We are at a critical juncture as the Fed is re-iterating their desire to drive the risk sentiment further via QE, and that substantial labor market progress needs to happen before that bonanza ends.
On the other hand, as is always the case when markets are trying to make new highs, voices will become increasingly vocal that growth assets are priced at levels where risk/reward is questionable. But the hope here that bullish buyers step up to the plate at marginally richer levels to push the rally forward.
Gold came under pressure overnight but was quick to recover from the lows. Support stands at $1765 after the $1800 line. Bulls were struggling from a technical perspective amid a price downtrend. The upsurge in yields weighed on the yellow metal, while oil prices traded higher.
ETF selling continues to cast a negative tone over the market.
BoK On Hold
The Bank of Korea left its key rate unchanged, as widely expected. The BoK sees 2021 CPI at +1.3% vs +1.0% previously, and 2022 CPI at +1.4% vs +1.5% previously. It's growth forecast for 2021 (+3.0%) and 2022 (+2.5%) are unchanged.
Fed Brainard's tapering roadmap
Lael Brainard has long been at the dovish end of the FOMC spectrum, so her comments do not add a great deal to the debate. Still, they are engaging in their own right. She makes the well-worn point that unemployment is much higher once you consider those on furlough and those who have left the labour force. She adds that such hidden unemployment is split by income level, and in the bottom quartile of earnings, the unemployment rate is about 23%. If this is not reversed, the fall in the participation rate for prime-age women will have long-term implications for income and growth.
Fed anchoring the front end yields
US equities were stronger Wednesday, S&P up 1% heading into the close. Nothing new from Fed Chair Powell on his second day of congressional testimony, and despite pushing back again on inflation risks, with Vice Chair Clarida in lockstep as well, US 10-year yields pushed through 1.4% during the NY session, though more recently have settled back to around 1.38%, up 4bps from yesterday.
Still, with the Fed anchoring the front end yields, risk assets have ample room to breath, with the Fed still pedal to the metal on maximum policy overdrive.
In Asia focus will be on Hong Kong markets after Hong Kong's finance minister announced a $15.5 bn stimulus program to be partly financed by an increase in stamp duty on stocks from 0.1% to 0.13%. The Hang Seng Index fell 3% yesterday and dropped below the key level of 30,000 points.
And while the increase in transactional cost could see a small reduction in trading volumes as investors look for proxy exposure on other local bourses, HKEX's unique gateway position into China and positive growth outlook should continue to support underlying bullish sentiment.
Stock markets continue to recover on the buy the dip basis after Fed Chair Jerome Powell mitigated market fears of any near or medium-term policy capitulation.
If you want to get into the Feds soul, then it is most evident through the lens of Jay Powell's current mantra: "The job is not done." Powell's view is that having been neck-deep in the COVID warfare trenches, now is not the time to start waving the victory flag and allow the rates market to sabotage the recovery.
The past week has seen massive sector dispersion driven by the sharp rise in yields. On the one hand, the cyclical part of the market exposed to the re-opening narrative kept marching higher. On the other hand, headline indices and Tech were under pressure given growing valuation concerns. Tech stocks are susceptible to rising yields because their value rests most heavily on future earnings, which get discounted more negatively when bond yields go up.
While the bid to the re-opening story could continue as the market doesn't seem nearly long enough energy, financials and materials, Tech could be due for a tactical bounce should bond yields stabilize or head lower.
Risk tends to suffer as yields move higher and or break new ground but quickly recovers when they back off and start treading on terrain that has already been staked out.
In the near-term, retail behavior will continue to drive a large segment of the stock markets' recovery bus as they have done so since the vaccine efficacy results hit the first days of November.
Should there be more days like Tuesday, which presumably was painful for retail investors with ARK ETFs, Tesla (NASDAQ:TSLA) and Bitcoin all trading down, it could again trigger the fear of another broader market capitulation.
However, with the market beginning to digest the recent back up in yields and Fed policy on autopilot, it still feels like any significant pullback on the index will run into "buy the dip" mode, especially as SPX psychological barrier at 4K is some way off, given time for investors to feel more comfortable with current surroundings before taking that next leap of faith.
Oil
Crude oil continues to soar as the market remains on full throttle bullish bias. Even the unwind of a once in a century cold snap in Texas, intense negotiations ahead of the next OPEC meeting or higher US yields are imprinting much of negative influence as reflation effects are finding an echo in speculative flows that remain full-on pedal to the metal as the global economy is moving in the right direction This year is likely to see the biggest ever jump in oil demand as the vaccination effect will amplify the natural COVID curve flattening data from lockdowns.
In rounding out a perfect day for the bulls, Chair Powell continues to deliver policy on maximum overdrive, all but guaranteeing the US will continue to carry the baton as the world's supreme oil consumer.
FOREX
The real story in G10 is that high beta and commodity currencies are going up, and funding currencies are going down. It is proving excruciatingly painful for dollar bulls to fade these moves as rising domestic rates supported the later part of the rally.
Although the yield back up this week was more of a globally synchronized event, my main scenario still expects yields to be led by the US this year, especially with the enormous fiscal US package likely to be finalized in the coming weeks, which should at some level offers support to the US dollar.
And while Powell will be one of the last doves to turn, he could become a turncoat much quicker than expected if the vaccines fulfil their promise of US glory days ahead.
GBP is punching above its baseline weight thanks to high vaccination rates and sterling reserve demand from central banks. Also, M & A activity on post Brexit inflows continue to pick up.
AUD should be in demand due to commodity appeal and also donning the halo of the gigantic BHP Billiton (NYSE:BHP) (ASX:BHP) and Rio Tinto (NYSE:RIO) (ASX:RIO) dividends payable in early March and April (US dividends converted to AUD)
NZD is among the best-performing G10 currencies year to date, clocking a rally of about 4% in nominal trade-weighted terms since the Nov. 11 meeting. The bullish FX market reaction to an unchanged policy shows a willingness to view the glass as half full.
Against the EUR, there is a battle of bulls and bears in the FX market about whether to sell the USD during a global upswing based on its safe-haven personality or to buy the USD due to rising US yields and accelerating US growth.
The Ringgit continues to trade in very tight ranges more prone to flowing US rates and the broader US dollar sentiment than soaring crude prices for th time being.
My feeling is investors want to see some economic progress on the ground before committing full bore back into the long ringgit trade.