While the recent valuation de-rating in China could offer a good opportunity for long-term investors, but policy normalization in China, the global economic recovery and rising global rates will take time to digest, so in the meantime, economic data will need to do the heavy lifting.
China's economic activity surged in the first two months of the year on a year-on-year basis, underscoring the strong recovery after the country experiencing the world's first lockdown due to the pandemic.
But today's economic hodgepodge was a bit mixed.
Out of the data released today, I think the jump in retail sales is the most important, as the domestic economy's demand side has lagged for a while.
China's National Bureau of Statistics is hosting a press conference now. It is flagging a separate piece of data: the unemployment rate increased from 5.2% in December to 5.5% by the end of February, likely due to the Chinese New Year holiday and small scale COVID outbreaks in some provinces.
The miss in fixed-asset investment data and the rise in the jobless rate partially offset the excellent retail sales and industrial production numbers.
Gold
Hammered by USD strength and the backup in rates, Gold's multi-month downtrend is forming a base that recently embraced the support at $1,680, paving the way for the ongoing uptrend.
The yellow metal tested $1700, and the market seemed to realise that below there is where the stronger hands await.
ETF outflows have slowed down compared to the previous two weeks, and bullion may begin to produce a sustainable move higher.
MARKETS
The bond sell-off was back in force Friday, US 10-year yields up 9bps to 1.62% and breaking new ground for the year. The disquiet around further moves higher in US yields makes little doubt for some interesting last-minute pre FOMC preparations across risk markets.
Despite US yields going higher, equities are holding up well, as the strong run of US economic data points to the overriding themes around rebound and resilience. And with US consumers feeling the $1.9 trillion reopening stimulus tailwind at their back, Wall Street has been upping their Earning Per Share forecasts; hence year-end S&P 500 suggesting "Damn the yield torpedoes, its still full speed ahead on the reopening trades."
Most market conversations show at least some concern around further moves higher in US yields, especially if the Fed does not offer some additional worry, so I think risk-taking will not return in earnest until after that, sadly.
Still, segments of the market should continue to bask in the afterglow of Bidens stimulus package. And with vaccination data suggesting that the US could reach herd immunity from COVID-19 by summer vacation time, it should continue to signal all systems go for the reopening trades.
The NASDAQ has already sold off a good chunk after de-risking on the back of higher yields, so we may be at some Mega Cap Selling pause or yields re-rating equilibrium, which could be favorable at the S&P 500 index level.
OIL MARKETS
Wall Street continues to upgrade the US consumer spending outlook, which is favourable for oil prices too. Still, oil is showing signs of consolidating after a supercharged multi-month rally.
Oil prices are trading a touch higher this morning as dip buyer emerge ahead of the widely expected US economic forecast upgrade by the Fed this week at the Wednesday rate decision.
And also helping oil prices, the US rig count fell, indicating US producers' response to higher prices remains meek.
Prices should continue to dance higher into the summer, especially to the chime of gasoline pumps turning over. And given the rosy US reopening narrative, more and more folks take the highways ahead of what is likely to be the biggest pent up driving season on record as the US could reach herd immunity from COVID-19 by summer vacation time.
But with limited new fundamental market news, traders could find they have too much time on their hands and might continue to rehash last week's negatives around Russia wanting to increase production and Iraq supply, which could affect oil markets upside ambitions over the short term.
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 MARKETS
The EURUSD is opened up dap smack in the middle of its well-entrenched 1.19-1.20 near term range as traders are not 100 % sure what the Feds are going to do but, as importantly, how the markets are going to react.
Everyone can see the Fed's community cards signalling an upward revision to growth and inflation and lower unemployment forecasts. But also a dovish policy outlook. The median dot is likely to hold at the ZLB for 2021 and 2022, but traders are unsure where the Fed will drive on Fourth or Fifth Street and if they will move all-in on liftoff in late 2023.
In December 2020, the dots showed 12 FOMC members thought rates will still be as they are at the end of 2023, one member thought rates take-off would be before the end of 2022, three thought there'd be one hike in 2023, one that there would have been two hikes and one that there would have been 4. It takes 4 of the 12 to move the median for 2023, but it perhaps only takes one or two to shift position to move the markets. Given the repricing of the Fed, there'll be considerable attention on the dots on Wednesday.
The Ringgit
The MYR should trade in a tight band ahead of this weeks FOMC as traders are still debating if the FOMC will signal a 2023 lift off and possible September Bond market taper. And the MYR could remain hostage to higher US yields of the near terms.
GOLD MARKETS
A technical and physical demand-driven relief rally?
Physical supply coming to market is getting absorbed by real money allocators from China and India towards USD 1700. And the failure to break that fundamental and critical technical level on Friday convincingly triggered a short-covering rally on Friday.
Gold still has that endearing inflation appeal, but the next critical test will be to break above March 3 highs at $1740. But ahead of the FOMC, I would expect Gold to trade very much tethered to the whims of the US dollar
The US economy is doing much better from a growth perspective than many had expected just two months ago. In particular, 'hard' activity data have surpassed consensus expectations lately and have been the driving force behind Bond yields higher, much to Gold investors chagrin.
US yields traded to their peak for the year, and the dollar touched its highest in three months, sending gold prices reeling. The interest rate pressure is likely to be a more extensive and nearer-term factor rather than the positive force of expected inflation, suggesting Gold may head lower when interest rates shoot up again.