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Written by: Edward Moya | OANDA
In what seems like the simplest argument to buy stocks, a sooner return to post-COVID world, the reflation trade has been running wild. The best streak of gains in 17 years suggests the relentless stock market rally is overlooking worrisome virus mutations and taking the Fed’s promise that they are not even thinking about tapping the stimulus breaks.
After making fresh record highs, the S&P 500 index pared gains but have stabilized after Fed’s Esther George noted the rise in yields is not concerning but that they will keep watching. Wall Street shrugged off a better-than-expected Empire Manufacturing Survey. The NY survey showed prices paid climbed to the highest level since 2011 and six-month general business conditions improved sharply.
I can't imagine the Fed will stay quiet if the 10-year Treasury yield passes 1.30% relatively easily this week.
COVID
It looks the world is going through a dramatic shift to include a quicker return to normal as COVID cases improve. COVID cases continue to decline and vaccine optimism just continues to grow. The Biden administration is vaccinating 1.6 million Americans per day, well ahead of their initial targets. Virus mutations have not derailed any optimism for the US and if that continues, reopening of the economy will continue. Supply chains will have to deal with disruptions, whether its microchip shortages or rare earth metals.
Oil
The crude price rally continues after an extreme weather event, the Russians struggle to ramp up production and as geopolitical risks in the Middle East percolate.
It is unclear if this is just the beginning of a series of winter storms and if the impact of halting wells will have lasting damage. This winter storm caught everyone by surprise as over 4 million are left without power and as the Permian shut-in roughly 2-million barrels of production. Conditions could ease over the next couple of days, so oil prices naturally have settled off their highs.
Providing some added support to the move higher in oil prices was Russia’s lackluster production, the first time they didn’t hit their quota which was allowing them to increase output. The cold is also impacting the Russians and it seems oversupply concerns are a nonfactor for OPEC +.
The Middle East region will likely deliver countless geopolitical risks that should prevent anyone from getting too aggressive in their calls for a major pullback with oil prices. Tensions between Saudi-led coalition and Yemen rebels and as Iran prepares to restrict some nuclear inspections will keep the situation tense for the rest of the year.
It is a perfect storm for oil prices on both the supply and demand side, so any softness should be temporary.
Gold
A runaway rally in global bond yields has delivered a fatal blow to gold. It doesn’t matter if you look at Bunds, Gilts, BTPs, and Treasuries, the story doesn’t change. Global bond yields are rising on reflation bets and that is triggering an unwind of many safe-haven trades. Gold is traditionally an inflation hedge, but post-COVID that will only happen once central banks show they are unhappy with the sudden surge in bond yields.
Gold did its best to avoid a potential death cross, a technical selling pattern that could trigger some momentum selling if the daily chart shows the 50-day moving average crosses below the 200-day moving average, but further pain could be imminent. The dollar rebound might not be over if global bond yields continue to rally and that could be the bearish catalyst that sends gold down to the $1,750 level.
While the forecasts look dreary for gold, the long-term fundamentals should provide underlying support. Gold can stomach a steady climb higher in yields and that will likely be the cases as policymakers will soon have to fight the advance in yields.
Bitcoin
Every day it seems there are fresh catalysts for Bitcoin. Today, MicroStrategy announced a proposed offering of $600 million of convertible senior notes, just so they can buy more Bitcoin. The cryptoverse was also still processing the news from the end of last week that US cardholders of BitPay Prepaid Mastercard can add their card to Apple Wallet and spend with Apple Pay. The public has spoken that they want cryptocurrencies and Corporate America is scrambling to meet their demands.
Bitcoin mania was primarily pumped up by Tesla’s $1.5 billion crypto bet, BNY Mellon’s decision to offer Bitcoin services, and as Morgan Stanley's $150 billion investment arm is considering cryptocurrencies. There is a magnitude of reasons to support calls that Bitcoin has reached mainstream acceptance and that is why so many traders remain resoundingly bullish. Bitcoin tentatively breached $50,000 and will likely consolidate if this surge in global bond yields continues.