Joined at the 10-year hip

Markets have been busy in my short absence, with recovery optimism and bullish speculative momentum making recent days look like a rerun of the 2020 buy-everything rally. Perhaps the key reason for the asset price resurgence is the yield on the US 10-year note, the risk-free rate of return for finance gnomes the world over. Along with its 30-year big-brother, the US 10-year yield has steadily retreated since the start of April, and the inflation heat map has steadily cooled.

Call it complacency, the market “fully pricing” in risks in their own minds, or the wall of money looking for a return – preferably immediately, as he clicks buy on dogecoin in his gamified investment portal- in a zero per cent world, the fall in US yields is there for all to see. Equities have rallied in general, DM and EM currencies have recovered, even the Turkish lire as the US dollar retreats, and gold’s rally has hung a tantalising long-term low formation on the charts.

All roads lead to the US 10-year, either directly or indirectly. Buying the dip on just about anything likely remains the name of the game. In the near term, speculative momentum has waned with US earnings season starting to look like a buy the rumour, sell the fact scenario. Netflix missed subscriber numbers overnight, although they quite reasonably note that the pandemic led to an unanticipated surge.

Pandemic concerns have provided markets with an excuse to book some of the last week’s profits. Rich valuations, notably in the US, mean that even as corporate America rolls out the juicy earnings as expected, investors will be asking themselves, “what’s next?” That is a valid point when one ponders the implications of the Biden administration’s taxation plans. It does, however, look like noise and not a structural turn in sentiment. That will require our good friend, the US 10-year yield, to move quite a bit higher from here and for the US yield curve to steepen. I believe we have not heard the last of that story. Rather than seconding guess it, a wiser strategy is to wait for it to unfold.

Asia’s data calendar is quiet today, with South Korean PPI and New Zealand inflation rising slightly above expectations, hinting that the inflation story is merely on vacation. Australia’s Preliminary Retail Sales for March also rose by 1.40%, well above the 1.0% expected and yet another data point to add to the Lucky Country’s V-shaped recovery narrative. Its impact on local stocks and the currency has been non-existent as both moves to the beat of intra-day global risk sentiment.

Bank of Canada expected to taper QE

This evening, the Bank of Canada announces its latest rate decision and against a backdrop of a worsening Covid-19 situation clouding its recovery narrative. Although rates will remain unchanged, the BoC is likely to, once again, taper its weekly bond-buying targets. It will be an interesting taper-tantrum lab experiment for the bigger fish to come in 2022.

USD/CAD broke through its one-year downtrend line around 1.2600 at the end of March and has underperformed its Australian and New Zealand brethren in April, even as risk sentiment rebounded. A slight taper this evening by the BoC could send the USD/CAD higher to 1.2700 in the short-term, but a BoC on track to normalise, if such a thing exists in the central bank world anymore, should be supportive once the dust settles. At the margins, Canada’s Covid-19 trajectory remains the limiting factor to a CAD rebound.

The rest of the week’s calendar globally is decidedly second-tier, but things get much more exciting next week. Highlights include China PMIs, Bank of Japan and FOMC rate decisions and US GDP and Personal Income. That means the rest of this week remains at the mercy of swings in risk sentiment and our good friend, the US 10-year yield. I will have my noise-cancelling headphones on.

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