Summary: An appearance from Fed Chair Powell failed to show sufficient concern about rising yields, even if Powell emphasized the intent to keep the policy rate low for now. The bond market threw another tantrum, sending US yields to their highest daily close for the cycle for seven year and longer maturities. Risk sentiment cratered and equity markets went into a tailspin over his speech. Gold dropped below 1,700 for the first time since last June while oil rallied strongly after OPEC+ left production unchanged.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–equities hit the skids yesterday as Powell failed to signal sufficient intent to do anything about the recent rise in treasury yields at the longer end of the curve, although the market did mount a solid comeback in late trading, cutting a bit less than half of the day’s losses by the close of the day, in the case of the S&P 500. The next notable chart point for the S&P 500 is the 3,656 area, the site of the prior major low, while resistance is 3,772 (a Fibo level broken yesterday and where the market closed the cash session),with more notable resistance perhaps at 3,800. For the Nasdaq 100, the bounce was less vigorous than for the broader market as the index lost more than 1.7% on the day. The next levels lower there are a major Fibo retracement near 12,070 and then the 200-day moving average at 11,657. The key resistance there is the well-defined 12,725-50 area.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - cryptocurrencies showing a clearer tendency to correlate with swings in risk sentiment on a day like yesterday as Bitcoin thoroughly lost its grip on 50,000 and traded near 47,000 this morning, while Ethereum slipped back below 1,500. Arguably, the logic could be that the next surge in crypto assets would require that the Fed continue to demonstrate that it will not allow Treasury yields to rise, triggering concerns of more deeply negative real yields, one of the key pillars of support for the crypto-positive narrative.
EURUSD – took out the 1.2000 level yesterday and traded and closed near the prior major low close at 1.1968, another close lowereffectively signals a breakdown that could result in the pair trading back in the 1.1500-1.2000 zone for some time, at least until the Fed signals new action and/or US inflation becomes more problematic and drags US real yields lower.
AUDUSD–the AUDUSD sold off again after spending days failing to follow through lower on the climactic rally and then reversal of last week.Still, the 0.7700 level (the actual low last Friday was 0.7683) did just manage to hang in there yesterday and overnight, the key area for bulls to avoid a deeper sell-off to perhaps 0.7500 or even a full trend test of the 0.7415 area before the pair can find support. In the short term, Aussie likely to correlate with risk sentiment as long as volatility is high, but is more likely to focus more intently on swings in commodity prices like iron ore and copper, as well as the strength of the reflationary narrative.
Gold (XAUUSD)suffered more pain yesterday after the bond market threw another tantrum, sending US yields to their highest daily close for the cycle. While saying that he was watching the recent rise in yields, Fed’s Powell did nothing to try to rein them in. Gold dropped below $1700 while silver (XAGUSD)dropped even harder in response to technical selling hitting industrial metals where HG copper (COPPERUSMAY21) briefly slumped to $3.84, a key technical level, before finding support. A five percent crude oil rally had limited immediate impact but will add to the growing inflation risks. From a longer-term bullish perspective, the metal would need to hold above a major band of support between $1670 and $1690 while a break above $1765 would send a signal of renewed strength and support.
Crude oil (OILUKMAY21 and OILUSAPR21) jumped 5% yesterday after OPEC+ decided to tighten the oil market further by deferring a planned production increase, basically gambling that US shale producers are more focused on dividends, than increasing production. Thereby keeping speculators happy at the expense of the global consumer while adding further fuel to the risk of higher inflation. In order to defend the 80% rally since early November, the group decided to roll over for one month the 0.5m b/d that was up for discussion. In addition, Saudi Arabia extended its unilateral 1m b/d cut, thereby risking overtightening the market as the global pandemic fades and mobility pick up. Several banks responded by raising their Q3 price forecasts towards the $75 to $80/barea and any short-term risk to oil is now primarily associated with deleveraging risks spreading from other markets.
Square (SQ:xnys) -in a sign of the times the payments company Square brought a majority stake in the music streaming service Tidal, founded by the musician Jay-Z, for $297mn in a deal using cash and stock – when your company is as highly valued as Square, you should go for 100% stock deals, but that is another story. Part of the deal is also that Jay-Z enters the board of Square. We see no meaningful synergies in this acquisition, and we see this as a negative on Square.
What is going on?
US Treasury yields rose sharply to close at their highest level for the cycle after Powell appearance. Powell spoke at an event yesterday and assured the market that the Fed intended to keep the policy rate low for now, butoffered insufficient levels for concern about rising US yields at the longer end of the curve. On this development, the Fed Chair merely remarked thatit “was something that was notable and caught my attention”. The most intense bond and equity selling unfolded while he spoke, clearly indicating a tantrum-like demand for more reassurance from the Fed that it will not allow rates to continue higher.
China establishes a 6% growth target for the year– at the ongoing “Two Meetings”. This surprisessome, as many observers note that explicit forced growth targets can create distortions in the economy and over-investment in capacity and low consumption in relative terms, as the Chinese economic rebalancing toward higher consumption has not succeeded. The growth target for 2020 was abandoned after the Covid pandemic outbreak. China also announced changes to Hong Kong’s voting system and an increase of the defense budget of 6.8%.
What are we watching next?
Whether the market properly falls apart for a few sessions or gathers itself-many portfolio managers have to be unsettled by the combination of both bonds and equities selling off at the same time. Normally, at least over the last few decades, bonds act as a safe haventhat counterbalance some of the risk when equity market action gets particularly depressed. But this time – the treasury market selling off is the direct cause of the equity market’s angst. Whether such a development is changing assumption about portfolio risk and triggers a further deleveraging for levered players, risk-parity, and "60-40" style portfolios is a risk worth watching in the near term.
China PPI (Feb) - as the world’s factory of consumer goods the price index of Chinese producers is a leading indicator for global inflation. The latest figure for February is scheduled to be released on Wednesday 10 March with expectations at 1.4% y/y figure up from 0.3% y/y in January, and –3.7% y/y in March 2020 at the low point of the pandemic.
The next FOMC meetingon March 17 –will be of particular importance for watching for new signals from the Fed if the selling in treasuries intensifies (and really even if the equity sell-off worsens, as many have called the stock market the Fed’s “third mandate” after inflation and employment). Worth reading on this account is yesterday’s Macro Digest from Steen Jakobsen, in which he suggests that the bar is very high indeed for yield-curve-control because of the collateral implications.
US technology stocks – this segment of the equity market has been a key driver of the rally since March last year, but the recent selloff likely tied to rising interest rates shifting the weight on equity valuations has put technology stocks in a position where they can negatively sentiment for quite some time.
Earnings releases to watch this week:
Light earnings day to end the week with none of the reporting companies likely to have any impact on the overall market.
Friday: Canadian Natural Resources, GSX Techedu
Economic Calendar Highlights for today (times GMT)
1330 - US Feb. Change in Nonfarm Payrolls
1330 – US Feb. Unemployment Rate
1330 – US Feb. Average Hourly Earnings
1330 – US Jan. Trade Balance
1330 – Canada Jan. International Merchandise Trade
1500 – Canada Ivey PMI
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