Risky business

No one can complain about a lack of volatility in financial markets at the moment. The tug-of-war between economic recovery and inflation risks continued on Wall Street on Friday and spilt out onto the street in Asia.

Friday’s outsized 379,000 gain in Non-Farm Payrolls caused US yields to spike initially. Still, equity markets just couldn’t keep saying no to the recovery story, and unwound all their ugly intra-day losses to post strong finishes. US 10-year yields peeped their head over 1.60%, before helpfully retreating to 1.55%, aiding the equity recovery story.

The weekend had plenty of interest as well. China’s Balance of Trade exploded higher in dollar terms to USD103.25 billion for JAN-FEB yesterday. For all the noise about its comparison to JAN-FEB 2020 (USD78.17 billion), it flatters to deceive. The same period last year being the start of the Covid-19 economic implosion. Still, given that the number encompasses Lunar New Year, the data is impressive.

By contrast, Japan’s Current Account this morning disappointed, rising only yen 645.8 billion, roughly half the number expected. Increasing gas and oil prices appear to be playing their part, along with flat domestic demand and Japan’s Covid-19-lite state of emergency.

US Senate approves stimulus bill

The US Senate passed the Biden USD1.9 trillion stimulus package over the weekend, which has continued the market sugar rush this morning after equities closed positively on Friday. Apart from ditching the minimum wage and tweaking whom is entitled to the fiscal goodies, the bill is relatively intact. It will now pass back to the House tomorrow in its amended form, and then onto President Biden’s desk for signing.

An attempted drone attack on a giant Saudi Arabia oil refinery and transport hub in the Kingdom this morning by the Yemeni Houthis has seen oil prices spike higher once again. No damage was caused, but Brent crude and WTI are 2.50% higher. Brent crude is now well above the $70.00 a barrel mark at $71.30 a barrel.

Notably, US 10-year yields have now climbed five basis points higher this morning, back to the 1.60% mark. The explosion higher by equities this morning on the US stimulus news was also a sign of pent-up demand, much like New York on Friday, after a series of torrid sessions. A tough mental state for a market programmed to FOMO-buy each day.

Despite the warm afterglow seen in equities this morning, the charts for the S&P 500 show the index has only retraced to its downside breakout level. The story is similar for the Shanghai Composite, CSI 300 and Nikkei 225. The Nasdaq broke out of its Mar 2020 uptrend two weeks ago and remains there. Only the Dow Jones remains safe for now, having bounced off its March 2020 support line on Friday.

Higher oil prices, robust US employment data and a USD1.9 trillion US stimulus, sound more than a little inflationary to me. US bonds seem to agree. Assuming that equity markets are out of the woods is a risky business.

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