Modest markets mask Fed fears

US dollar, Wall Street show gains

US bonds stabilised overnight, allowing the FOMO buy-everything crowd to dip their toes back into the magical healing waters of technology stocks. Buy everything really did mean buy everything, though, with all three major Wall Street indexes closing higher. Unusually, that same premise saw the US dollar and precious metals, notably gold, rise as well, a deviation from the mechanical correlation playbook of late.

The relief that Friday’s US bond tantrum did not result in another trip to the naughty corner was palpable. However, the US dollar and gold rising even as technology stocks rose hints that all is not quite right. One must respect the linkages of late, sell bonds, sell technology, buy cyclical, buy oil every day, buy US dollar, buy gold, oh wait, its gold, sell it anyway no matter what is going on. Bitcoin has also given up all its “we’re Sleepless on Saturday what shall we do, buy bitcoin,” rally as well. Thankfully, the nonsensical noise about it being the inflation hedge of a new generation has ebbed as well, although, like McArthur, I am sure it will be back.

Nothing in the background has changed other than US bonds had a quiet night. The Astra/Zeneca blood-clot-gate story is not enough to derail the global recovery story, with most of the countries halting its use (read Europe and Indonesia), only just out of the vaccination starting gates and sprinting on one leg anyway. With financial markets more Fo-mechanical and less FOMO of late, the price action across asset classes yesterday and Friday hint some sort of breakout is imminent.

The answer to just what will probably be answered by the FOMC statement and the dot plots on Thursday morning (Asian time) One senses that some bond complacency has crept into markets overnight and that they are assuming that the Federal Reserve will calm the inflationary waters. There is a genuine danger that the Fed disappoints the street. A procession of governors, including the Chairman, has made it quite clear they are comfortable with inflation and a steepening yield curve. Let us also not forget another USD1.9 trillion of the stimulus, with potentially another couple of trillion of “new deal” money later in the year.

The refusal of the US dollar, and more importantly gold, to roll over as calm returned overnight suggests lingering concerns in some asset classes. Gold finding its inflation-hedging mojo will be a massive indicator that darker times lie ahead for 2020-darlings. Despite the rise in equities overnight and today, the technical picture for the Nasdaq and CSI 300 show technical breakouts of year-long ascending support lines, and ensuing failures to recapture them. A similar view is playing out on the Nikkei 225 and Taiex and ASX 200. One of long-term support lines rapidly rising to meet lofty valuations, leaving them little room to manoeuvre.

If the FOMC doesn’t play ball this week, another US yield spike is on the way; the dollar will rise, Asian currencies with dirty dollar pegs will break into a cold sweat, and richly priced 2020 equity darlings may join them. A higher-than-expected US Retail Sales tonight will make an excellent pre-match opener. In a pseudo-globalised world, the US treasury market, and the 10-year bond, remain the globe’s deepest and liquid capital market. What happens there affects us all directly or indirectly. To paraphrase Grace Jones (google her, Millennials), we are all slaves to its rhythm.

The day in Asia is quiet on the data front. The RBA minutes contained no surprises, with the committee focused on employment and wage expectations. They reiterated no rate rises before 2024 when they finally expect wage pressure to climb over their 3% target. I suspect markets will test the RBA’s assumption and mettle by pushing 3 and 10-year yields higher again in Australia. Even if the RBA intervenes once again to cap the 3-years, a steeper yield curve seems inevitable, especially if the FOMC this week doesn’t play ball.

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