By Stephen Innes, Chief Global Market Strategist at Axi,
In an echo of yesterday’s morning note, it’s not unusual for the market to pause at record highs, even more so as the S&P moves towards its upper reaches, hinting investors could be exhausted from chasing strength.
But more poignantly, they likely need a little more confirmation at precisely what stage of the recovery we are at. And more specifically for bond yield concerns, exactly where inflation sits as the technical correction lower in US 10-year bond yields.
Given that more prominent sectors (Tech) continue to struggle in the face of higher US bond yields, the most significant risk is that inflation readings force the US Fed’s hands to modify their normalisation plans.
Still, the recent shift lower in US Bond yields indicates a market positioned for higher bond yields, where price action is likely to be of the “two steps up, one step back” variety.
And according to the latest trend, the S&P 500 should be expected to move in tandem, making headway when Treasuries ease back and then consolidating or seeing small profit-taking as yields step up.
But it has been a hugely impressive run in US equities given the high US yields and the negative buzz around corporate tax hikes, especially when the quarter-end pension rebalancing kept a good chunk of investors on the sidelines.
However, the Q1 earnings season is probably limiting appetite to add risk as the markets need corroborative evidence to justly lofty valuations.
There is still some room to the upside. However, on a cautionary note, the viewfinder points to some significant consolidation in stocks as the street soon begins to factor in growth peaking over the next three months, which would be historically consistent as the markets enter the window of maximal US data (April, May, June).
A minuet on the FOMC Minutes
The March FOMC minutes indicated that the US Federal Reserve’s view of the economy continued to improve – but slowly while containing little in the way of surprises while publicly stating “that now was not the time to talk about taper.”
On inflation, most participants pointed out supply constraints could contribute to price increases for some goods in the coming months as the economy reopens. Still, that inflation reading would likely edge down next year. The US 10-year yield’s response to the release was muted by design.
With 8 million reasons (US unemployed) and knowing full well the impact from past taper mistakes and while the statement gives voice to the many, all in all, it is consistent with the narrative Federal Reserve Chair Powell has been pushing.
Whippy session for oil
After another whippy session as the market continues to digest the competing narrative of US growth and Europe’s vaccine catch-up recovery versus the uncertain supply conditions.
Traders are trying to hash out a near-term sweet spot around Brent US$63 to provide a springboard for the build-up to a pent up summer travel boom in the US where gasoline demand should soar, and a further pick up in air travel could assuage jet fuel concerns.
The third and fourth wave virus outbreaks in Europe and parts of Asia, notably India, have elevated lockdown concerns that continue to weigh in the market’s topside ambitions hitting the prompt demand outlooks.
And at this stage of the oil market recovery, COVID -19 resurgence continues walking back investors thoughts of an oil supercycle down to a very ordinary rebound as the last few miles remain littered with supply and demand speed bumps.
Walking down memory lane, typically, summer driving season is an absolute rocker for US gasoline sales. This year, demand should blow through the roof if we believe the max optimism forward-looking gauges around consumer confidence and the ISM.
On the Department of Energy (DOE) inventory data, the crude supply excess is eroded by rising refining runs. Distillate stocks 6.9mb (5%) above their five-year average and refining runs continue to improve as more robust gasoline demand is boosting US refining margins. And this should continue to improve.
But of course, traders would feel more comfortable pushing oil higher if the product supplies moved in the other direction today!
The EUR is steady this morning on good data, holding onto the decent gains posted over the last week. Upward revisions to the flash services PMIs for March have helped buoy the mood.
The British Pound has gingerly bounced back from some initial overnight weakness which preceded a downward revision to the March Services PMI.
Most FX traders expect the dollar to drift off. There aren’t any signs of big outright “dollar sellers” yet. Instead, the street seems to feel that the dollar has reached its upper bounds, so it’s more a case of not wanting to buy it further.
EURUSD has probably bottomed, but there’s only limited upside. Same for USDJPY – the call is more for it having topped than returning to the low 100s.
Although I’m not privy to the flow, the Toshiba -CVC deal could be weighing on the USDJPY. Private deals at this scale are unusual and almost unheard of in Japan. There will be considerable pressure for USDJPY to absorb if the deal goes through.
Malaysian Ringgit looks for direction
Despite a positive vibe in the local bond market, the ringgit searches for fresh exogenous catalysts while getting ping-ponged between broader US dollar moves in G-10 and whipsawing oil prices.
Gold struggled to push back above US$1740, let alone test the $1750 pivot level as the US Fed minutes were extremely balanced and didn’t perhaps wax as dovish as some had expected. US yield eventually ticked higher post FOMC minutes as the path of least resistance for the US recovery is higher into the summer and supporting higher US yields outlook.