Intraday Market Thoughts Archives

Indices hit new highs along with further strength in bond yields and a recovering US dollar. The resulting pullback in metals from higher yields is also helping USD stabilize. A strong ISM services index on Wednesday and the non-stop buying in equities highlighted the strong economic outlook but there's a catch. The US dollar is again the top performer while the yen lagged. Non-farm payrolls are due up next. A set of new trades will be issued to the Premium Insights after the US jobs report.  Below is the 10 yr yield analog between today and late 2012-early 2013, which not only suggests 1.50% yields ahead, but also potential challenges for gold if inflation fails to keep up with yields. If If real yields join the party, then happier days are ahead for the US dollar. 

At the moment, it's almost a perfect storm in risk assets. All bad news is discounted because of the vaccine and good news is cheered as another sign that the economy will be stronger. Another example was on Wednesday with the ISM services index at 57.2 compared to 54.5 expected.

That survey was taken before the latest $900B stimulus and whatever else Democrats have planned on the spending file.

US equities jumped to a new record after the number and the US dollar benefited from investment flows.

The catch is bonds. Treasury yields continued to creep up with 10s rising another 4.6 bps to 2.11%. As yields rise, they may be triggering foreign hedges or other flows that put a bid in the dollar. We will be interesting to see how the FX market performs once rates flatten out for a few days.

In the big picture, the market isn't going to fret about rates anywhere near these levels but they will eventually work against equities and provide a significant tailwind for the dollar. Whether that's at 1.4%, 1.6% , 2% or beyond remains to be seen.

How much steeping is even possible is another question. The Fed's Evans offered the first hint at the tapering timeline Wednesday saying it could be in late 2021 or in 2022 if the economy is strong (something that's looking more likely). He paired that with a forecast that the Fed funds rate would stay at zero until mid-2024.

Looking ahead, the jobs report is up next and expectations are modest at +50K. It's tough to envision this edition being a big market mover because if it's soft, it will be brushed off because of looming stimulus. If it's strong, it could push current ranges even further, particularly in USD/JPY.

The Democrats turned out in numbers on Tuesday and picked up two Senate seats in Georgia to flip the chamber and pave the way for a much-stronger Democratic agenda for the next two years. The somewhat surprising outcome propelled Treasury yields above crucial technical levels and gave a boost to the dollar but markets were riled when protestors stormed the US Capitol. The messages below are from Ashraf's Wednesday insights to the WhatsApp Broadcast Group reitearing the short in gold and silver based on the recurring equidistant triple top in gold as outlined below.  The Premium EURUSD long from 12060 fell short of its final 12350 target. 

Democrats pulling into a 50-50 tie in the Senate effectively gives them control because the Vice President is the tie-breaking vote. In comments Wednesday, Democratic Senate leader Schumer confirmed that one of the first priorities will be $2000 stimulus cheques. That highlights that deficits will not be a priority for the US government any time soon.

That was reflected in 10-year yields, which rose 8 bps to 1.035% in a break of the 1% threshold for the first time since the start of the pandemic. That break led to some initial support for the dollar but it later faded.

Here is the tweet from Dec 15, highlighting the analog in bond yields between 2012 and 2020. 

Equities initially sold off before heading much higher. High spending from the Democrats ensures a faster recovery and stronger economic growth in the next two years. Fears of a corporate tax hike are overblown with far too many red Democrats in both chambers likely to oppose it.

That almost sets up a dream scenario for equities with high spending and little restraint. Some pockets like tech face more scrutiny but global equities will cheer the news. More broadly, this is likely to further usher in an era of high government spending globally, something that should underpin precious metals and crypto.

Mixed into the market reaction was serious concern after protestors stormed the US Capitol, sparking unbelievable scenes at the seat of the country's government. Shots were fired and the scene remains volatile in what might be a preview of what's to come; or come be the last gasp of Trumpism.

Markets shifted into a more-cautious stance after the scenes but we expect the scene to calm in short order and positive trends restored. If anything, governments facing instability are even more-likely to spending heavily.

The eyes of the financial world will be on Georgia tonight as voters determine who controls the US Senate. According to PredictIt betting markets, there's a 60% chance of Republicans keeping the Senate (More on what it means below).  Polls close at 0000 GMT. Will the Senate race involve a delayed outcome? Was Tuesday's rally an opportunity for markets to lift the markets for one last hurray before gridlock provides an excuse for deep profit-taking?

The combination of the Georgia race and the UK lockdown on Monday upended markets. The covid variants present a formidable threat to the reopening narrative in the months ahead and potentially for much longer in emerging markets where vaccine rollouts will extend deep into 2022. Sterling made a broad recovery from Monday's selloff, which was triggered by the UK's announcing a new shutdown of schools. 

Early voting data looks promising for Democrats and much of that shift occurred over the holidays, leaving little opportunity for market participants to place hedges so that may have been what kicked off the big reversal.

Looking beyond the results, the consensus view is that a Republican hold on the Senate is good for markets but that's highly debatable. Biden promised $2000 stimulus checks at a final rally Tuesday and a Democratic sweep would open the way to a highly stimulative agenda. The most straight-forward trade in that scenario may be precious metals along with broader commodities. Look for CAD and MXN to be the top FX beneficiaries on commodities and the spillovers from US spending.

How the vote plays out is an important consideration as well. It took nearly a week before the result of the Georgia general election was clear and the timeline in this vote will also extend well-beyond the close of polls. As in the November vote, the early tally will favor Republicans but mail-in voting will favor Democrats.

What's different this time is that market participants can use data from the general election to model and compare this vote. If Democrats look to be outperforming the November vote by 3-4 percentage points, it would indicate a sweep.