Creeping Bond Yields Unnerve Markets

 By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA 

Government bond yields crept higher overnight, notably in the United States where the US 10-year rose above 1.30%, and the 30-year consolidated above 2.0%, rising to 2.08%. With the buy, everything trade spanning equities, currencies and commodities in full swing for most of February, the rise in yields was enough to provoke investors to book profits. That was despite the price action in yields being a repeat of much of last week.

I noted yesterday that another spike in US yields was the only thing that could upset the Biden stimulus/vaccine-led recovery buy everything rally. For once my timing was right, although I can really claim no credit. Financial markets at the moment are schizophrenic, concentrating on a single issue of the day depending on the narrative they want to hear and their positioning while excluding what doesn’t suit. Last night it was bond markets turn to be the dish of the day.

Equity markets retreated slightly, and the US Dollar rose, notably against the rate-sensitive Japanese Yen. Oil also staged a modest retreat. The price action looks corrective and not a turn in markets underlying trends. Yields are almost certain to rise in the United States, especially if the Biden administration gets its USD1.9 trillion packages over the line; definitely, if they look like succeeding with the follow-on multi-trillion green energy/infrastructure new deal.

It will be the pace of the rise in US yields that will dictate whether markets will start weaning themselves of the automatic assumption that equities will always finish the week high, so buy everything. A slow but steady rise will allow other asset classes to adjust. A rapid increase in US yields will likely spark nerves among the buy-everything
aficionados. Even Bitcoin might fall into such a scenario. But for now, we do not have visibility on which way it will play out. In my opinion, the US 10-year would have to move to 2.0% to threaten the equity rally. Whether the Federal Reserve would allow that to happen is another matter all altogether.

One notable loser apart from the Japanese Yen was gold. Having struggled to hold USD1800 with a series of dead cat bounces last week, gold sank below that mark by 1.35% to USD1794 an ounce overnight. Gold bugs’ nerves will be frazzled, not least because the 50 and 100-day moving averages (DMA’s) both look likely to cross below the 200-DMA in the coming week. Gold’s inflation hedging role has disappeared in a cloud of lead dust in 2021, and it may only find its mojo again after a trip to USD1600 an ounce.

In other news, Bitcoin traded at USD50,000 of fiat US Dollars, backed by the United States’ tax revenues, yesterday. It continues to flirt with that level this morning. The Tulip mania is given another leg up every time a financial institution mumbles about facilitating client custodial services for cryptos. Failing, in the tulip glare, to distinguish between offering a service to a client, and actually embracing cryptos as an asset class. We are even at the point where a listed US company plans on raising hundreds of millions of debt to buy Bitcoin, instead of investing the proceeds in growing their underlying business.

That’s a warning sign if there ever was one that things are getting out of hand in the crypto world. I’m having a 1980’s IPO moment over this, where companies would IPO, raise money, buy a jet, and party like its 1999, without doing anything. Anyway, Bitcoin might be USD60,000 tomorrow, or today, I’ll not argue with the speculative momentum. I shall not move, though, until Elon Musk tells me what to do via his Twitter account. That’s how proper financial markets work these days apparently, and I need to be less dinosaur and more digital.

Data from Asia this morning painted an interesting picture. Singapore Non-Oil Exports rose impressively by 7.0% MoM led by electronics. Japan’s Tankan Survey printed higher with Exports and Machinery Orders well above expectations. Imports though fell by a much worse 9.50% YoY in January. The data suggests that domestic demand remains muted even as the export facing sectors fire on all cylinders. That is a similar pattern seen across much of Asia, including China and South Korea. There will be limits to US stimulus and Covid-19 vaccines’ economic peace dividend until borders reopen, something unlikely to pick up pace until later in the second half of the year.

United Kingdom inflation data and US PPI data may give us more hints about inflationary pressures accruing in the world economy. US Retail Sales will also be released and are expected to rise by 1.10%. Higher prints across this data set could see US yields move higher again, and with the markets in inflation watching mode today, that could pressure equities, and I frankly fear for gold in such a scenario.

Asian equities mostly lower

Equities paused the US overnight, the S&P 500 falling slightly by 0.06%, the Nasdaq falling 0.34% which the Dow Jones managed to edge 0.20% higher. The price action looks more like a correction to the cyclical rotation seen last week then a bond market move. Higher US Retail Sales and PPI data tonight could deepen the correction, however.

Nevertheless, the jump in US 10 and 30-year yields overnight was enough to frighten Asia, which moved higher while the US and China were on holiday. The Nikkei 225 has fallen 0.60%, with the Kospi down 1.13%. Mainland China remains closed, with the Hang Seng unchanged today.

Taiwan is bucking the trend, playing catchup to the rally while it was on holiday, rising 3.0% this morning. Elsewhere though, equities are lower. Singapore has fallen 0.45%, with Kuala Lumpur down 0.50% and Jakarta 1.10% lower. Australia also sees profit-taking the ASX 200 down 0.50%, and the All Ordinaries are falling 0.35%.

Overall, today’s picture looks corrective after a strong run higher by regional equities in recent sessions, especially when Friday’s move higher in US yields was ignored entirely by markets. US data could deepen the malaise, but one suspects it will only take some positive noises on the stimulus package from Washington DC for all to be forgiven.

US Dollar rises on higher yields.

The US Dollar rebounded overnight on higher US yields, which coincided nicely with a short market, the greenback having been sold for all of the past week on “rotational” plays. Again, the price action looks corrective rather than a structural change in trend. The dollar index rose by 20 points to 90.50, smack in the middle of its recent days’ trading range.

EUR/USD fell slightly to 1.2105, edging lower again to 1.2090 this morning. GBP/USD has also declined to 1.3895 today. Both, however, remained comfortably above support, notably Sterling. USD/JPY was the big G7 mover, climbing 0.63% to 106.05 before retreating to 105.85 this morning. The rise in USD/JPY highlights its sensitivity to US/Japan rate differentials. USD/JPY is comfortably above its falling wedge and the 200-DMA, both at 105.55. Assuming US yields stay where they are, USD/JPY should target 107.00 in the coming sessions.

The commodity centric Australian and New Zealand Dollars both fell overnight, having been primary recipients of the global recovery rotations, along with the Canadian Dollar, last week. Despite this, USD/CAD remains well below resistance at 1.2760, at 1.2700 today. Similarly, AUD/USD is trading at 0.7750, well clear of support at 0.7690. NZD/USD has fallen to 0.7200 this morning and is threatening to fall back through its symmetrical triangle at this level. It could potentially target 0.7100 initially, with the return of community Covid-19 cases in Auckland finally weighing on the Kiwi. An increase in New Zealand cases could herald the start of a deeper correction for the flightless bird.

With China on holiday until tomorrow, Asian currencies have given ground modestly overnight and this morning, although the price action looks corrective again. USD/IDR has climbed back above 14,000.00, and if US yields rise again this week, a weaker IDR could take a Friday rate cut by Bank Indonesia off the table. For the rest of the currency universe, tonight’s US data, and its effect on US yields will determine how far the US Dollar correction will run.

Oil resilient in the face of a stronger Dollar.

Structural factors, notably the US big freeze, allowed oil markets to ignore the US yield nerves seen in other asset classes. Brent crude and WTI finishing almost unchanged at USD63.45 and USD60.10 a barrel respectively. In Asia, trading has been subdued with both contracts unchanged after an early dip.

With oil futures markets in aggressive backwardation, cold weather wreaking havoc in the United States, reducing oil and refinery output, any dips in oil prices will remain short-lived despite overbought technicals. In fact, a sideways consolidation for the subsequent few sessions would reduce the overbought technical picture and remove my main doubts about the oil rally.

A fall by Brent crude through USD62.80 a barrel could set up a short-term spike lower targeting USD60 a barrel. Similarly, a fall through USD59.50 a barrel by WTI could see it drop to the USD57.50 barrel region. Otherwise, oil remains a buy on dips and it will be very interesting to see what OPEC+’s technical committee decides in early March.

Gold is in trouble.

The move higher by US yields overnight has delivered a blow to gold, whose recovery from the February lows had always looked unconvincing. Gold fell overnight by 1.34% to USD1794.50 an ounce, and it has edged lower to USD1793 an ounce this morning.

The 50-DMA at USD1855 today, has crossed below the 200-DMA at USD1857 an ounce, a bearish technical signal. The 100-DMA is just above at USD1867 and could well cross lower itself next week, adding more gloom to the bigger gold picture. All three moving averages form a formidable resistance zone to any gold price recovery.

Gold has support at USD1785 an ounce, the February low, followed by the 50% Fibonacci of the March to August rally around USD1760 an ounce. As I have stated previously, USD1760 is the must-hold level for the longer-term gold rally, and marked, I believed, a structural low. Failure may well provoke a capitulation trade by longer-term gold longs, and I expect gold would fall to near USD1600 an ounce in such a scenario.

Gold’s fate will be decided by the US data this evening and its effect on longer-dated US yields. If yields rise with as much vigour tonight as they did yesterday, gold faces a torrid session.