- Markets debate the likelihood of rising inflation
- Dollar rebounds from further losses
- Gold confirms resistance
Key Events
Global equities extended their rally for an eighth straight session on Wednesday, thanks to US President Joseph Biden’s fiscal stimulus initiative, strong earnings releases and falling coronavirus cases. This morning, futures on the Dow, S&P 500, NASDAQ and Russell 2000 are all pointing to a higher US open.
Bitcoin is attempting to reach $50,000 once again, a level it's been struggling to hit, so far without success. The oil rally continued.
Global Financial Affairs
The MSCI World Index rose 0.2% today, its longest winning streak since November. The trading pattern emerging, however, opens the possibility of a top.
The global benchmark is struggling against the top of an ever-expanding pattern known as the Broadening or Megaphone pattern. Its development demonstrates irrational behavior, suggesting a loss of leadership, a potential sign for a top.
While prices rise with both highs and lows, as buyers and sellers expect the trend to continue rising, declines are marked by falling highs and lows, as both supply and demand are on the same page about that as well.
A broadening pattern however, posting higher highs but at the same time lower lows shows that investors are unsure. However, the pattern needs to break to the downside in an obvious way in order to top out. On the other hand, a catalyst could create new leadership and move the market higher. The RSI shows that for now momentum supports the move up, which, if continues, will catapult prices upward.
All this technical conflict reflects investors’ indecision on whether the current, largest, combined monetary and fiscal policies in history will spark reflation, a healthy rise in prices that helps the economy grow or destabilizing inflation, that will upend the delicate economic recovery from the worst recession since the Great Recession.
Investors are also concerned that inflation rising for the first time in 12 years will disrupt financial markets, as even a healthy reflation can siphon demand away from equities in favor of rising Treasury yields.
Even as US futures were well in the green today, stocks in Europe struggled for traction amid mixed earnings results from a variety of companies including French banking giant, Societe Generale (PA:SOGN) and Danish shipping operator, AP Moeller-Maersk (CSE:MAERSKb).
It’s noteworthy that contracts on the NASDAQ 100, representing an economy in lockdown, are up 0.5% at the time of writing while futures on the Russell 2000, which represents a return to an open economy are lagging, up just 0.2%. This dichotomy of growth stocks leading the rally, while value shares lag, shows the disagreement among investors on the impact of rising inflation on markets.
Earlier, major Asian indices were in the green, overcoming Tuesday's lackluster US session, on the narrative that US fiscal stimulus and slowing growth in coronavirus cases infused regional investors with vigor. China’s Shanghai Composite leaped 1.4% despite falling consumer prices buoyed by the first rise in a year in factory prices. Signs of continued recovery in China received an even more positive reaction in Hong Kong where the Hang Seng surged 1.9%, to a three-week high.
US stocks paused yesterday, ending a six-day rally on profit taking. Traders are trying to assess if rising inflation will help boost companies' profits, causing a ripple effect and buoying economic growth or if it will further damage an already fragile economy and drive equity prices lower.
The S&P 500 Index stepped back from an all-time high, on the heels of a 5.4% gain this month. As opposed to growth vs value projected in today’s futures, Tuesday’s Russell 2000 trade helped it notch the longest rally since December 2019, while the NASDAQ 100 had to struggle to register a gain.
Investors are waiting for US consumer prices data for January, as well as a speech from Federal Reserve Chairman Jerome Powell on the labor market later today.
Yields on the 30-year Treasury are holding at 1.9% after crossing the 2% threshold earlier this week.
After hitting a high on Jan. 12, yields on the 10-year Treasury note have been in retreat.
But the congested downward tilt appears to be a falling flag, as Treasury investors pause amid a selloff. An upside breakout will take rates above 1.2 percent and higher.
The dollar has matched the decline in yields. The greenback fell back below the neckline of a H&S bottom, its rising channel since the Jan. 6 bottom and back into a falling wedge since the March high.
While this puts our bullish expectation to the test, we still anticipate the USD will rebound, especially if yields complete their bullish flag.
Gold has been rising on dollar weakness.
However, it has proven resistance for the second day amid a confluence of technical signposts on the chart, creating a dream short from a risk-reward perspective.
Bitcoin extended gains for the third day, struggling against a doji—when traders stopped for a breather—after Tesla's (NASDAQ:TSLA) SEC filing revealed the carmaker bought $1.5 billion worth of Bitcoin as an investment and to allow its products to be bought with the cryptocurrency.
Once the digital currency overtakes Tuesday’s high, we expect it to continue and retest the psychological $50,000 level.
Oil pushed higher for the eighth straight day, its longest winning streak in two years, a sign of hopefulness of reopening economies, as oil heads to $60
Up Ahead
- Lunar New Year public holidays begin in nations across Asia, with China breaking for a week.
- US initial jobless claims are released on Thursday.
- Bank of Russia’s policy decision comes Friday.
Market Moves
Stocks
- Futures on the S&P 500 Index gained 0.2%.
- The Stoxx Europe 600 Index increased 0.1%.
- The MSCI Asia Pacific Index rose 0.7%.
- The MSCI Emerging Markets Index rose 0.9%.
Currencies
- The Dollar Index was little changed at 90.43, having rebounded from a 0.2% drop.
- The euro rose 0.1% to $1.2131.
- The British pound gained 0.1% to $1.383.
- The Japanese yen was little changed at 104.57 per dollar.
Bonds
- The yield on 10-year Treasuries declined less than one basis point to 1.16%.
- The yield on two-year Treasuries was unchanged at 0.12%.
- Germany’s 10-year yield rose less than one basis point to -0.44%.
- Britain’s 10-year yield climbed one basis point to 0.473%.
Commodities
- West Texas Intermediate crude dipped 0.1%.
- Gold strengthened 0.3% to $1,843.12 an ounce.