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Yellen found taxing

The Janet Yellen/Jerome Powell double act did not entertain markets overnight. Mr Powell stuck to his inflation is temporary, nothing to see here move along mantra. Ms Yellen talked about the follow-on stimulus and paying for it with higher taxes, corporate and higher earners. Unsurprisingly, it did not sit well with financial markets. The small-cap Russell 2000 coming in for particularly negative attention. I suspect, though, that both Ms Yellen and Mr Powell’s comments about some asset prices looking high or overvalued at the moment may have been the excuse investors needed to hit the sell button.

US yields fall but US dollar rises

US yields also headed lower again overnight, with short-term note auctions achieving a good bid to cover ratio. We have 5-year and 7-year note auctions to come this week as well, and once again, the bid to cover ratio will be closely watched, despite most of the action being in the long end of the curve.

Rather surprisingly, the US dollar rallied quite strongly overnight, despite its recent correlation to US yields. The deteriorating Covid-19 situation in Europe, with new or extended lockdowns delaying the European recovery and spiralling cases in Michigan, as well as in India, seems to have sparked some risk aversion. Circling back to equity markets, it may also explain some of Wall Street’s underperformance, as I search for facts to back up my narrative (I am not immune to it either).

Oil markets certainly felt the spectre of Covid-19 in Europe and India, with prices tanking overnight. Signs of increasing Iranian exports may also be adding to prompt supplies despite the “complicated” logistical chain. Although I had signalled that we could see another leg lower, the scale has caught me by surprise. Clearly, there were still a large amount of speculative long positions awaiting culling out there. Notably, that has removed the backwardation in the M1-M7 futures, and it seems likely that oil will remain soggy until OPEC+’s April production decision. I would rate the chances of a further unwinding of production cuts by OPEC+ or Saudi Arabia as zero at this stage.

The data calendar has been mixed in Asia today. New Zealand’s Balance of Trade disappointed, likely putting more pressure on the under-fire New Zealand dollar. The new government regulations to temper property prices announced yesterday saw the kiwi fall by 1.0% as markets took future RBNZ rate hikes off the board. Australia’s Manufacturing and Services PMI’s outperformed as the lucky country continues to fire on all cylinders. I expect AUD/NZD to outperform over the next few weeks.

In Asia, South Korean PPI rose more than expected, and Japan’s Market Manufacturing and Services PMI’s outperformed. The success of each country’s export rebound is well-documented, but domestic demand remains muted. A situation reflected across much of Asia, notably in the Philippines and Indonesia. Any talk of rate hikes from the record lows across Asia is, therefore, premature, something the Bank of Korea head stated in not so many words today. Thailand will also leave rates unchanged at 0.50% later today. Asia’s test will come if US yields resume their upward path, something I expect once the Biden infrastructure package takes shape next week, which will challenge the region’s plethora of dirty US dollar pegs.

European area, German and French manufacturing and services PMIs are released this afternoon, along with UK inflation data. With Europe squarely back in Covid-watch, soggy numbers could pressure a wavering euro, which is testing its 200-day moving average (DMA) this morning. Although UK CPI and PPI should be robust, sterling broke powerfully lower overnight to 1.3750, crashing out of its 5-month rising wedge. Its vaccine spat, and potential knock-on effects to the impressive vaccination programme are the centre of sterling’s woes. Soft inflation numbers won’t help its cause.

US Durable Goods will take a February weather hit this evening, although that is well priced in. Markit PMI’s have plenty of room to outperform, though, and could see Wall Street’s animal spirits’ return. Official crude inventories are expected to fall slightly and will be closely monitored after the overnight carnage in oil markets. More likely, however, Wall Street’s direction will be dictated by the plethora of Federal Reserve governors speaking tonight.

All-in-all, markets remain choppy. Asia and Europe’s coat-tailing of US markets recently now hints that the news feed is thin outside of New York. The tail-chasing nature of price movements across asset classes recently is likely to remain the theme of the week. I suspect the bond tantrum has merely taken a vacation. It will return, and with it will follow more US dollar strength and some tough days ahead for a number of major stock indices around the world, including the Nasdaq.

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 [4]

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is 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, Channel News Asia as well as in leading print publications including 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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