming out from an induced coma, a Federal Reserve unwilling to pullback from emergency measures and a large amounts of US fiscal stimulus finding their way into equities by retail investors. However, this isn’t a “buy everything” situation. The higher bond yields move from here, the more challenging it becomes for growth stocks to resume their upward trajectory. Highly priced Tech stocks trading at elevated multiples compared to historic averages will likely remain under pressure in the short to medium term, so it makes sense to reduce their weight in portfolios.

On the flip side, value stocks such as those in financials, energy, materials and industrials are the ones to benefit most from this environment. Is it not only fundamental factors, such as easing lockdowns and improving profitability that will lead those sectors to outperform, but also technical ones. The MSCI World Value Index has outperformed the MSCI World Growth Index by more than 10% from the beginning of November last year. Many value stocks are likely to become momentum ones, leading to more systematic trading systems picking them up in their portfolios, hence we expect the outperformance of value stocks to continue in the short to medium term.

While the dollar index fell 0.5% following the FOMC meeting, the ongoing rise in yields and widening spreads should continue to lend support to the greenback. Traders will keep a close eye on the upcoming monetary policy decisions from the Bank of England today and Bank of Japan tomorrow but expect both to echo the dovishness heard from the Federal Reserve.

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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.

What To Expect From This Week’s Fed Meeting

The Fed emergency action back then included an additional $700 billion in asset purchases, expanded repurchase operations, swap lines with foreign banks and credit facilities to commercial banks.

Fast forward one year and the US economy looks in a better shape than most other developed economies thanks to a second heavyweight $1.9 trillion stimulus package just passed and three vaccines promising an end to the current pandemic. Growth and employment estimates have been revised sharply higher by the private sector with Morgan Stanley now expecting the economy to grow by 8.1% this year.

Despite the rosier economic outlook, this week’s Fed meeting is expected to be absent of major policy changes. Nevertheless, how officials see the economy and rates heading over the upcoming years is crucial for investor’s decision making.

A lot has changed since December when the Fed last updated its economic projections. GDP was estimated to grow by 4.2% and unemployment to decline to 5% by year-end. Expect these forecasts to significantly change on Wednesday when the new forecasts are released. While these upgrades should be positive to risk sentiment, it is the inflation forecast that matters most to investors at this stage.

Markets are betting that inflation will rise at a faster pace than official’s estimates. Massive stimulus combined with fast vaccination rollouts and low interest rates are all seen as ingredients for rising prices. Inflation expectations have soared over the past three months with five-year breakeven rates rising to 2.6%, the highest since 2008. US 10-year Treasury yields are now trading above 1.6% and some market participants are betting the benchmark could reach 2% before year-end, which would lead to a further selloff in growth stocks that have benefited from low interest rates.

Fed Chair Jerome Powell has attempted to play down fears of rising prices on numerous occasions as he expects any surge in inflation will likely be more temporary than sustained. On Wednesday, we will get to know whether Powell and his colleagues are getting more aligned with market expectations or continue to see the matter differently.

As of December, only five out of 17 Fed officials expected interest rates to move higher by 2023. The median projections continued to reflect no interest rate hikes through 2023. However, if four or more participants joined those who expect a rate hike in two years, that would suggest an earlier exit from loose policy, and hence could bring additional volatility to equity markets and strengthen the dollar.

There is no doubt that the recent surge in US government debt yields has caught the attention of officials, but there have been no signs that they are ready to step in. So far, implementing yield curve control does not seem to be on the table, but whether the Fed will shift its asset purchases to more long-dated bonds remains a question to be answered on Wednesday. Given the current environment, if the FOMC does not take action to calm volatility in debt markets, we should be prepared for another selloff in growth stocks, especially in the highly priced Tech firms.

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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.

Value Stocks Continues To Be Favoured, Despite Markets Passing Big Tests

Most stocks in growth sectors with overstretched valuations have seen their prices plunge by double digits and some have even erased more than a third of their market cap. Tesla Inc, Zoom Video Communications and Peloton Interactive are examples of familiar names that have dropped more than 30% from their highs. While one reason has been attributed to economies returning to pre-covid habits, the other big factor is rising inflation and bond yields which makes these growth stocks less attractive in investors’ portfolios.

Those fears abated significantly on Wednesday as the market passed two crucial tests. Consumer prices while rising 0.4% in February, when stripping out food and energy, the spike was a modest 0.1% from January and 1.3% on a year-on-year basis. The data showed that a feared spike in prices has not materialised, at least for now. The second test was an auction of new US Treasury debt as investors were concerned that the $38 billion sale of 10-year notes wouldn’t be met by strong demand. However, the auction had a solid bid-to-cover ratio of 2.38 and priced at 10 basis points below this year’s high at 1.52%.

The debt auctions so far this week have shown that investors are comfortable with current rates and today’s $24 billion sale of 30-year bonds will test investor’s appetite for even longer durations.

Given that President Joe Biden’s $1.9 trillion Covid-19 relief bill cleared its final stages yesterday, the issuance of new government debt is expected to rise above the $3.6 trillion issued in 2020. This should keep yields rising from current levels, but it is the momentum of the rise that will impact equities.

We continue to favour value stocks overgrowth and see prolonged high volatility in “Big Tech” names with risks tilted to the downside in the short term. Not only will higher interest rates lead to the outperformance of value companies but it is also the optimism surrounding the economy reopening. That is not to say that all growth names will be out of favour, but investors need to be very selective and take valuations into serious consideration. From a tactical perspective,to tilt portfolios more into cyclical sectors may benefit the most from returning to pre-covid ways of living

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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.

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.