Markets continued with their skittish tail-chasing price action overnight, with the Nasdaq leading the charge higher, starkly reversing course after a few tough days at the office.
The US Dollar duly fell in militaristic-like lockstep, and even gold found some friends as it rallied strongly.
The sharp reversal of the previous sessions can be laid at the door of good old-fashioned bonding, namely, the US 3-year note auction, which achieved a healthy bid-to-offer ratio.
“That assuaged inflationist fears for a day, allowing markets to pile back into their 2020 comfort zones,” commented Jeffrey Halley, senior market analyst at OANDA, this morning.
“Of course, the 3-year note auction was just the opening stanza for the week. The action on yields curves has been at the far end of the curve, not the belly.”
“We still have the heavyweight 10-year note and 30-year bond auctions to come tonight and tomorrow. Talk of markets becoming ‘more comfortable’ with inflation after the overnight bill auction are premature,” Halley remarked.
The increasingly schizophrenic and tail-chasing nature of the price action across numerous asset classes suggests that a sizeable directional move is coming. Having spent the past year buying everything except the US Dollar, the balance of probabilities suggests down and the US Dollar short squeeze continuing.
Even meme stocks were back in fashion overnight, with GameStop jumping 40 per cent and Tesla, an S&P 500 component, rallying 20 per cent.
“When an S&P 500 component stock moves around intraday like GameStop or Bitcoin, you know trouble is coming,” Halley said.
In the past few weeks, the bond market has often set the tone for equities as whenever yields spike, it tends to get equity traders worried about the possibility of higher inflation.
Also playing into the mix is the optimism connected to the recovery story, commented David Madden, market analyst at CMC Markets UK, this morning.
“Governments are rolling out their respective vaccinations so they are slowly but surely edging towards reopening their economies. Hopes the US $1.9 trillion spending scheme, which includes $1,400 stimulus payments, will be introduced in the near-term helped sentiment too,” he said, adding that policymakers want to get it signed off by President Biden before 14 March so aid programmes can be renewed.
The mood on Wall Street was upbeat but the tech-focused NASDAQ 100 powered ahead as it rallied 4 per cent. The S&P 500 gained a more modest 1.4 per cent.
In the past three weeks, tech stocks have underperformed. The prospect of economies easing restrictions and in turn, going back to some form of normality has encouraged dealers to rotate out of tech companies and into traditional industries, such as natural resources, banking, travel and hospitality.
Central Bank of Canada today
The Bank of Canada (BoC) is expected to keep rates on hold at 0.25 per cent today, Madden said.
“Canada is rebounding from the pandemic but the recovery is showing some signs of weakness,” he explained.
The labour reports for December and January showed that -62,800 and -212,800 jobs were lost, respectively. In January, the jobless rate rose to 9.4 per cent, a five month high.
“In light of the weaker labour market, rates are likely to remain at record lows for even longer,” he added. The interest rate decision will be announced at 3pm (UK time).