Market Quick Take - November 27, 2020
Equities in Asia traded mixed overnight while U.S. Futures - led by the Nasdaq - rose ahead of a holiday shortened trading session for U.S. stocks and bonds. The dollar traded softer on a drop in U.S. bond yields while the yen rose against most major currencies as global coronavirus cases continue to surge higher. Gold and silver remain stuck close to key support, oil trades lower amid tensions ahead of next week's OPEC+ meeting while copper traded near a seven-year high on falling global inventories led by China.
Podcast: Commodities are heating up reviving the inflation ghost
The energy in markets are low due to the US Thanksgiving holiday, but a few markets are on the move. Chinese equities are up 1.6% today on government statistics showing industrial profits are up 28% y/y in October. In commodities economic activity and the rebound in China continues to drive copper to a seven-year low. But it is not only spot prices that are showing interesting signs, the average forward curve in commodity futures has shifted into backwardation for the first time since 2014 indicating further potential in commodities. Are rising logistics cost posing a challenge to e-commerce and finally, we take a look at Bitcoin which was selling off hard yesterday on potential regulatory crackdown coming to crypto currencies. Today with Peter Garnry on equities and Ole Hansen on commodities.
Falling real yields prove that sovereigns are a ticking bomb about to explode
10-year real yields are falling and are pushing investors to higher-yielding junk. We find that US high-yield corporate bonds offer a higher buffer against rising inflation compared to emerging market bonds. US investment-grade corporates which provide an average real yield of around 100bps are barely protecting investors from overshooting inflation. The Federal Reserve's average inflation targeting framework (AIT) might prove a dangerous monetary policy as the economy recovers.
Could the party in e-commerce stocks stop on real inflation?
Financial markets are not indicating inflation but real life indicators such as significantly higher global container rates and bottlenecks in last-mile delivery of packages are indicating inflation. We investigate whether these forces could end the party in e-commerce stocks.
Commodity roll yields drive expectations for a strong 2021
Commodities, are increasingly looking towards the post-pandemic recovery in global growth and demand. In addition, the sector has already benefitted from a strong recovery in Asian demand led by China while weather concerns have lifted agriculture commodity prices. Investors are also focusing on the impact of continued fiscal and monetary spending and with that the risk of a weaker dollar and rising inflation. While the spot market fluctuates with short term demand and supply developments, the forward curves are increasingly pointing towards a strong 2021 for commodities.
FX Update: USD momentum not impressive yet, given backdrop.
The US dollar seems to want to go lower, but does not seem in any hurry to get there, with key near-term uncertainties perhaps holding back directional trades. Nonetheless, key support levels are looming in a growing number of USD pairs, and the backdrop remains supportive for greenback sellers unless something comes along to spook robust global risk sentiment.