Stocks enjoy a bonding session

Markets continued with their skittish tail-chasing price action overnight, with the Nasdaq leading the charge higher, starkly reversing course after a few tough days at the office. The US dollar duly fell in militaristic-like lockstep, and even gold found some friends as it rallied strongly.

The sharp reversal of the previous sessions can be laid at the door of good old-fashioned bonding—namely, the US 3-year note auction, which achieved a healthy bid-to-offer ratio. That assuaged inflationist fears for a day, allowing markets to pile back into their 2020 comfort zones.

Of course, the 3-year note auction was just the opening stanza for the week. The action on yield curves has been at the far end of the curve, not the belly. We still have the heavyweight 10-year note and 30-year bond auctions to come tonight and tomorrow. Talk of markets becoming “more comfortable” with inflation after the overnight bill auction are premature.

The increasingly schizophrenic and tail-chasing nature of the price action across numerous asset classes suggests that a sizeable directional move is coming. Having spent the past year buying everything except the US dollar, the balance of probabilities suggests down and the US dollar short squeeze continuing. Even meme stocks were back in fashion overnight, with GameStop jumping 40% and Tesla, an S&P 500 component, rallying 20%. When an S&P 500 component stock moves around intraday like GameStop or Bitcoin, you know trouble is coming.

The overnight rally by the Nasdaq, while impressive, has not made a dent in the bearish outlook from a technical charting perspective. If the bid-to-cover ratio is lacking for the 10-year and/or 30-year auctions, or if US CPI prints higher than expected tonight, you can be sure all talk of “comfort with inflation” will disappear in a puff of smoke.

This morning, China’s February Inflation and PPI data eased from January but printed at higher than expected levels. Food inflation continued easing, but healthcare costs ticked up. All-in-all, the China numbers will get a pass mark from local markets, with all attention on the US CPI and bond auctions this evening.

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