The rotational games continued with Wall Street overnight and are continuing to some extent in Asia this morning. Stock markets heavy with the winners of 2020 are suffering, while previously unloved markets heavy with boring banks, consumer staples, resource and property companies are catching more of the global recovery trade winds.
Overnight, the tech-heavy Nasdaq was stretchered off the field, while the S&P 500, containing a mixture of both, limped off. The Dow Jones, as legacy as you get, meanwhile, enjoyed another warm day in the rotational sun. In Asia today, mainland China markets are under pressure, along with South Korea and Taiwan, while ASEAN markets outperform once again. The North/South divide in Asia was laid bare in 2020, but a correction seems to now be underway, in line with my thoughts that ASEAN would outperform in 2021.
US dollar rises
The US dollar short squeeze has found a new lease of life, with the greenback powering higher overnight. In the bigger picture, I am adamant that this is a potentially painful correction in a longer-term bear market for the US dollar. The January squeeze disappointed me with its longevity, but it is back with a vengeance thanks to inflation fears.
All of these sudden doses of valuation reality can be laid at the US bond market door. The impressive firming of US yields on the back of the Biden-stimulus, a procession of improving data, as well as vaccination progress, has delivered a long overdue dose on the efficient allocation of capital when its cost isn’t quite zero per cent anymore.
More event risk lies ahead this week in the form of auctions. Many readers will know what a dangerous place an auction can be. Be it bidding for a home, or some alcohol-fuelled holiday or sports memorabilia, for a good cause, of course. I personally own a rugby ball signed by all of the 1995 All Blacks team.
If auction exuberance can be dangerous for your bank balance when the hangover clears the next day, financial markets face a similar peril this week. Starting today, tomorrow and Thursday, the US Treasury will hold a total of USD120 billion auctions of government bonds in the 3-year, 10-year, and 30-year tenors.
All eyes will be on the bid-to-cover ratios after a recent 7-year auction saw that ratio slump. If markets’ appetite for US government debt at these levels disappoints, we can expect more equity market carnage for a start and US dollar strength. Although the US Treasury already has the balances available to start disbursing the USD1.90 trillion Biden stimulus, the government was already running eye-watering deficits anyway. A trillion dollars per annum in the latter half of the Trump term. So even setting stimulus packages aside, the US government has an impressive underlying borrowing appetite.
Once President Biden signs of on the latest stimulus package, probably this week, the talk will turn to his USD3.0 trillion remake America New Deal, or whatever it is called. Even the mere thought it could happen is likely to have inflationistas breaking into a cold sweat in the current environment. With markets on edge, a soft bid-to-cover ratio at the auctions this week, either singly or as a whole, is going to spark another inflationary rush for the exit door on selective asset classes.
The direct correlation to the US bond market for everything is there to see in Asia today. US 10-year futures have rallied ever so slightly (yields lower), and sure enough, EUR/USD and GBP have perked up, and gold has rallied modestly. Base metals and oil have risen, although they are probably going to no matter what.
With the US bond market, the fixation of financial myopia for the week, some Asian data has slipped in under the radar this morning. Japan GDP for Q4 and Household Spending for January did what Japanese data does best, disappoint. That may leave the Bank of Japan with a quandary at next week’s policy meeting regarding whether to tolerate higher JGB yields. My guess is the answer will be no, meaning USD/JPY will probably be well above 110.00 next week.
South Korea’s Current Account for January also disappointed, coming in at a USD7.06 billion surplus. The primary culprit will be increased energy prices. It will be a factor making itself felt in energy-hungry North Asia’s data in the coming months.
Reports are coming in that the CSI 300 is seeing China’s “national team” coming in to buy stocks this morning, as reported by Livesquawk. The tech-heavy CSI 300 has suddenly reversed 3.0% losses on alleged state fund buying. The joys of a centrally planned and controlled economy aside, China’s disquiet at the pace of the stock retreat over the past few sessions may be indicative of alarms sounding elsewhere in the world, as I circle back to my comments on Japan above. Unfortunately, not every country can order its pension funds to buy equities to prop up the market. Although China’s alleged actions today have slapped a band-aid on, it further reinforces just how important for equity markets these three US bond auctions are this week.
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