Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Markets Suffering From A Steep Case Of Interest Rate Escalation, Stressing Gold

By Stephen InnesMarket OverviewFeb 28, 2021 12:13AM ET
www.investing.com/analysis/markets-suffering-from-a-steep-case-of-interest-rate-escalation-stressing-gold-200563888
Markets Suffering From A Steep Case Of Interest Rate Escalation, Stressing Gold
By Stephen Innes   |  Feb 28, 2021 12:13AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

2-year yields have covered their prior 6-month range in the last week.
 
Whether or not this move is sustainable matters quite a bit. While the USD and risky assets could shrug off actions in the long end, they will find it harder to ignore 'Blues, and 2's' (2-year yields) moves without question.

(Blues are a sequence of individual future contracts bundled on a 4-year duration. Corporates use these IMM US Libor interest rate strips to hedge floating rate Libor loans, and the market speculates against.)
 
Despite consistent messaging from the Fed leadership last week that reinforced their 'patiently accommodative' policy stance, interest rates continued to climb sharply, with the market pricing a whole rate hike by early 2023 and nearly three rate increases (cumulative) by the end of 2023.
 
I think worth keeping an eye on is the pickup in direction volumes in the 1-year mid curve exposures. So far, it has been centered on Sept. and Dec. expiries, but if the move continues, rates traders could start shifting into June, which is currently being acknowledged as the line in the sand for downside plays.
 
Fed officials have largely shrugged off the recent moves in yields, viewing the rise in rates reflecting a more positive growth outlook. However, the sharp repricing of Fed policy tightening coupled with the rapid increase in real yields across the curve—presents risks of an unwanted tightening of financial conditions. Real yields have become a source of volatility for pain trades rather than a source of support for reflation trade.
 
This week will be the last opportunity for Fed officials to shift their tone in this regard, given the upcoming blackout period ahead of the Mar. 16-17 FOMC meeting. So it's a big week on the pushback front. 
 
Meanwhile, the RBA will need to fabricate a more convincing scenario to argue that QE keeps yields down even as their buying again met ferocious selling last night. Many of the Australian bonds sellers are probably punters trapped offside by hard-to-keep promises from the central bank. 
 
Just like the 1.2000 floors in EUR/CHF attracted speculators to the SNB line in the sand on the allure of a free-money trade that, of course, ended up anything but free money. The RBA's late-cycle bond-buying commitments have similarly drawn too many longs. 

Investors will also have a complete data docket to contend with this week, and any signs of stronger-than-expected inflation will continue to hit the market like a ton of bricks. And even if the Fed plays down the impact of base effects, traders will be fast to call their bluff. 
 
Adding to the inflationary repricing  last Friday, US January core PCE came in at 0.3% month-on-month and 1.5% year-on-year, higher than expectations for 0.1% month-on-month and 1.4% year-on-year, and after 0.3% month-on-month and 1.5% year-on-year.

Forex

The rally in US yields eventually prevailed. The deterioration of risk sentiment into the end of the week shook relation sentiment from its foundations, triggering a short USD squeeze compounded by the fact liquidity dropped precipitously on Friday.

Oil

As are most commodities and linker currencies, crude prices are getting caught up in the domino effect of higher US rates. Still, it's quite surprising how resilient oil has traded given broader market moves so far, suggesting OPEC unity rather than supply management cessation remains the order of the day.
 
The OPEC+ meeting on Mar. 3 is an increasingly essential ingredient, and producers face the tricky task of sorting through the various moving parts to form a strategy that makes everyone happy. But let's not beat around the bush; more supply needs to come onto the market to ensure OPEC+ meets incremental demand and keeps internal discipline ducks in a row.
 
Evidence of a tighter oil market in 2021 prompted several brokers to make upward revisions to oil price targets, which helped push Brent to a 13-month last week. While it is true that the market is likely to be undersupplied this year, what is getting ignored is the fact that this deficit is entirely dependent on OPEC+ supply cuts. The artificial shortage created by the OPEC+ agreement will help to accelerate the draw-down of global inventories. Still, the upside in oil is likely to be capped by the ~9mb/d of spare capacity in OPEC+.

Gold 

Higher US yields continue to pressure gold, which remains mired in a downtrend that began in August, with Gold ETF (NYSE:(GLD) and futures speculative positioning both coming off from the top to about 80% of the last year's range.

Technical trends kicked in when gold gapped down to $1756.30 from $1765.66 then triggering stop losses in a cascading effect.
 
The rise in US bond yields triggering inflows into USD is the most forceful headwind for precious metals.

Markets Suffering From A Steep Case Of Interest Rate Escalation, Stressing Gold
 

Related Articles

Chris Markoch
How To Profit From Value Investing By Chris Markoch  - Jun 14, 2021

Simply put, value investing is an investment strategy in which investors look to buy stocks that are on sale. However, that is an oversimplification. Value investors are looking...

Markets Suffering From A Steep Case Of Interest Rate Escalation, Stressing Gold

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Brad Smith
Brad Smith Mar 01, 2021 9:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
"with Gold ETF (NYSE:(GLD)" Stephen Innes, you seem familiar with this particular gold fund. I've spent quite a bit of time doing my due diligence into GLD. Would you happen to know why there is a clause in the GLD prospectus that states GLD has no right to audit subcustodial gold holdings? The GLD managing organizations sure went out of their way to create this glaring audit loophole. What is the purpose of this loophole? Additionally, the GLD organizations promise that this fund is 100% backed by actual physical gold but yet they staunchly deny retail investors the right to any of their listed physical gold. I remember there was a highly publicized visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities.
Brad Smith
Brad Smith Mar 01, 2021 9:33AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Note that even on the subject of GLD's insurance, they are not at all straightforward about it. Their representatives will not confirm nor deny the existence of GLD's insurance. I recommend anyone curious about this to confirm via calling GLD's publicly listed number for general inquiries at 866 320 4053 and ask about this clause from the GLD prospectus: "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." Exactly how much of the fund is insured? They will not give you a straight answer and might even throw in some bizarre excuse which I've experienced. Why hide this information from investors? The people behind GLD certainly do not seem like the most honest types.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email