Who Needs Yield Curve Control?

Written by: Craig Erlam | OANDA Europe

Stock markets in the red across the board on Thursday, as sentiment softens a little on the back of the Fed minutes.

With the S&P 500 and Nasdaq both back in record territory, we may also be seeing a little profit taking as the minutes themselves weren't exactly that much of a blow. Policy makers don't seem to be entertaining the idea of yield curve control at the moment, with the policy offering only modest benefits, while offering the view that the pandemic is both still weighing heavily on activity and poses considerable risk to the outlook. 

All considered, even with the tweak to the language on forward guidance, I don't think there's much to be concerned about. They're not tightening any time soon, the chances are we're facing the status quo for some time. It seems the minutes were just an excuse to take a little profit off the table as a number of people question these lofty valuations, under the circumstances.

There may have been a giant leap forward since March for many trends that had been evolving gradually anyway in the years prior but many are questioning whether the size moves we're seeing are justified. Eyebrows are always going to be raised when a company becomes the first to reach a $2 trillion valuation in the midst of a pandemic and two years after becoming the first to reach $1 trillion.

ECB minutes get muted reaction from markets

Not a huge amount to take away from the ECB minutes, with the central bank acknowledging the dependence of markets on the continuation of policy support, while noting that the markets aren't fully backed by the data. They also stressed that the PEPP program, while currently envisaged to be used in full, was a ceiling rather than a target and that it must remain flexible. None of this is a game changer, obviously, and the tight range in EURUSD in the ten minutes after the release perfectly highlights this.  

Oil coming off despite OPEC+ optimism

Oil prices are coming off a little as sentiment takes a dip, the Fed highlights outlook risks and the dollar bounces back. Crude prices still remain around the upper end of their ranges though as OPEC+ met on Wednesday to review compliance with the previously agreed levels. 

The group opted not to raise output further, after reducing cuts by two million barrels per day from August to 7.7 million. The only difference is a slight deepening of the cuts in the coming months to compensate for Iraq, Nigeria, Angola and Kazakhstan missing their targets. The move was in line with expectations, although one positive was the view that demand will hit 97% of pre-pandemic levels by the end of the year. A staggering bounceback under the circumstances.

Another painful stumble for gold

Gold has given up overnight gains as the rebound from Wednesday's slide was short-lived. The culprit for the latest gold dive was the Fed, who's reluctance to get on board with yield curve control jolted yields higher, in turn dragging the dollar off its lows. As I said earlier, I don't see this as a big shift from the Fed so the moves may not last but it is another reminder of the vulnerability of precious metals despite being on such a stong run, more generally. Gold and silver both fell around 3.5% and looks susceptible to further corrections.

Related: US Eyeing Record Territory Again