Joined at the 10-Year Hip

Call it complacency, the market “fully pricing” in risks in their own minds, or the wall of money looking for a return – preferably immediately, as he clicks buy on Dogecoin in his gamified investment portal- in a zero per cent world, the fall in US yields is there for all to see. Equities have rallied in general, DM and EM currencies have recovered, even the Turkish Lire as the US Dollar retreats, and gold’s rally has hung a tantalising long-term low formation on the charts.

All roads lead to the US 10-year, either directly or indirectly. Buying the dip on just about anything likely remains the name of the game. In the near term, speculative momentum has waned with US earnings season starting to look like a buy the rumour, sell the fact scenario. Netflix missed subscriber numbers overnight, although they quite reasonably note that the pandemic led to an unanticipated surge.

Pandemic concerns have provided markets with an excuse to book some of the last week’s profits. Rich valuations, notably in the US, mean that even as corporate America rolls out the juicy earnings as expected, investors will be asking themselves, “what’s next?” That is a valid point when one ponders the implications of the Biden administrations taxation plans. It does, however, look like noise and not a structural turn in sentiment. That will require our good friend, the US 10-year yield, to move quite a bit higher from here and for the US yield curve to steepen. I believe we have not heard the last of that story. Rather than seconding guess it, a wiser strategy is to wait for it to unfold.

Asia’s data calendar is quiet today, with South Korean PPI and New Zealand Inflation rising slightly above expectations, hinting that the inflation story is merely on vacation. Australia’s Preliminary Retail Sales for March also rose by 1.40%, well above the 1.0% expected and yet another data point to add to the Lucky Country’s V-shaped recovery narrative. Its impact on local stocks and the currency has been non-existent as both moves to the beat of intra-day global risk sentiment.

This evening, the Bank of Canada announces its latest rate decision and against a backdrop of a worsening Covid-19 situation clouding its recovery narrative. Although rates will remain unchanged, the BoC is likely to, once again, taper its weekly bond-buying targets. It will be an interesting taper-tantrum lab experiment for the bigger fish to come in 2022.

USD/CAD broke through its one-year downtrend line around 1.2600 at the end of March and has underperformed its Australian and New Zealand brethren in April, even as risk sentiment rebounded. A slight taper this evening by the BoC could send the USD/CAD higher to 1.2700 in the short-term, but a BoC on track to normalise, if such a thing exists in the central bank world anymore, should be supportive once the dust settles. At the margins, Canada’s Covid-19 trajectory remains the limiting factor to a CAD rebound.

The rest of the week’s calendar globally is decidedly second-tier, but things get much more exciting next week. Highlights include China PMI’s Bank of Japan and FOMC rate decisions and US GDP and Personal Income. That means the rest of this week remains at the mercy of swings in risk sentiment and our good friend, the US 10-year yield. I will have my noise-cancelling headphones on.

Asian equities edge lower in sympathy with Wall Street

Wall Street ran out of upward momentum overnight after a series of impressive buy-everything sessions over the past week. The price action looks corrective and not structural, but the S&P 500 finished 0.68% lower, the Nasdaq lost 0.92%, and the Dow Jones fell by 0.75%. US index futures have continued South, adding to exit door clamour in Asia.

Japan is leading the region lower, and the Nikkei’s travails appear to be spilling over into other regional bourses to a lesser extent. The Nikkei 225 has fallen 2.10% after the government announced that Tokyo would enter a Covid-19 state of emergency starting on the 29th of April. I am slightly confused as to why Tokyo, having asked for the declaration, needs a whole week’s notice of it starting. Doubts are no doubt resurfacing that the Olympic Games will be imperiled if the situation continues to escalate.

Elsewhere regional markets are on the back foot as well, with the Kospi falling by 1.40% and the Hang Seng falling by 1.70%. Notably, Mainland China’s Shanghai Composite and CSI 300 are unchanged in a sea of red today, hinting that China’s state-backed “national team” is “smoothing” bearish volatility.

Singapore has fallen by 1.30%, while Kuala Lumpur and Bangkok are 0.40% lower, with Jakarta down 0.60%. Australia’s All Ordinaries has declined 1.10%, with the ASX 200 falling by 1.30%.

Overall, the price action looks corrective after a strong performance over the past week by equities in a market being driven by short-term risk sentiment. A thin data calendar means that the status quo is likely to continue for the remainder of the week, although markets will have more to get their teeth into over the next two weeks. As long as US 10-year yields remain stable, buying the dip will likely win the day on a weekly horizon.

US Dollar marks time

With US yields ranging overnight, the US Dollar gained precious little direction on a slow news night. Despite the noise in equity markets, the dollar index rose just 0.13% to 91.20 in a non-descript session. The greenback’s fall from grace in my absence has mirrored the fall in US longer-dated yields, and I expect that correlation to continue. The dollar index looks set to range between 91.00 and 91.50 with a bias to the downside.

The technical picture is more unequivocal with falling wedges the name of the game. EUR/USD, GBP/USD and AUD/USD have all broken higher out of falling wedge formations, strongly bullish indicators. Although, as usual, Asia has contented itself to wait and see with the dollar index and the majors almost unchanged today. EUR/USD is trading at 1.2030 and looks set to test its 100-day moving average (DMA) at 1.2060 once again this afternoon. GBP/USD, meanwhile, is on the verge of recapturing its multi-month upward channel if it can rise through 1.4000 today. AUD/USD has nearby support at 0.7700 with resistance at 0.7800.

The fall in the US 10-year yield has been kind to regional Asian currencies, which have mostly rebounded strongly over the past few days as lower yields led to Dollar weakness. The notable exception is the Indian Rupee, which remains under pressure around 75.500 as the country’s Covid-19 situation deteriorates badly. A clearly unprepared government that appears rudderless in the face of the Covid-19 wave means the Rupee will remain under pressure. The present situation will also complicate the stagflation situation in India, another negative. I remain confident that USD/IDR will test 76.000, although I would be happy if I am wrong as that likely signals an improving situation.

Notably, the heightened sense of risk aversion sweeping equity markets has not materially impacted the risk-barometer Australian and New Zealand Dollars. That implies that the greenback’s 10-year Note correlation remains as strong as ever and will dictate the greenback’s overall direction.

Oil meets Covid-19 nerves

Oil prices retreated overnight as last week’s impressive rally continues to run into long-covering headwinds and falling momentum. Brent crude fell 1.20% to $66.30 a barrel, retreating to $66.05 in Asia. WTI fell by 1.70% to $62.30 a barrel and has eased to $62.05 in Asia. WTI’s demise being assisted by an unexpected rise in US API Crude Inventories on a quiet news night.

Overall, oil has run into two main headwinds. Firstly, the escalating Covid-19 situation in India, the world’s third-largest oil importer. Secondly, the apparent progress of talks in Vienna with Iran signalling a positive tone. That threatens to release more official Iranian crude onto global markets if sanctions are eased.

Nevertheless, the breakout by Brent crude through $65.00 a barrel has to be respected. Although Covid-19 is threatening individual countries recovery, the overall picture in critical global markets is one of improvement.

Brent crude has support at $65.50 and $64.00 a barrel, with resistance at $68.00 a barrel. It looks set to trade noisily between $65.00 and $67.00 a barrel for the rest of the week. WTI has support at $61.50 and $60.00 a barrel, with resistance at $64.00 a barrel. Those levels should contain the trading range for the rest of the week.

Gold’s longer-term recovery continues

Gold has now very clearly traced out a major longer-term low around $1680.00 an ounce over quarter one. That should set gold up for further gains to the $2000.00 an ounce region in the weeks ahead. The main driver of the gold rally has been falling US yields of Q1 highs and a tempering of inflation concerns. Gold moving in a 100% inversely correlated manner to the US 10-year yield.

Therein lies the rub, with further gold gains entirely reliant on the direction of the US 10-year yield. In effect, gold has become a 10-year Treasury note. So, although the charts are screaming that a longer-term low is now in place, some caution should prevail, as I suspect the inflation story and higher US yields may yet return to haunt precious metals markets.

That said, gold rose strongly overnight, even as US yields and the US Dollar moved in a narrow range, hinting that it may finally be picking up some shorter-term safe-haven flows as global risk sentiment soured. It is, however, far too early to say that its correlation to the US bond market is weakening.

Gold rose 0.40% to $1778.00 an ounce, advancing another 0.25% to $1783.25 an ounce in Asia. Gold has resistance at $1790.00, and at $1803.00 an ounce, it is 100-DMA. Support lies at $1764.00 and then $1760.00 an ounce; it’s 50% Fibonacci. Gold is likely to remain contained between $1770.00 and $1800.00 an ounce for the rest of the week, as other asset classes play chase their tail intra-day, awaiting new directional drivers.