It is rare to see the markets providing so many mixed signals. Technology names have been hammered, as too have cryptos with Bitcoin falling more than 10% and below the key $50K level. Yet, it is not entirely risk off, with some European indices being sharply in the black, while others are lower. Commodities that are sensitive to the economy, which have been outperforming, were also lower at the time of writing. So, what the hell is going on?
I think there are two main considerations here:
- First, the fact that techs are falling and value stocks have been outperforming along with copper and crude oil are clear signs of rotation into assets that are expected to do well during good economic times. If this is the case, then the weakness for technology shares could be short-lived, and dip buyers will be happy to get back in at relatively inexpensive levels again.
All eyes on Jay Powell
- But the flip side of the above argument is that the markets may have already priced in much of the prospective global recovery, spurred by vaccines and stimulus. Will rising inflation expectations become a reality? If so, could major central banks start ending emergency easing programmes that have supported global markets so far? This is the key risk facing the markets in the months ahead and so trading could become two-ways again rather than just up, up and more up for major US equity indices.
So far, some of the major central banks have been careful not to fan the flames and have re-iterated the need for current loose policy stances to remain in place for some time yet. But will that slowly change? We will be hearing from Jerome Powell, who will testify later today and tomorrow. Analysts expect the Federal Reserve Chair to play down the risk of high inflation from President Joe Biden’s $1.9 trillion coronavirus relief proposal.
Here is what happened in the first half of today’s session
- European stocks traded mixed in the first half of today’s session. Spanish Ibex outperformed with a gain of 1.4% while the German DAX dropped about 1% and the FTSE fluctuated around flat line. US equity indices opened sharply lower, after futures had dropped with the Nasdaq again being under the most pressure with investors evidently reducing their holdings of techs and other sectors that did particularly well during lockdown. It looks like investors are moving into sectors and other assets likely to do well with a rebounding global economy, in a so-called reflation trade. Expectations that a strong rebound in the economy will boost inflation and therefore require tighter monetary conditions have boosted yields on longer-dated bonds.
- Growing inflation bets have also seen investors move into commodities, with copper continually hitting new multi-year yeah highs while crude oil defying gravity with both contracts recently hitting their best levels since before the pandemic. That being said, crude and copper prices had turned lower at the time of writing, owing to a bit of “risk-off” trade being emitted from the equity markets.
- In FX, the pound remained supported near the $1.41 handle after its recent sharp gains and in light of the UK government outlining plans to reopen its economy. Other pound crosses also looked solid especially the likes of the GBP/CHF and GBP/JPY, as haven currencies continued to be sold. But if the sell-off in equities gather pace then the Japanese yen could rebound.
- In the precious metals space, gold and silver we a touch lower after gold tested a key resistance area between $1810 and $1816 following a sharp two-day rally. Out of the two metals, silver continues to look stronger than gold amid ongoing reflationary trade boosting industrial metals like copper and to a lesser degree silver. The white metal has formed a base around the $27 handle and for as long prices hold their own here, we may see the onset of a fresh rally towards $30 and possibly beyond.
Source: ThinkMarkets and TradingView.com
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