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Written by: Edward Moya | OANDA
The higher Treasury yields move up, the quicker investors are rotating out of high-flying tech stocks and into stocks in the Russell 2000 Index and Dow Jones Industrial Average. The move up in rates will not yet test the Fed’s patience and that should allow for Fed Chair Powell to maintain his dovish stance over his last couple of appearances.
Powell will likely reiterate they are nowhere near their employment and inflation targets. The path of rates won’t change this year, with the earliest that some economists see a potential move up in rates being next January. Since financial conditions are tightening and with wage pressures remaining nonexistent, that should keep inflation fears from getting out of control. The economic data has been improving but remains inconsistent and that is all Powell needs to keep his ultra-accommodative stance.
Investors remain committed to US stocks due to the faster pace of vaccinations, which will support a quicker reopening and outperformance over in Europe. European indexes pared losses after ECB President Lagarde noted the ECB is closely monitoring long-term nominal bond yields. Europe’s delay of a few months over vaccinations suggest the recovery can’t handle a surge in yields just yet.
FX
The dollar declined across the board as Democrats moved closer to delivering on President Biden’s $1.9 trillion COVID relief bill. The dollar initially was strong in Europe but has since declined dramatically ahead of Tuesday’s testimony from Fed Chair Powell which should be a dovish confirmation that their current policy is widely appropriate.
Oil
Crude prices continue to ride the reflation trade and herd immunity hopes. The return to normalcy for large parts of Asia and the US are providing a strong case for an even stronger pickup in crude demand in the second quarter. The reflation trade is driving dollar weakness and that is providing some additional support to an oil market that is seeing steadily bullish demand and supply side fundamentals.
Oil prices can’t stop going higher if the global outlook is for a faster pace of vaccinations. The energy has priced in for the US economy to reopen at some point at the end of second quarter, but now that Europe is finally getting their vaccine rollout strategy in order, the pickup demand could outpace the supply that comes back online.
WTI crude is back above the $62 level and that could be just the beginning of a major bullish breakout if over the next couple weeks if COVID variants (B117) don’t disrupt the downward trend of new cases. If hopes grow that the US could have COVID under control by the end of April, the gradual reopening of the economy will require a lot more crude than anyone is pricing in.
Gold
Gold is back as dollar bears wake up from hibernation. Today is an important day for gold as it is rising alongside US Treasury yields, and ahead of Fed Chair Powell’s testimony to lawmakers. Today’s rally in gold is rather impressive and partially attributed to the tumble in Bitcoin. Hedge funds and active traders quickly ran to the exits for digital gold and could not ignore the appeal of jumping back into bullion.
Gold bulls are not in the clear and will have difficult waters to navigate if the dollar over the short-term rallies over US growth exceptionalism. Gold is still in the early stages of a death cross selling pattern, but that could go away quickly the sooner prices recapture the $1850 level.
Bitcoin
Covering Bitcoin is extremely exhausting given the wild swings that can happen on any day of the week. Bitcoin trades 24/7 and this weekend’s tweet from Elon Musk was the trigger in what eventually became a significant plunge. Musk’s tweet noted that Bitcoin and Ethereum seem high but does not show a major reversal of his belief over the long-term for cryptocurrencies. Given the recent surge, his comments should mostly be attributed as an obvious observation that not many would argue.
Adding to selling pressure was further downbeat comments from Treasury Secretary Yellen. Yellen is not an ally for the cryptocurrency world, so her comments that Bitcoin is an “extremely inefficient” way to conduct monetary transactions should not surprise anyone. Yellen supports the research of a digital dollar which means Bitcoin’s reign as king is not going away anytime soon.
The ECB also released an opinion on the EU proposal for crypto-asset regulation. It doesn’t matter if you are in the US, Europe, or China, Bitcoin’s regulatory hurdles don’t seem like they are anywhere close to becoming the needle that bursts this bubble.
After freefalling towards $48,000, Bitcoin has bounced backed comfortably back above the $53,000 level. Bitcoin’s backers appear unfazed with this morning’s plunge and that underlines the relentless loyalty from both the institutional and retail space.