Stocks Tumble As Markets Become Fixated On Risk Of Inflation & Economic Overheating

Okay, very good morning to you. It is Friday, 26th of February, so hope you are doing well. And in terms of this briefing, I would say it's more of talking about the theme at the moment, which is that of some substantial selling pressure we've seen in global equities on the back of rising yields. So going to delve into that more so than individual isolated news stories. And the reason for that is because nothing else really matters at the moment. That is the definitive force fundamentally that's driving the overall top-level kind of macro moves, definitely for this week. And, uh, really looking forward to chatting with the head of trading, Piers Curran. He and I will have a conversation in about an hour's time as well, which will record for the weekly Market Watch podcast. So do check that out on Apple or Spotify, whatever platform that you, you look at. Be really great to get his insight and take on this, but I'll let you know what I think in this briefing. But first off, let's just start with what is going on at the moment, and very much so a continuation overnight in the Asia-Pacific session of what we saw at the close of Wall Street last night, which was the NASDAQ 100 fell actually 3.6%. It's the biggest fall we've had since October, and the benchmark Treasury yield in the US, the 10-year spiking to a 1-year high. The 5-year, which is often considered as more sensitive to monetary policy shifts, actually saw its big— but second largest, uh, one-day rise seen over the last decade. And with higher yields, the dollar also moving quite aggressively higher in the context of what had been some recent weakening in the Dixie, of course. And actually, the Bloomberg Dollar Index, uh, moving up by around 0.7% was the biggest move we've seen there since around September. So to encapsulate that then, a couple of charts to have a look at. The NASDAQ, uh, definitely has been the underperformer against that of the S&P 500, albeit both have moved lower. But you can see here considerable underperformance here. We've talked about this all week, this idea that, um, the higher yield environment definitely has a greater impact on those generally that have been benefited the most during a low rate environment, and particularly then also those in, uh, that flourished more in the pandemic conditions. So big tech and associated pandemic plays are being unwound, and then more cyclical-based sectors have created this rotational effect where I guess it's not that some sectors are positive and negative, they're all negative, just some are selling off more aggressive than others. And this chart really encapsulating that going back looking at Monday, uh, to where we are at the moment, uh, quite clear from the off that the market has been rotating to a certain degree. Otherwise, just talking through, as I said, that US 10-year yield briefly flirting with 1.6. One thing to be aware of is there's probably a very sharp flash in your T-note chart from last night. So let me just put an ellipse around that to make that really clear. There was like almost like a miniature flash crash in price there, and that did come after yields spiked after a really terrible US 7-year note auction. The bid-to-cover ratio was the lowest on record, and indirect plunged from 64.1% to just 38.06%. That was the lowest since 2014. So basically telling you that there was really no foreign appetite to buy into that US debt at that auction. It was, it was a one of the most terrible ones I think I've ever seen in my career. So that's what created that short-term spike. It has reversed, but ultimately then this obviously this trade on the 10-year, uh, just the mirror image of course then of the, the price of the bond. So, um, or the, the yield move I should say. So the price of the bond obviously has been dramatically under pressure through the course of really since the 12th of February, we broke through with more conviction than some of these key levels which actually came out to the beginning of the year. Um, the initiation of some of this yield move really coming after the Georgia shift, the blue wave thinking with the shift of the Senate to go to the Democratic Party. That had a momentary move, but that was kind of the catalyst then to break through some of these key multi-month levels. And since then, this whole combination of reflation— and again, what's really underpinning this trade right now across markets is the US economic outlook boosted by the pandemic improvement, vaccine distribution, and the prospects of Biden's forthcoming stimulus. And that's what's been creating this fixation of the risk of inflation and an overheating economy, and consequently the moves that we're seeing. In summary, a couple of other things that people were looking at that I thought was quite interesting, and this was that the brisk rise in yields caught many fund managers on the back foot reportedly yesterday, and trend-following hedge funds and traditional buyers of mortgage bonds rushed to hedge themselves this week. And that's why it's almost overpronounced the movement or exacerbated some of the price movement that we have seen. Funds that rebalance on a monthly basis, such as pensions, may have contributed to the equity sell-off. Um, US pension funds will need to sell about $16 billion of domestic stocks to return to prior asset allocation levels following the latest equity rally, of course, that we have had, according to estimates from Credit Suisse. So again, it's more functional readjustments And also the fact that it's moved so rapidly that's caused this knee-jerk move to cover almost that's propelled this kind of move, if you like, and made it seem more acute, particularly this week. Overnight, as I said, stocks over in Asia were lower. I think the Nikkei was down in excess of 3% at one point, but generally losses in excess of 2% across South Korea, Hong Kong, elsewhere in the region. The Dixie's firmer again this morning, it's up about 0.3%. So, um, on that note, let's just have a look. The one currency pair I do want to have a look at is Cable, because Cable's down 100, Euro's down 36. Now both of these of course are being pressured by the firming dollar, but the selling pressure is much more pronounced in Cable. And really for me that's just a byproduct of the extremity of the rally that we've had in Sterling. Briefly flirted in the futures, at least up at around 1.4250. So it's been like rocket fuel for the pound over the course of February. If you actually look, we were trading right down here on the 4th of February, which was around a 1.35 handle. We've gone up 7 handles since then over the course of the— this month. So a little bit of a pullback to where we are at the moment, um, I think it's just a combination of the dollar strength but also some profit taking, uh, on those positions. Relatively, we're still up considerably for sterling even with the pullback down to these levels. Just looking at here on a 60-minute chart, um, the areas I guess of interest now on the upside on any price recovery: 1.3953. As you can see, the high on the 16th, the support levels on the 18th and it bounced overnight before then eventually breaking under. That does for me, in my mind, keep cable under a bit of pressure here technically. I think that 139 handle is quite key. You can see it was that high on the 17th and the low on the eventual move up on the 18th. So you've got technical relevance, resistance, support. It's what the 139 psychological handle, and also if you were taking, um, the move here from some of the um, that a fib going from that entire February rally, then that, um, 0.6 fib retracement, um, or 50% fib retracement level, excuse me, comes in as well at that 39 level. So quite a solid level of support downside, but we still got another 30 pips to run until we get there, which I don't think would be too surprising to see at least a test, uh, down there. So something I'd be keeping an eye on. Just while I'm on the charts, I think from an equity perspective, the one of course to keep an eye on is the NASDAQ because the selling tends to be outweighed or magnified because of the tech exposure, of course, in that index. And looking on the daily chart here, we are at quite a key level here in the NASDAQ. You can see the area of around the 18th, 19th of— or 15th, 19th of January. Again, we bounced directly off that point to the tick on the 1st of February before we we then push back up to all-time highs, which believe it or not was only 10 days ago. Um, and then we're right at testing at that level right now. So I do think the NASDAQ for me does remain a little bit susceptible here to potentially further downside technically. And as I'm going to talk about, I think fundamentally as well, I think there's some scope for further pressure here in the equity market for the time being as far as today's session is concerned. If we do break lower, then again, another move down there's a really key area of support that would come in at around 12,461 on the downside. So, you know, from a percentage basis, I mean, we're— if we're going from the market open to down, that would be another 2.5%, 2.7% to get down to that point. And I think that's absolutely achievable, uh, just given the, the size of market move at the moment. Um, it does require some context. I mean, even a pullback down to these levels, we are still very high as far as, um, when you zoom out of this chart, you start looking at— look, this was the pre-pandemic levels, this was the pandemic low. And if we pull back to here, it doesn't really, on a much higher time frame, send shivers down your spine. But intraday traders obviously are having bit of a moment right now, just given the severity of some of these moves. Haven't been seen to this degree for a number of months. So yeah, that's definitely key to have a look at. What do I think just generally about what's going on right now? What are my thoughts? Well, a couple of things. I saw quite good commentary out of the guys on the, the Newsquawk desk, and I'll read that to you. They said that the next week and a half is going to be crucial for yields. And the basis for that is, is that we've got a lot of major economic data coming out, and that includes then personal income spending and PCE data, which is the Fed's preferred measure of inflation. That's coming out later today, so that's going to be particularly key. Next week sees the ISM reports, and then bookended around that week with non-farm payrolls, which of course is also closely followed at the moment given the employment situation in the US. We're also going to be getting stimulus updates. So it's kind of the where are we at with the Biden stimulus package, uh, and any package above $1.5 trillion might require then further US government issuance, and issuance then tends to increase supply, which inadvertently then puts further pressure on prices, which drives yields even higher. So that in itself could be, um, interesting as well, component to bolt into some of this recent movement. As yet, as we know, we've had the Fed semiannual testimony from Powell. We've had a number of Fed speakers, and Fed officials have been reticent to aggressively push back on the yield moves. And that, I think, is a really good point. The fact that they've come out and said nothing, that does lead to then the belief that there's some potential for further upside here in the yield move because the Fed are reluctant to counteract it. Now, why would the Fed not want to come out and just say, look guys, this is a direct comment saying, you know, we're watching this, if it continues to do this, we're going to take this action. You know, you might think that might be prudent in order for them to restore a bit of calm and stability. My experience, and Fed officials will be thinking, is that they do not want to react to every beck and call of the market. On every twist and turn. Remember, their job is to install, um, kind of stability over a medium-term horizon. If they were to react to one intraday move where the NASDAQ or WIK drops 4-5%, well then every time the NASDAQ moves 3 or 4%, they're going to have to come out and say something, and that would be a disaster for Fed communication. Because then they're just a slave to the market and their forward guidance and the credibility behind that would be absolutely decimated. So I think the Fed are right. I don't think the Fed need to say anything right now. I think they've got to let the market find its own feet. But me saying that, I think then that this market might have a little further to run. Um, so definitely some of these equity markets, as we just saw on the NASDAQ, are quite key levels. I do think that that's kind of the trigger point here to further follow that trend move. The NASDAQ underperformance, given the sector rotation we've had this week. But again, I'd be looking at the, the similar type of moves that we've had. So key downside technical levels and the major dollar-based pairs will be key to watch. In gold, that gold as well is also at a very interesting level on the daily chart here. Gold has broken through 1762. And as you can see here, that was the low that we hit on the 30th of November. So for me now, at these price levels, I think actually gold could trade pretty heavy here under these conditions we've been discussing, because there's not a great deal of support on the downside. And you know the way that gold moves, you know, it can, it can really shift quickly. So even being as bold to say that a move down to $1,700 and this area here of previous resistance support and that price consolidation we had kind of after the initial phase of the shock of the onset of the global pandemic, I don't think is off the cards here. So I think gold's got quite a bit of distance to the downside before it really finds a bit of a footing, uh, and, and it could be even today that that trade's particularly heavy. So I'd be interested to watch So again, I think there's, there's two things to think about here. One is the idea that, you know, if you look at the yields on a short-term basis over the 12-month period, this looks quite frightening. You know, we're up at levels that would exceed them, um, or put us back to the pre-pandemic state in terms of yields. However, when I look at this one I think perspective is quite key. And if you actually look where we are, yields are on a historical basis very low still, even with this move. And, you know, if we're looking at the world in that way, I think you've got to think about the intraday short-term move. I think it's quite negative over the more medium, longer term. Do I think that this is room for, for kind of an all-out panic at this point? I definitely do not see that right now. Layered in the fact that there's various different adjustments about fund managers being caught a little bit on the back foot this week. There's a degree of rebalancing going on as well that, that's kind of exacerbating some of this. I think there's a lot of that has driven this move. And yeah, I think downside for now, sure. Room for the Fed to panic? No, I don't think so, would be my overall take on things. Otherwise, that's pretty much it. As I said, that is the main story and narrative driving markets that you've really got to focus on. There's the odd other things to, to be aware of in terms of the economic data for the UK European morning. It's very quiet, so we go into the US session. As I said, some interesting data points of course because we've got the core CE price index, Chicago PMI, the Michigan one probably the least important given it's the final reading for February. We also have, from a speaker's point of view, ECB's Schnabel speaking at 8:30 London time, Bank of England's Ramsden at 12:30. And also you've got the G20 finance ministers and central bankers holding a virtual meeting later on today, of which Janet Yellen will be appearing as well. So she could be one to watch just given the context of this week's market moves. Final thing you've probably read about, I don't think it's particularly meaningful for markets today, but definitely in regard to US-Saudi relations going forward, particularly as Biden tries to find his feet on how to deal with that geographic region and that relationship. Um, there's an imminent release of a US intelligence report on the killing of Saudi Arabian journalist Khashoggi. That happened obviously a few years ago now. And that is going to lay the blame at MBS's door, which obviously is going to cause a degree of potential friction between those two nations. Biden has already spoken to King Salman, it's believed, yesterday to prepare him for this forthcoming report. So it will be interesting over the coming weeks and months how that actually plays out. Is the report's findings surprising? No. I don't think it is. And is this going to be a meaningful thing to trade oil today? No, I don't think it is either. This is more of a, a kind of a longer play than, than that. Oil for the moment still remains relatively high. Let's not forget, underpinning a lot of this market move at the moment is this notion of just generally economic outlook being boosted by those positive factors. So for oil at the moment alongside a lot of other reasons in regard to still getting back to, to work on the supply side. Still, um, and there's also the OPEC commitments, the weaker dollar that had been in play. But, you know, the strength of the dollar at the moment, yeah, that's perhaps just taken a bit of the shine off the recent price in oil. We got up to around $64 in the futures, we've backed off. But again, any pullback in oil I mean, in the context of the week, it's been a good week for oil. So again, I don't think it's really a greater cause for concern in that respect. But oil's kind of lesser down on my radar today. I'm more keen to watch particularly equities, NASDAQ focus, gold prices on the downside, any further continuation pullback on some of the gains that we've seen, particularly in sterling, but also wait in the dollar-based pairs. And perhaps then the trigger point to watch really is the yield movement in regards to the curve, the 5, the 10-year. All right, that is it. So, uh, have a good session ahead, take care over the weekend, and remember to check out the podcast coming out in a few hours' time. All right guys, take care.