Bitcoin Behaving Badly
Stocks are showing less sensitivity to higher rates, but WTI longs are getting fidgety ahead of March 22 settlement because of inventory concerns due to the Texas freeze.
Oil
WTI settlement approaching (Mar. 22). Oil longs are getting a bit fidgety as the front end moves into Contango. With time spread pointing to near-term oversupply due to US oil stockpile increasing after the Texas freeze, so traders could be reducing longs for technical rather than a fundamental reason to avoid settlement and rollover risk.
Markets
Given the stronger-than-expected activity in January and February, markets now expect China Q1 to be slightly positive rather than negative, bringing y/y GDP growth for the quarter close to 20%.
Meanwhile, the $1.9 trn stimulus package in the US will lead to a stronger US and global recovery, hence more exports for China, which continues to resonate through Asia risk sentiment as the global synchronized growth story looks more in sync than only one week ago.
And with stock sensitivity to higher rates dampening, it offers a real sense of comfort to investors despite inflation worries lingering in the background.
Investors feel increasingly confident that the Fed is unlikely to rock the boat, so markets continue to move on the expectation of a post-virus boom.
After struggling early on Covid vaccine concerns, US equities were stronger Monday, S&P 500 was up .6% while US 10-year yields were down 2 bps to 1.6%.
On the heels of the reopening optimism, stocks again become a flat out buy as tailwinds from an expected stimulus-induced shopping bonanza will find there way into higher corporate profits and higher earnings per share.
Markets continue to move based on the expectation of a post-virus boom. At least that is the dominant narrative right now. The economy, boosted by another round of stimulus, will surge once the virus is under control and things return to normal.
President Joseph Biden last week offered his version of positivity, saying that families would be able to gather for a July 4 celebration, but only in small groups for backyard barbecues. But I have some news for the Biden administration—the party has already started.
Investors feel very confident that the Fed is unlikely to rock the boat by walking them hand-in-hand through calibrated policy goalposts that are neither too dovish nor hawkish.
With the policy rate projections and bond-buying pace both likely to be left unchanged, the focus will be on the economic forecast. Upward revisions to growth would primarily represent a catch-up to the shift higher in consensus expectations since the Fed's last forecast iteration in December and not too hot of an outlook that could chase rates higher.
In a nod of confidence to Fed Chair Jerome Powell, investors continue to dive headlong into the markets.
And as the NASDAQ continues to perform, there are no broad rotations—just a flat outbid for the reopening names as investors unilaterally agree the Fed is unlikely to blink before 2023 this time around.
Risk markets struggled a little bit overnight, with equities under pressure and fixed income climbing. Europe led the selloff after Germany said it was to suspend the use of the AstraZeneca (NASDAQ:AZN) vaccine.
In the short term, it's yet another piece of bad news for the EU vaccination efforts. However, with other vaccination options, the European Commission's objective of having 3/4 of the population inoculated by end-August looks unlikely to get pushed back much more than a couple of weeks. Note that the EU is due to receive 1 billion vaccine doses by end-September.
Oil Price
Oil rallied in Asian trading hours Monday to trade just above USD70 a barrel on robust Chinese data, but weakened during the European morning as the market veered risk-off after Germany said they would suspect AstraZeneca vaccinations.
Oil price took the terrible AstraZeneca headlines in stride. Still, with limited new fundamental news and sentiment currently mired in consolidation mode after the recent month-to-month tidy moves, traders find they have too much time on their hands and are now focusing on broader supply concerns, like OPEC fractures, the return of Shale and Iranian barrels coming back to markets.
It is encouraging for higher prices to see that US producers appear to be maintaining discipline despite the rise in oil prices this year. Weekly rig data from Baker Hughes showed a decline. The drillers' response suggests a level of caution that would not usually be evident with an oil price move of this magnitude. Whether this discipline will hold remains to be seen, and the potential for a US supply response remains one of the critical risks for oil this year.
That said, the main concern for the recovery in crude prices has been the risk of a fracturing of OPEC+ cohesion as market conditions improved, given how much supply was (and is) still curtailed. So far, OPEC+ discipline has been surprisingly good, even when tested in recent weeks at higher prices.
Boots on the ground suggest Chinese imports of Iranian crude might double in March from February to 856kb/d. There have been reports recently that Iranian production is ramping up, potentially designed to test the Biden administration's commitment to sanctions put in place by the previous administration. Whether the ramp-up in Chinese imports in March represents a step up in Iranian production or just more accurate labelling of the sources, upside to Iranian production is an important variable to watch.
Forex
The USD is steady this morning with little fresh impetus from bond or equity markets, and we could face a holding pattern until Wednesday's Fed meeting.
With the Fed expected to revise their economic projections, the issue will be whether this will be enough to nudge the median dot for 2023 into signaling a possible rate hike. The FX market will also remain watchful of the bond market's reaction to the meeting, which may be sensitive to the Fed's decision to extend the supplementary leverage ratio exemption for Treasuries.
The Ringgit
In a policy shift possibly designed to address some FTSE investors' concerns, Bank of Malaysia (BNM) has moved to liberalize the interest rate swap market, which will allow investors to better hedge bond portfolios.
Allowing onshore banks access to this derivative market will add much-needed liquidity in the Malaysia Interest Rate Swap market while simultaneously addressing some lingering foreign investors' hedging concerns. This as the FTSE Russell gets set to publish its biannual fixed income review on Mar. 29, where Malaysia remains precariously perched on the Watchlist for possible exclusion.
The Malaysian ringgit traded firmer as investors view the BNM policy move positively regarding Malaysia FTSE watchlist status. Still, overall, FX trading remains subdued ahead of the FOMC this week.
Gold Markets
Gold continues to move up without much support from yields or USD, and focus on the FOMC meeting sees the market shift from bearish to slightly bullish, thinking the Fed is very unlikely to blink.
Bullion may have received some support from poor showings by German Chancellor Angela Merkel's CDU Party in two regional elections over the weekend. The path of COVID-19 in the Eurozone also remains problematic.
Gold is rallying without too much support from US bond yields—which edged lower only slightly—and no real help from the USD, with the DXY holding form.
After strong hands embraced support at 1680 m, gold seems to be base building above USD1,700/oz. If it maintains a holding pattern, it could stage for gains in the medium to longer-term as physical demand in India and China seems to be on firmer footing than earlier this year and 2020.
But the view on the horizon, which is attracting gold players back, is the possibility of tax increases due to increased government spending—not just in the US but elsewhere—may support gold. Historically, tax increases trigger shifts into bullion and hard assets.