Where to start?

US yields rise sharply

That is what is running through my mind this morning after an emotional overnight session. The calming effect of a suitably dovish and inflationary nonchalant FOMC lasted less than 24 hours. The US/Europe crossover session saw US long-end bond yields explode higher on inflation fears.

The straw that broke the camel’s back appears to be the Philadelphia Fed Manufacturing Index, which exploded from 23.1 to 51.8 for March, a 50-year high. That telegraphs input cost rises are coming as much as anything and was all an edgy market needed to hit the sell button on US bonds. The US 10-year rose to 1.72%, trading at 1.75% intra-day. The 30-year rose to 2.47% as the US curve continued to steepen.

The results followed the playbook of previous sessions; the US dollar rallied, the Nasdaq was crushed, and the other major indices were also suffering. Gold retreated, but only slightly, continuing to hint that its inflation-hedging mojo is returning. Commodities eased, but not markedly so except for oil. Black gold looked like black lead as both Brent and WTI plummeted by over 7.0%. I had mentioned that both were threatening a modest downside breakout/correction, but clearly, there was a lot more speculative long positioning waiting to be culled then even I envisaged.

The geo-political front provided no solace. The US-China meeting in Alaska started with both sides exchanging insults. Maybe it’s the weather. Presidents Biden and Putin called each other killers. And the US threatened to sanction everyone involved with Nordstream 2, the new gas pipeline between Russia and Germany, bypassing those inconvenient Ukrainians. The US has a point. Russia doesn’t have good form on accidentally turning off gas pipes. Tying your energy security to them is as dumb a strategic move as the West allowing China to control almost all rare earth element refining because of global nimby-ism.

Covid weighing on Europe

Covid-19 is doing Europe no favours at the moment. Although Germany, Spain, France and Italy have reversed course on their halting of AstraZeneca vaccinations, parts of Europe return to lockdowns. With the well-telegraphed vaccine distribution problems in Europe already weighing on the bloc’s markets, the news that France is placing over 30% of its population in complete lockdown again played no small part in oil’s demise. When compared against the recoveries in Asia and the United States, and even the UK, I am surprised that European assets are not more unloved.

While Asia digests the implications of the overnight developments, most likely heading for the exit door themselves, today’s data calendar is strictly second tier and low impact, leaving markets at the tender mercies of flow-driven momentum and headlines. Japan’s inflation data, released this morning, showed that it still does not have any, maintaining the operations normal of the last 25 years.

The one exception will be today’s Bank of Japan rate decision; with market speculation building, it will widen the trading bank it will tolerate for JGB’s. I am 50/50 on this as US yields, for example, have now only risen back to around pre-Covid levels when the BOJ had the same monetary policies in place. It may also “tweak” its ETF buying policy which means they want to buy less of them. If both of those moves happen, the effect on USD/JPY is a little hard to read; one can make a bullish or bearish case. However, USD/JPY has traced out a number of recent daily highs around 109.30 despite US yields rising. If the BoJ indulges in some tapering QE chicanery, the path of least resistance for USD/JPY is likely to be lower, potentially quite quickly.

Asian markets can expect no solace from the US-China meeting either. I mentioned above that the talks got off to a rocky start, and more comments are now hitting the wires in China state media. To summarise, “China isn’t happy,” so business as usual. Any improved trade premium has vanished from mainland China stock markets today, and rapprochement between the two superpowers looks as distant as ever.

I prefer to look on the bright side. Growing up, I and the rest of the world lived under the threat of nuclear Armageddon, because the United States and Russia couldn’t share the toys. In the 2020s, the United States and China are swapping insults over a table in Alaska, but no nukes have been harmed in the process. It’s sometimes hard to believe, but the world is getting better. Happy Friday.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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