Today’s session has far been mixed for risk assets, as investors try to weigh the impact of rising yields against the prospects of a strong economic rebound with the ongoing COVID vaccine rollouts. Crude oil and copper – assets sensitive to the economy – were decisively higher, but the dollar was flat, while stocks were mixed. Gold remained undermined by the rising government bond yields. Today’s price action suggests investors are waiting for some fresh impetus, and there will be plenty of those with further key economic data, central bank speeches and OPEC+ meeting all to come.
After Monday’s sharp rebound, global indices and futures were hit by profit-taking first thing this morning. But as the session wore on, the major European indices started to recover and were in the positive territory at the time of writing. US indices had opened flattish, recovering from earlier losses, but were easing off their best levels. It remained to be seen whether stocks would be able to push further higher given the growing list of investor worries. In FX, the dollar had turned flat after giving back its earlier gains, with the Aussie dollar outperforming. Gold and silver were flat. Copper was 1.5% higher and oil prices were up about 1% at the time of wiring.
Recently, government bonds have sold off and yields have risen with some investors getting worried about risks of possible economic overheating – something, which would require contractionary monetary policy. Another major concern is overstretched valuations in the markets. This is something that even China has voiced concerns about, saying it was “very worried” about the bubbles in overseas financial markets.
But evidently not everyone seems to be too concerned about the global economy overheating or about asset bubbles. The appetite for risk remains firm, judging by the lack of any further downside follow-through following last week’s sell-off. Central banks are not ready to reduce their assets purchases and are keen to stop the bond market route. The Reserve Bank of Australia, for example, bought double the usual amount of Australian government debt on Monday, causing yields to drop sharply. The Bank of Japan was reported to have warned that it too was prepared to quell risk of yields rising too much ahead of the central bank’s policy review on 19th March. German bund yields fell noticeably too, pressuring the euro and causing a rebound in European stock markets Monday. This was possibly due to increased purchases of bonds by the European Central Bank, with ECB policymakers repeatedly having talked up the potential to accelerate PEPP purchases if needed.
Market participants are waiting to hear how Federal Reserve officials feel about rising yields this week. There are a few Fed speakers this week, with Powell’s speech on Thursday perhaps the most important one to watch.
With stocks rebounding off their lows, the US dollar had turned flat after climbing against most of her major peers earlier. Earlier, the EUR/USD momentarily slid below the 1.20 handle before bouncing back along with other dollar pairs. The EUR/USD has struggled compared to the other major pairs, and this is a reflection of the widening of the yield spread between US and German debt with investors speculating that inflation is likely to return more pronouncedly in the US than in Eurozone, with the latter still struggling to get the Covid vaccinations rolling.
Today’s latest Eurozone data underscores that view, with core inflation easing to 1.1% from 1.4%, while German unemployment change and retail sales both disappointed expectations.
It is worth keeping a close eye on the EUR/USD and at the 1.20 handle. A closing break below this level could pave the way for further losses, potentially leading to a drop to 1.1800 next. However, if price holds this 1.20 handle and goes on to break above the key 1.2150-80 resistance range then this could pave the way for a rally towards 1.25s next:
Source: ThinkMarkets and TradingView.com
Looking ahead, the US employment report is likely to cause the dollar to move sharply on Friday, while Powell is likely to provide reassurance that Fed is likely to keep its accommodative monetary policy stance for months to come. This could boost the market sentiment and buoy demand for riskier assets, potentially lifting the EUR/USD.
It terms of data, there are a few macro releases to keep a close eye on this week, not least the US jobs report on Friday. The other main event is the OPEC meeting on Thursday, which should move oil prices sharply. Here are the data highlights: