A Wild End to the Week
It's a bit of a wild end to the week, with stock market jitters returning in force after yields spiked again on Thursday.
As the morning progressed in Europe, yields pared gains which has alleviated some of the pressure on stock markets but that seems to have reversed itself once more and they find themselves comfortably in negative territory, with US futures are pointing to a similar open.
The rapid rise in yields this week has come despite a perfectly competent performance from Fed Chair Jerome Powell in front of the Senate Banking and House Financial Services Committees. He gave his best assurances and it's seemingly fallen on deaf ears.
I expect we'll see a lot more of this from central banks in the coming weeks if stock go into freefall. Despite a couple of days of losses, we're very much not in that territory yet - this is not a taper tantrum - and policy makers may be perfectly comfortable with what's happening.
We are heading for a super-charged recovery, after all, thanks to the vaccine rollout and all the fiscal support measures over the last 12 months. Not to mention the desperation of people to escape their now beautifully decorated homes.
Investors should not need the central bank to hold their hand much longer and I expect by the end of the year, taper discussions will and should be starting. Of course, a lot can happen in that time and maybe that's too optimistic at this stage but the point is simple. If Yellen envisages full employment by next year, central banks shouldn't be employing crisis mode monetary policy when that happens.
But that's a message better employed when the economy is fully open and firing, and the outlook is much clearer. And markets may be better positioned for it at that point. Right now, a lot of positivity is priced in and there's frothiness everywhere you look. Not the time for taper talk or the tantrum may become self-fulfilling.
Today presents an opporunity for investors to lose their heads a little once more, with income, spending and inflation due from the US. The inflation number is also the Fed's preferred measure which obviously carries that bit of extra weight. An above expectations reading will be interesting and could lend itself to a volatile end to the week.
Oil continues to lose momentum ahead of OPEC+ meeting
Oil prices are pulling back from very elevated levels today. That doesn't necessarily mean the party is over but the latest peak was once again made on declining momentum which is a sign of an overextended market. Obviously, it could become more overextended but each rally not backed up by momentum further confirms that a correction is likely.
And the proximity to the OPEC+ meeting next week is surely not a coincidence. The group could surprise once more and restrain production in order to support prices and I'm sure something like this would see momentum return, but I'd be surprised to see this given the current prices. They'd just be opening themselves up to a resurgent US shale sector.
The key to any agreement will be Saudi Arabia, who's additional one million barrel cut was only intended until the end of March. So any increase would be on top of that, unless the Saudi's decide to act unilaterally again in order to support prices while allowing others to increase. They may not be so charitable this time around which could make for intense discussions. Perhaps no surprise then that we're seeing rally momentum wane this week.
Gold pushing break of key support
Gold is in trouble once more and the near-term outlook isn't looking great for the yellow metal. It's making fresh lows again and pushing for a break of $1,760, which could open up a much sharper decline. Rising yields and now a jump in the dollar are piling the pressure on gold and, barring a reversal in bond markets, it's tough to envisage its fortunes improving.
The recovery trade and prospect of premature monetary tightening naturally isn't supportive for gold, which typically does well in expansionary periods. The current support level has been key the last few months but the pressure isn't easing up. A break of this could see it break into a new range around $1,660-$1,760, with next support around 1,740.
Bitcoin caught up in risk off markets
Bitcoin's correction is deepening on Friday, after the crypto failed to generate fresh upward momentum following the sell off earlier in the week. I'm sure Elon Musk is getting a few funny looks from Tesla shareholders after his admission that it's looking a little expensive.
It may be tempting to draw a link between rising yields and cryptos but I'm not buying it. If yields keep rising, I don't envisage bitcoin falling off a cliff. Despite people's best efforts to convince otherwise, it is not an inflation hedge.
It is a market that was ridiculously overbought and will probably be so once again in the not-too-distant future. Even if yields keep rising. A full taper tantrum may catch up with it but bitcoin is a risk asset and could be dragged lower with the rest of them. Unless, of course, we're told it's a safe haven again. I lose track of what it's currently claiming to be.