Are we out of the woods yet?
There will be a $24 billion US Treasury 30-year bond auction later today, and if it turns out well, the stage will be set for risk assets to continue to recover strongly from here.
Yesterday’s $38 billion US Treasury 10-year bond auction was a touch weak, but it was not as bad as feared. That was good news to a bond market that has been repeatedly battered by inflation fears. The benign US inflation data earlier in the day had already set the tone for a positive day.
As such, old school stocks propelled the Dow Jones Index to new all-time highs. With the Biden $1.9 trillion stimulus plan almost a done deal (he just has to sign it on Fri), the market seem set to grind higher from here.
There will be a $24 billion US Treasury 30-year bond auction later today, and if it turns out well, the stage will be set for risk assets to continue to recover strongly from here. In an environment where US bond yields are driving risk sentiment, we are now all US bond traders in some shape or form.
If all goes well, yields will stabilise and drift lower. Risk assets will grind higher, USD will grind lower and all will seem well with the world again.
A Tale Of Two Worlds
While John Kerry, diplomat serving as the United States Special Presidential Envoy for Climate, encourages the oil industry to “speed up its transition to fight climate change”, we have Total’s President of Strategy and Innovation calling for a 10 million barrel per day gap in supply between now and 2025 (from Total’s annual results, chart below):
“What’s shown here is a cautious outlook out to 2025, but a 10 million barrels per day gap in supply between now and 2025, that’s a massive shortfall of supply to cover in just a very few number of years.” –Helle Kristoffersen, Total President, Strategy and Innovation, 3/2/21
It’s interesting when the climate change narrative looks like it coincides with the strong belief in the “end of oil”. Climate change investment provides policymakers an avenue to grow their way out of record levels of sovereign debt via global “Green New Deal’’, while a 10m b/d shortfall in oil supplies by 2025E would seem to be a structurally bullish underpinning to oil and gas prices, and commodities more broadly (along with gold and silver, as energy is a key input cost.) The oil sector and “Green New Deal’’ sector stocks should stand to benefit from the trends above.
The ECB is most concerned about the rise in US rates. From its perspective, this is mainly an American story that is spilling over into Europe for no good reason. The US is vaccinating its citizens quickly, and there’s a storm of federal spending coming to heal the economy. This is pushing US yields higher as Fed rate hikes are brought forward, which is spilling over into European yields.
The ECB’s problem is that Europe is not really healing. The economy is still fragile amid the ongoing lockdowns, vaccinations are very slow, and the recovery fund money still hasn’t been distributed. As such, senior ECB officials have been warning that this spike in yields is unwarranted and that the central bank could fight it.
This brings us to the upcoming ECB meeting today. The key question is whether the central bank is concerned enough to characterize this as an unwarranted move that should be resisted, or whether the situation is not desperate enough yet to hit the panic button. In other words, will the ECB signal it is ‘ready to act’ or is it just ‘monitoring the situation’?
It’s a close call, but the second option seems more likely for now. While some ECB members like Panetta (Italy), the former Director General of Bank of Italy, have called for increasing QE immediately, that doesn’t seem to be the consensus among the Governing Council yet. Hence, if the ECB falls short of signalling immediate action, that would likely boost yields and the EUR during the meeting.
1. Currencies : Keep short USD and long NZD, & CNH. USDCNH came off hard from 6.55, the level to add to shorts. Stay with it.
2. Commodities : Silver — Support for Silver is at 24.70–80. Looks good, but things can always change. Stay patient.
Key risks: Spikes in US bond yields that lead to a stronger USD remain the key risk. There’s a $24 billion 30 year US Treasury bond auction tonight. If the result is not as weak as feared, the stabilisation of the US bond market will continue but a bad result will cause a spike in yields, and general risk aversion.
3. Equities :
Equity Index: As the market continues to stabilise, the time to get back into buying the dip mode may soon be at hand.
Single Stocks: The great opportunities we have identified in this sell-off are starting to perform. Don’t be left behind! Find out what they are at TrackRecord Model Portfolio.
Key risks : Higher US yields is now the driving force in markets.
WHAT HAPPENED YESTERDAY
As of New York Close 9 Mar 2021,
- US inflation measure, Consumer Price Index (CPI) increased +0.4% month on month (m/m), as expected, while core CPI, which excludes food and energy, rose +0.1% (expected +0.2%). The monthly changes left total CPI up +1.7% yr/yr, versus +1.4% in January; however, the yr/yr increase in core CPI edged lower to +1.3% from +1.4% in January. The yr/yr increases remained below +2.0%, the Federal Reserve’s official target. The report didn’t contain any headline surprises to fan the flames of inflation concerns, which many expect to fire up in coming months. The so-called reopening trade was aided by the House passing the $1.9 trillion stimulus bill, as expected, and New York Governor Cuomo saying that restaurants in New York City and New Jersey will expand indoor dining to 50% beginning March 19.
- The U.S. Dollar Index fell -0.2% to 91.79. Dollar edged lower on Wednesday following a tame U.S. inflation report and a benign auction of benchmark 10-year Treasury notes, while riskier currencies like the AUD and NZD rose on improving global growth prospects. The Bank of Canada on Wednesday left its key overnight interest rate unchanged at 0.25%, as expected, and said the Canadian economy was proving to be more resilient than anticipated to the second COVID wave and containment measures.
- The 10-yr yield decreased 2 basis points to 1.53%, with the market showing little reaction to the tepid $38 billion 10-yr note auction in the afternoon, which though was a touch weak but was better than feared after last week’s disastrous 7-year auction. The 2-yr yield decreased 1 basis point to 0.16%. This was a case of slightly bad news being seen as good news.
- S&P 500 advanced +0.6% on Wednesday, as value and cyclical stocks reclaimed their recent leadership roles and inflation concerns were put on hold. The pro-cyclical trade disproportionately benefited the Dow Jones Industrial Average (+1.5%) and Russell 2000 (+1.8%), with the Dow setting intraday and closing record highs. The Nasdaq 100 (-0.04%), however, closed slightly lower after being up as much as +1.6% intraday. The S&P 500 information technology sector (-0.4%) and Philadelphia Semiconductor Index (-1.8%) were other growth-stock pockets of weakness.
HEADLINES & MARKET IMPACT
Notable Snippet: The U.S. House of Representatives gave final approval on Wednesday to one of the largest economic stimulus measures in American history, a sweeping $1.9 trillion COVID-19 relief bill that gives President Joe Biden his first major victory in office. The measure provides $400 billion for $1,400 direct payments to most Americans, $350 billion in aid to state and local governments, an expansion of the child tax credit and increased funding for vaccine distribution. Forecasters expect it to supercharge the U.S. economic recovery. Approval by a 220–211 vote in the Democratic-controlled chamber came with zero Republican support after weeks of partisan debate and wrangling in Congress. Democrats described the legislation as a critical response to a pandemic that has killed more than 528,000 people and thrown millions out of work.
THEMATIC CONTEXT: “It is becoming clearer that US policymakers are going to be forced to make a difficult choice in 2021: Crush the US economy, or crush the USD. There remains a question about the path in the near term, but the political inertia seems to be clear — when push comes to shove, the USD will likely be sacrificed to save the economy. We will be looking to sell USDCNH on rallies.” — 18th Jan 2021 (See 18 Jan 2021: TrackRecord Market Obs)
“What’s more important that Biden’s promise of more cash be it to individuals or the economy, is his constant emphasis on “radical change”. Game theoretically speaking, the narrative forces the action and this is especially true for a new president who will be forced to make an impact, and he sure did paint himself into a corner where people are expecting a lot. We believe his administration will be great for asset prices and finite assets, especially those with growth, will continue to outperform.” — 5th Jan 2021
Notable Snippet: The Australian government unveiled a A$1.2 billion ($928 million) tourism support package on Thursday, aimed at boosting local travel while international routes remain closed because of the coronavirus pandemic. The government will subsidise 800,000 tickets on domestic flights to 13 destinations around the country that mostly rely on international tourists, and offer cheap loans to small tourism operators. Qantas hopes to resume some international flights by the end of October, when Australia expects to complete its national COVID-19 immunisation drive
THEMATIC CONTEXT: “Vaccine efficacy is a key development to monitor. Societies around the world have a bifurcation of sorts where some countries are still experiencing the full brunt of Covid-19 while others are having Covid-19 fatigue and just want to get on with their lives. Vaccine is the key to level the field with herd immunity and markets are clinging onto this hope. If severe allergic reactions halt the process, this will weigh on risk sentiment, what we need to know now is if these allergic reactions are within the scope of expectations.” — 7th Jan 2021
Notable Snippet: President Joe Biden on Wednesday directed his administration to procure 100 million more doses of the single-shot Johnson & Johnson coronavirus vaccine to boost U.S. supply in the event of “unexpected challenges” in the pandemic. The president has said previously that the United States will have enough supplies to vaccinate the U.S. population by the end of May. But the White House is eager to have more on hand. “We want to be oversupplied and overprepared,” White House spokeswoman Jen Psaki said earlier on Wednesday.
THEMATIC CONTEXT: “These developments are going to be positive for the mainstreet economy and people coming out again will inadvertently increase monetary velocity of the broad money supply (fiscal stimulus with relation to growth in M2 money). When broad money supply growth is strong and coincides with high monetary velocity (i.e. high retail sales etc), this puts upward pressure on rates as inflation is usually the outcome under a sustained period of such an environment. We believe that some semblance of more monetary easing is around the corner and this will give assets great confidence to sustain a powerful rally.” — 10th Mar 2021
Phan Vee Leung
CIO & Founder, TrackRecord