Risk-on
Unquestionably the market has shifted focus away from the de-grossing caused by the squeeze in heavily shorted names back to US stimulus, vaccine tailwinds and reopening optimism which should continue to play out well for stocks in Q1. All of which is being complemented by a significant systematic bid to the market, aided by the sharp pullback in the VIX this week.
And while over the short term, the pain trade remains higher, but despite being some way off levels in rates that would cause severe pain to the equity market, any further sharp acceleration in the back end of the rates curve may weigh on expensive growth in the near term, with money rotating into reflation names.
Ferocious move in rates
The move in rates has been swift and ferocious. The market has correctly shifted focus back towards improving data, progressing vaccinations, fiscal stimulus in the US, and a Fed intent on reflating the US economy. It isn't time yet to flatten reflationary risk altogether. Still, it may be an excellent opportunity to reduce some beta risk tactically. There have been some nascent signs of pattern divergence amid shifting comovements, especially as far as the US dollar and the equity mark relationship is concerned.
We still have payrolls to get through tonight, but since the ADP beat and strong ISM Services employment release most economists on the street are now ratcheting up their forecasts. A healthy result may be reflected in the price at this point, but I still think there are tail galore for yields the US dollar and gold. A data miss could help rates settle down, but a beat could send the dollar and yields higher much to the chagrin of precious metals investors.
Forex
EUR/USD breaking the psychological level of 1.20 added to the downside momentum in the pair, and so far resistance levels are being respected, so bounces have been shallow. It seems to be a somewhat isolated FX move this week in G10, which could be the beginning of position reduction. Looking at CFTC data, the market is very bearish on USD, and the lion's share of that is against the euro. So far we have seen limited interest this morning fast money accounts seem to be short, probably since the break of 1.2050. The key to the extending the rally will be longer-term bulls and real money accounts. For now, we were looking to sell EUR/USD on any rallies after squaring up 75 % of SPI Asset Management JAN 22 EUR/USD Shorts ahead of the NFP.
The pound has scope for more positioning catch up
Due to different vaccine rollout times, FX could become increasingly fragmented, and the Pound stands to benefit just like the USD.
There was a remarkable reaction in GBP to yesterday's Bank of England meeting, though it's not very hard to explain. The negative rates buzz was always exaggerated, and the MPC finally made it clear that it's effectively an administrative exercise with very little or no policy implications.
As long as there is a valid prospect of reaching some post-pandemic recovery this year, zero rates are off the table
I don't think any major central bank will look at further easing. Instead, they will need all their energy and communication on pushing back pressures to tighten.
For GBP, the critical argument has been that the UK will come out of lockdown earlier than the EU, and with real money arguably still underinvested. There is scope for more positioning catch up. Maybe we get a bit of a pullback now on EUR/USD and EUR/GBP, but unless the EU starts to do a lot better on covid vaccinations, or the UK somehow stumbles, 0.85 EUR/GBP could come into view.
FOMC Muzzled on Taper for now
Knowing it's coming while trying to pour ice water on near term taper talk near term, there was a telling comment from St. Louis Fed President Bullard Thursday, who said the FOMC would look to Chair Powell's leadership when it comes to the question of when to start tapering. This sounds very much like Powell has had a word with the regional Fed presidents, if not all the FOMC, to tell them to stop discussing taper. Indeed, the likes of Raphael Bostic and Robert Kaplan have been rowing back pretty hard. Kaplan himself in comments Thursday said the inflation gain to come this spring would be transitory.