Every man for himself

US dollar dips, markets eye Powell testimony

Financial markets have an every man for himself look about them today, as various asset classes diverge in their own directions. A combination of tightening yields and the impending two-day testimony by Fed Chairman Powell starting today in Washington DC seems to have provoked differing reactions across different markets.

Despite yields rising once again in the 10 and 30-year tenors, the US dollar fell overnight across the board. Gold rallied impressively as the dollar weakened, and US yields rose, despite that being a repeat of the price action on Friday which it completely ignored. Equities fell on Wall Street, led by the tech-heavy Nasdaq, which endured a torrid day. Oil, meanwhile, rose impressively despite thawing signs in Texas and signs of cracks among OPEC+ on the trajectory of production cuts. Base metals, notably tin and copper, rallied strongly once again. Meanwhile, Bitcoin did what it does, falling 10% intra-day before finishing 6.0% lower for the session.

The plot thickens in Asia, with regional equities and US futures rallying this morning, unless you are tech-heavy South Korea or Taiwan, which have followed the Nasdaq’s overnight fall south.

Overnight, the Dallas Fed Manufacturing Index, the Conference Board Leading Index and the Chicago Fed National Activity Index all impressively outperformed. Covering the January movement restrictions and February’s inclement weather, the results were all the more impressive. A falling Covid-19 caseload and a ramping up of vaccinations suggest that the US rebound could well accelerate, once the pandemic gloves come off.

That was all music to the ears of the inflationistas, with inflation definitely the week’s theme for financial markets, even amongst the FOMO gnomes of the equity market. Despite the attention centred on US markets and bond yields, it is not confined just to the United States. A quick glance showed that longer-term yields in Australia, New Zealand, South Korea, the Eurozone and the United Kingdom and Japan (yes Japan), have all firmed over the past few days. That may explain why the US dollar hasn’t received a US bond lift, with the steepening of yield curves appearing to be globally synchronous now.

My first thoughts are steeper yield curves worldwide should bring back the love to banking sectors in various parts of the world, perhaps even Europe and parts of ASEAN (US banks are already FOMO-loved) Unless your CEO is incompetent, banks typically make lots more money in environments with steeper positive yield curves. In the short-end, funds low on free central bank money lend higher on the steeper yield curve at the long end. Easy. Those on the wrong side of the K-shaped recovery may find their bile rising at the thoughts of banks making more money, but a healthy economy requires profitable banks; just ask Japan and Europe.

If I were to take away anything from the directional moves across markets over the past few days, it would be the markets positioning for an accelerating global recovery. It is led in no small part by the Biden stimulus package, which looks increasingly likely to pass through Congress mostly intact. It leads to cost-push inflation and a rotation into cyclical asset classes (commodities and boring legacy industries and sectors with company names that don’t end in .com). At the same time, the periphery tactically accumulates inflation hedging positioning (gold and crypto-Musk’s).

Mr Powell’s testimony this evening assumes a more significant than ever importance in maintaining the momentum of the trade. Expect every single word to dissected, looking for hints that the Fed may blink sooner than expected. That is nonsense, of course; America still has 10 million more unemployed than before Covid-19. Mr Powell will go out of his way; I am sure, to put tapering to bed and rightly so, as I dread to think what a taper-tantrum of the 2020s will look like. In this environment, though, the most he can probably hope for is a short-term correction, and he should probably avoid saying he is comfortable with a steeper yield curve at all costs. As Mel Brooks said, “it’s good to be the king,” it’s less fun to be the Chairman.

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