Higher yields globally see stocks dip, US Dollar weakness resumes

Intermediate

Macroeconomic/ geopolitical developments

  • Another relatively quiet week for financial markets, with the main central bank activity from the Reserve Bank of Australia (RBA) and the Federal Open Market Committee (FOMC) releasing their prior Meeting Minutes, with minimal impact on markets.
  • Macroeconomic data releases were on the lighter side with the global Markit Flash Manufacturing and Services PMI releases on Friday also failing to ignite financial markets.
  • Earnings season is coming to an end with Walmart the standout in the past week, missing expectations.
  • President Biden’s COVID relief bill saw some progress late last week with the full text of the bill released and Treasury Secretary Yellen calling for lawmakers to pass an aggressive package.
Yellen
  • The anticipation of a more aggressive COVID relief bill has resumed the belief in the reflation trade, plus possibly allowing for the Fed to step away from their ultra-dovish position.
  • These developments had the most impact on an already bearish bond markets, with US and global yields surging to multi-month highs.
10yr yield
  • However, equity markets have signalled concerns over the possibility of higher yields and maybe a sooner than expected tapering and move to higher interest rates.
  • The European vaccination program has improved somewhat but it is still lagging the US and notably the impressive UK vaccination roll out.
  • The number of cases, hospitalisations and deaths in Europe, the UK and the US have continued to see a positive reaction from lockdowns and vaccinations.
  • The UK Prime Minister Boris Johnson will outline a path out of the current lockdown on Monday.
  • The extremely cold weather and snow in Texas has seen a state of emergency declared, with oil and gas production significantly impacted, sending energy prices even higher.

Global financial market developments

  • The main financial markets development was the sell off in global bond markets with US, European and UK bond markets moving to multi-month highs.
  • The major global equity indices were erratic, higher initially in the week, then setting back before rebounding.
  • The US Dollar gained in the first half of last week but saw notable losses later in the week.
  • The “risk currencies” have performed very well this week, as global commodity prices have soared (notably base metals and oil), with AUDUSD the standout moving to a multi-year high.
  • The Pound remains strong, with GBPUSD breaking above a key psychological level at 1.4000, whilst EURGBP continuing to trend lower.
gbpusd chart
  • Oil surged higher to new multi-month highs and then dipped, driven higher by both the reflation trade and has the state of emergency in Texas, with oil production impacted.
  • Copper (and base metals) has surged to multi-year highs with the anticipation of a strong global recovery in 2021.
  • Gold has stayed weak, despite a weakening in the US Dollar.

Key this week

  • Geopolitics:
    • Traders will look for progress of the Democrat’s COVID relief bill.
  • Monitoring possible updates for the removal of lockdown measures in Europe and the UK, with Prime Minister Boris Johnson due to describe a path out of the lockdown on Monday at 19:00 GMT.
  • The monitoring of the falling COVID-19 cases, hospitalisations and deaths stay in Europe, the UK and the US.
    • Any further vaccine developments will be watched.
  • Central Bank Watch: Reserve Bank of New Zealand (RBNZ) interest rate decision, statement and press conference on Wednesday.
  • Macroeconomic data: A fairly quiet week on the macroeconomic data front with the standouts being the German IFO Business Climate Survey and GDP on Monday and Wednesday respectively, with UK employment data Tuesday and US GDP and Durable Goods releases on Thursday.
DateKey Macroeconomic Events
22/02/21German IFO Business Climate
23/02/21New Zealand Retail Sales; UK employment data; EU CPI
24/02/21Reserve Bank of New Zealand (RBNZ) interest rate decision, statement and press conference; German GDP
25/02/21EU Consumer Confidence; US GDP, Durable Goods, weekly Jobless Claims
26/02/21US Personal Consumption Expenditure

Editor in chief

Steve Miley is the Market Chartist and has 29 years of financial market experience and as a seasoned expert now has many responsibilities. He is the founder, Director and Primary Analyst at The Mar... Continued

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