There are Two Markets

Markets are cheering the biggest daily decline in US bond yields in over a week ahead of the 3-yr auction. One way to understand the current set of market moves is by envisioning two different markets. There's the momentum-driven market and the bond-driven market. Knowing which of those markets is dominant at any given moment, is the key to understanding what's moving and why.

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The momentum-driven market is largely tech and SPACs. It's the set of high-flying stocks that soared during the pandemic. They're hard-to-value stocks with extremely high multiples.

The bond-driven market is much larger. It's the universe of inflation-sensitive and rate-sensitive assets.

There are two kinds of risk trades right now. The one driven by slumps in momentum is largely contained and doesn't spill outside of its realm until it gets very ugly. When it's higher yields driving the trade it's all-encompassing and leads to meaningful moves in FX and global markets.

At times these trades intersect. It may have even been the rise in bond yields that burst the tech bubble but they're best thought of as separate trades.

The point being: If you're only going to watch one market, make sure it's the 10-year yield -- not the Nasdaq. If rates stabilize it will spark a resumption in growth-positive trades like commodity currencies, emerging markets and global equities.

The $1.9 trillion US stimulus plan overcame a major hurdle on the weekend, passing through the Senate. It came just after a strong jobs report showed signs of a better-than-anticipated recovery. CFTC positioning data highlighted waning enthusiasm from euro longs.

Friday's non-farm payrolls report showed 379K net jobs, easily surpassing the +198K consensus. Revisions also pushed the January reading to +166K from +49K and within the report there were positive signs.  Risk to that may be on the upside as Congress nears the passage of the stimulus bill. The assumption among many was that the Senate would trim the pricetag of the bill to around $1.7B from $1.9B but that wasn't the case. It's a safe assumption that it will now pass in something very similar to this form within the next few days.

The surprise from the bill was how united Senate Democrats remained. They can't afford to lose a single vote but they didn't and that increases the likelihood of more spending in the year ahead, including a $3 trillion infrastructure plan that Biden has floated.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +126K vs +138K prior

GBP +36K vs +31K prior

JPY +19K vs +29K prior

CHF +12K vs +12K prior

CAD +15K vs +9K prior

AUD +6K vs -2K prior

NZD +16K vs +15K prior

Persistently high net euro longs have been the dominant feature of this data set for the past six months but as rate differentials widen and the ECB prepares to do more, it's an increasingly difficult trade to love. Eventually the eurozone will be vaccinated but the US will be first and the high US fiscal spending ensures a faster recovery.