US stocks are rising higher as investors embrace calm in the bond market and look to a brighter future following J&J's COVID vaccine authorization and robust US manufacturing data. Last week’s bond market selloff was for growth not inflation and that is helping many traders become comfortable with the idea of a higher stock market and steady rise in Treasury yields. Now that the US has three highly effective COVID vaccines, expectations for herd immunity at some point in the summer should release a lot of pent up buying power from the US consumer. The small-cap trade is back and will likely lead the charge higher as reopening bets return.
A very strong ISM report showed that the manufacturing economy continued its recovery in February. The headline reading of 60.8 was much higher than the consensus estimate of 58.6 and matched the highest reading since February 2018. Supply shortages, higher commodity prices, and higher prices paid, explain while managers are still conservative with hiring new people. The US economy looks strong, with virus mutations being the main risk to the outlook. If the next few months do not provide a major reversal in the reopening of the economy, the manufacturing sector could run hot.
Normally the start of the month of the month would focus on Chinese manufacturing data, but this time, China took a backseat to Australia. The RBA’s commitment to yield curve control provided a lot of comfort to investors that the all the other central banks will fall in line. The RBA’s decision to double their bond purchases signaled central banks won’t let the reflation trade get out of control. Central banks are firmly committed to a low interest rate environment this early in the global economic recovery and that should remain the case for the Fed. China’s economic data disappointed, but many are shrugging that off due to the Lunar New Year holiday.
The euro held onto losses against the dollar after reports that the ECB reduced their pandemic bond-buying last week, despite the skyrocketing move across global bond yields. The short-term outlook for the euro is somewhat bleak now that the UK COVID variant is spreading across Germany, France, and Italy. The US growth exceptionalism could provide a strong some headwinds for currency traders who were looking for a softer dollar. Europe is ramping up inoculations against COVID-19, but still trail the US by months. The euro will likely struggle in the short-term to both the dollar and British pound solely on COVID vaccinations.
Crude prices have shrugged off the strong start following the FDA’s approval of the J&J COVID-19 vaccine. The US now has three highly effective COVID vaccines and if virus variants don’t derail the trajectory of new cases, herd immunity could be reached in a few months. Also providing some support for oil was better-than-expected US manufacturing data. The data was impacted the deep freeze, but surging demand shows how ready this economy is ready to roar once large parts of the country return to pre-pandemic life. The bond market has calmed down and that should stop the dollar from strengthening.
Oil will likely trade rangebound ahead of Thursday’s key OPEC+ meeting which will test the relationship between the Saudis and Russians. The question at hand is how much should OPEC+ increase production in April. Some softness in Chinese economic data, albeit likely impacted due to the Lunar New Year holiday, could support the Saudis call to remain conservative with ramping up output. The Saudis hold a lot of the cards since they are the ones that have delivered a surprise extra 1-million bpd cut, but this is OPEC+ and it could get messy on how they divvy up the share of next month increases in output. In addition to the Saudis ending their voluntary cut, April production could increase anywhere from 300,000 to 500,000 bpd. This is a live meeting, but most energy traders would likely welcome a pullback in crude prices. With an improving global COVID-19 vaccine outlook, the energy market is bracing for much higher prices by the end of the year.
Gold prices are stabilizing as the bond market selloff appears to be over. Treasury yields are higher but the skyrocketing pace appears to be over. This week is all about Fed speak and if they can signal a little concern over the impact of higher yields on the recovery, that should give many investors the all-clear sign for scaling back into gold.
Gold’s rebound is somewhat unimpressive as a broad stock market rally has investors piling back into only stocks. Gold is not in the clear just yet, but the fundamentals appear to be improving. The US economy is a couple weeks away from Biden’s massive relief bill and then ramped discussions over infra-structure spending, which will allow the stimulus bowl to overflow.
Bitcoin is bouncing back strongly as risk appetite returns to Wall Street as the bond market selloff appears to be over for now. Last week, surging global bond yields forced many institutional investors to close out some of their best performing trades and for some that was Bitcoin. Bitcoin had a wrath of headlines that are noteworthy, but the primary driver still seems to be the calm in the bond market.
Another key story for Bitcoin was a new endorsement from a top bank, this time it was Citi. Citi put out a research note adding that Bitcoin could “become the currency of choice for international trade. The more banks that come out with constructive comments on Bitcoin, the more likely the speculative bubble will continue to grow.
An interesting development in China was the announcement that cryptocurrency mining projects in Inner Mongolia, that use up massive amounts of computing power and energy will shut down in two months. Energy control measures are expected since China failed to meet their targets in 2019. Less cryptos being mined was another catalyst in this week’s strong start.
The cryptoverse over the weekend also saw many cryptocurrency traders make the plea to take your cryptos off the exchanges and keep them in your wallet. Traders normally put their cryptocurrencies on an exchange if they want to cash out.
Bitcoin’s wild ride is far from over, but it seems another attempt at $50,000 could be in the cards if the bond rout is truly over. Bitcoin can survive a steady rise in Treasury, but not a skyrocketing move like we saw last week.
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