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Why stock markets can fall further, but not for long


The US dollar extends bullish correction entirely on the back of increased volatility in the stock markets. The risk-off on Friday were fueled by an apparent liquidity shortage in China money markets, where the overnight repo rate rose to a 5-year high, presumably also signaling increased credit risk.

The halt of trading in shares that were rampantly bought up by retail investors in recent days calmed markets on Thursday, but today it became known that brokers resumed access to buying, so the hot theme of market cornering and short squeeze of hedge funds has every chance of jolting stock markets again. To justify this, take a look at the following chart:


 mirror-images.jpg

 


It shows the value of two portfolios - stocks which have the highest number of short interest (aka “most shorted stocks”) and stocks - favorites of hedge funds. The indices are completely different in terms of composition of portfolios - the first consists of “losers” according to some market consensus (since they were heavily shorted), while the second – good firms with strong potential. It can be seen that in the last few days, especially on January 26-28, the indices mirror each other - when the value of “most shorted” index rises, the VIP index falls. That is, when retail investors rushed to buy shares of hopeless firms, for some reason market favorites fell. How can it be possible? One of the most logical explanations is that hedge funds were forced to sell their favorites from the index below in order to cover their short positions in stocks from the index above.

From the reasoning above, it follows that if hedge funds failed to reposition and close shorts yesterday when trading were halted, resumption of the opportunity to buy losers could allow the army of retail investors to again push the pros to the wall and this could lead to deeper fall in ‘favorite’ stocks, which, as we have already seen, easily feeds into the broader market, which is quite fragile due to weak news background and proximity to historical highs.

However, it is worth remembering that the macro picture has not changed much. Investors continue expect economic rebound in the first half of 2021. The risk described in the article is unique, so long-term correction, in my opinion, can be safely ruled-out. I consider the 3650 level in the S&P 500 (Christmas lows) as a potential entry point upwards. Unless, of course, the market turns around earlier.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Market short-squeeze is likely to continue keeping broad market under pressure


Asian and European stock indices rose on Monday, while silver surged nearly 10% (5-month high) as investors on social media and chatrooms have apparently set their choice on the precious metal for another pump. The rest of the precious metals complex posted much more modest gains.

The global stock index MSCI All-Country World lost 3.6% last week, but recovered 0.5% on Monday. However, it is still too early to take the rebound as a signal of reversal: inspired by recent success in GME and AMC, retail investors will likely continue raids on outsider shares, devastating short sellers. Goldman Sachs said that ongoing short squeeze was the biggest in 25 years with most shorted stocks almost doubled in just 3 months. Top-50 stocks in Russel 2000 (index small-cap firms) by volume of short positions in open interest rose by almost 60%:

Picture-1.png

These market trends suggest that the companies combing high volume of short positions in open interest with small market cap, increasingly become the targets for a pump driven by amateur investors, forcing market participants which weren’t lucky enough to be on the short side to seriously worry. According to the latest data, hedge fund Melvin Capital, the most famous victim of recent short squeeze, lost about $ 7 billion last week. In January, the fund's assets fell by more than half. Another financial institution, Maplelane Capital, was reported by the WSJ to suffer a 45% loss in January (it managed $ 3.5 billion).

According to GS, attacks on the short sellers prompted hedge funds to carry out massive deleveraging last week, pushing equities lower across the globe. However, given that the short-squeeze strategy hasn’t experienced massive failure so far, it’s likely to continue maintain the risk of further downside in the markets. 

It should be well understood that the losses of hedge funds and associated liquidation of positions in stocks market favorites (which pulls broad indices down), is only one mechanism of development of correction. The second channel of impact is the wave of withdrawal of shabby deposits from funds, which is apparently gaining momentum. To meet withdrawal requests, hedge funds will be forced to sell assets increasing pressure on the broad market. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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S&P 500 poised to break 3900 on NFP release as the US recovery gains steam

The December Non-Farm Payrolls report made investors seriously worried about impact of the coronavirus restrictions imposed in the winter on the US economy. Then the number of jobs in the economy shrank by 140 thousand, in particular due to the fact that 372 thousand restaurant workers lost their jobs. That quickly changed, though, with economic data for January pointing to expansion on all fronts. What kind of data made it possible to revise so quickly the outlook for the US economy in the first quarter and what impact on stocks we should expect? 

First, these are indicators of activity and employment in the services sector, which accounts for about 70% of US GDP. The sector was hit hard in November and December due to tightening of social distancing measures and forced business closures. This week, the data such as the ISM Service Sector Activity Index, ADP January report, came out well above expectations. In particular, the ISM employment sub-index rose from a depressed 48.7 points to 55.2 points, indicating quite fast recovery in the pace of hiring. The ISM report on manufacturing sector released earlier this week also pointed to rebound in labor demand - the corresponding sub-index ticked higher, from 51.7 to 52.6 points. The 50-point mark in PMI indices separates zones of depression and recovery.

The ADP estimate of job growth nearly tripled expectations of 174,000 versus 49,000 forecast, although investors expected a rather downside surprise.

The latest readings in unemployment claims data, which experienced a brief surge in December, indicated that situation stabilizes with layoffs slowing quickly:

Unemployment-Claims-US.png

The growth of initial unemployment claims has been slowing for three weeks in a row while continuing claims also consistently beat expectations, dropping below 5 mn.

Following the data updates, Goldman updated its forecast for NFP jobs count, increasing its estimate from 125 to 200 thousand, which is higher than market consensus (50 thousand).

Second, in early January, stimulus checks from the government, which Congress approved in December, started to prop-up consumption. This led to high-frequency US consumption data indicating a spike in consumer spending in January:
 Screenshot-2021-02-05-at-15-44-43.png 

High-frequency indicators indicate that in January, US consumption not only recovered, but could exceed pre-crisis levels by 4.1%. It’s extremely welcomed data as rising spending translates into rising firm revenues and consequent higher demand for labor. 

The US dollar tends to appreciate either during downturns which are accompanied by tightening financial conditions => lack of liquidity (which drives demand for financing currencies, i.e. USD), or when there are expectations that US economy will outperform the Old World like EU or UK. The latest data on the US economy speaks in favor of the second scenario.  

As we discussed in the article about possible new all-time highs in SPX, rapidly improving outlook for the US economy is accompanied by capital inflows in risk assets nominated in the US Dollar, and emerging economies, primarily in stock markets. The SPX hit its all-time high yesterday closing at 3875 points. In my opinion, a positive deviation in today's NFP report will be a catalyst for SPX breakout of 3900 mark. Preliminary data allow us to count on this outcome in the data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Democrats inch closer to the huge stimulus bill. Should we expect inflation shock?

Both houses of the US Congress approved on Friday a budget plan that effectively deprived Republicans of any possibility of obstructing a new coronavirus relief package. Now, to approve the $1.9 trillion aid, a simple majority (51 votes), instead of the usual 60, will be enough for the Democrats.

Democrats and Republicans shared equally seats in the Senate, but Vice President Kamala Harris has the tie-breaking vote. As a representative of the Democratic Party, she will likely tip the scales in favor of Democrats in the voting on any tough Senate motion.

The news sparked a violent reaction in the markets fueling the rally towards new all-time highs. In line with the ideas we discussed last week, the S&P 500 is preparing to occupy a foothold at 3900.

As the markets celebrate another victory, various economists, even determined Keynesians, are sounding the alarm. The biggest risk is that another boom in government spending could push economy into overdrive, which, on the contrary, will be harmful, primarily by causing a jump in inflation. Already, the commodity price index, closely followed by the US consumer inflation, has jumped 25% over the year, which, given the correlation in historical data, corresponds to consumer inflation of about 4% in the United States:


Commodity-inflation-vs-US-CPI.jpg


Of course, in the immediate aftermath of the past recessions, consumer inflation has not kept pace with commodity prices, but the post-2020 recovery has been much faster than in past crises, and the US government intends to directly stimulate consumer spending, which will remove the main barrier to cost-push inflation.

Nevertheless, the head of the Treasury Janet Yellen made it clear that she sees more pain for the economy due to delay and less than necessary stimulus. In an interview over the weekend, she said the central bank has all the tools it needs to keep inflation under control. In her opinion, if the government approves the announced stimulus, the economy will recoup lost jobs by the end of 2022.

Expectations of stimulus measures fuel risk appetite in the markets. As the past stimulus rounds have shown, the consumer in the United States did not have time to worry and turn on austerity mode – government money transfers (“stimmy checks”) was followed by surges in consumer spending, which, as a result, led to an increase in companies' revenues. Consider the 44% growth in Amazon sales in 2020, despite the consensus that pandemic caused the worst shock in consumption since the Great Depression in the US. Tax risks have not materialized, as the hawkish Democrats have made it clear that they will return to this issue when the economy is on its feet.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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World equities at fresh all-time highs


US equities sustained elevated mood on Tuesday closing near their all-time highs, passing the baton to Wednesday trading. SPX futures tested new all-time high at 3925 today, but trended lower later during London hours. European indices inched higher as well, but with less confidence, as news on lockdowns in the EU hinders "spreading wings", with no easing of restrictions in sight.

The rally is propelled largely by two growth catalysts – developments on the story with US extra government spending ($1.9 tn. stimulus bill) and quickening vaccinations in the United States.

The MSCI Global Equity Index, which tracks stocks in 49 countries, rose 0.27% renewing all-time record. Investors are not afraid of a potential tipping point, ignoring pronounced risk of overbought, judging by extreme RSI deviation:


MSCI-WORLD-US-LANG.png


After the leg of rapid rally since the start of the February, it would be great to see some intermittent “reset” in the of form of bearish retracement, however, as I wrote earlier, if there is a correction, it should be a quick, short-term, transient shock - it does not seem that the rally since the beginning of February were based on some indecision, on the contrary, it really looks like a new episode of the bull market thanks to the upcoming US stimulus. In addition, the search for yield (growing overweight to risk assets in portfolios) appears to be strengthening consensus in the markets (due to extremely low interest rates), and deviating from this consensus means losing a profit opportunity. Basically, there is nowhere to escape from the market (better place to store wealth) currently. 

Among the short-term catalysts for the growth of risk assets, we can note the expectations of favorable hints from the head of the Federal Reserve System Powell, who will speak late tonight. Since the situation with the stimulus package of $1.9 trillion is gradually becoming clearer, signals about participation are expected from the Fed. The US government’s plans for huge new borrowings in the debt market (in order to finance stimulus) are unlikely to please the current holders of government bonds. 

The market will wait for signals that the Central Bank will help the government to safely borrow funds on the debt market and avoid unwarranted move in yields. To do this, it will be necessary to "help" investors to absorb government bonds from the Treasury market, which may ultimately lead to an additional increase in money supply and a weaker dollar. Another view on rising money stock in the US is reserves (a form of money) of the US depository institutions with the Fed which continue to rise despite no aggressive QE from the Central Bank:

Screenshot-2021-02-10-at-16-43-23.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Stimulus expectations, jump in US economic momentum put USD under pressure


A key theme of trading on Monday has been renewed rise in market risk-free interest rates in the US. The yield on 10-year Treasury bond after short consolidation near 1.30% mark last week has updated its local high Monday, rising to 1.38%. This led to increased anxiety in equities: US stock index futures tumbled, SPX by about half a percent, Nasdaq by more than 1%.

There are two key channels through which an excessive rally of Treasury yields exerts pressure on equity markets:

-    Bonds vs. stocks choice. Some investors start to rebalance their portfolios, dumping stocks and buying bonds as they became cheaper and start to offer meaningful returns. Stocks which have high duration (like growth stocks) are good candidates for replacement by bonds and tend now to sustain more losses;

-    Borrowing costs channel. The effect of the rise in risk-free rates feeds into other credit market rates, so it’s reasonable to expect that long-term borrowing costs for firms will rise as well. This has negative effect on shares value as rising interest rates reduce firms’ access to cheap financing.

Nominal interest rates in the US are rising due to expectations of new fiscal stimulus, which in turn will lead to an increase in the supply of Treasuries in the market. Spurred by government spending economic growth should lead to higher inflation, so investors are now also demanding higher compensation for this risk. Comparing yields on 10Yr Treasury Note and bonds with same maturity but protected from inflation (TIPS) we can clearly see the steep rise in inflation premia:


Screenshot-2021-02-22-at-16-54-27.png

This week, attention will be focused on Powell testimonial in the US Congress. Also, the Fed will release a semi-annual report on monetary policy. Investors will examine the report for clues on the essence of the Fed’s new concept of inflation targeting. It’s still not clear from the Fed communication what should be trajectory or rate of growth of inflation which can enable the Fed to lift interest rates. We are talking about a change in rates on a more distant horizon, but long-term investment assets should be sensitive to the new information, which will constitute a market reaction.

US dollar is expected to continue to drift lower thanks to benign environment for risk-on trading supported by strong US economic data. We saw huge jump in US retail sales in January but still White House administration determined to push new 1.9 tn. stimulus to the Congress. Rising self-sustained economic momentum supported by massive government spending spree in the US should trigger stronger hunt for the yield and inflation fears which is generally negative for US currency.  

The technical picture also favors USD slide as we get closer to March:


Screenshot-2021-02-22-at-17-18-17.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Where oil could move ahead of the OPEC+ meeting in March?

Oil prices continued to rise on Thursday with Brent breaking $67/bbl, returning to the level where it traded in January 2020. Powell's speech this week, in which he said about the need to maintain significant monetary easing, helped oil rally. Additional reports from the US indicated that oil market tightening gathers pace. As it often happened before, traders could easily miss the moment where the market will already start to suffer from undersupply. That is why oil prices are rising in unabated fashion. 

The US EIA released its weekly oil inventories report yesterday. One of the key indicators, commercial crude oil reserves, showed an increase of 1.29 million barrels. The rise in inventories is usually associated with a bearish price response. However, the market discounted the reading despite expecting a 5.19 million barrels decline. Why? It may seem that US oil producers quickly restored output, which led to an increase in stockpiles, but this is not the case: in fact, the level of refinery capacity utilization decreased over the week by 14.5% to 68.6%, complicating the clearance of inventories:

Screenshot-2021-02-25-at-13-32-24.png
 

This utilization rate is the lowest level since May 2020. Therefore, even a moderate recovery in production could have such an effect on inventories. That is why the release of the data could have a positive effect on the market despite the negative change in headline reading. 

Gasoline reserves rose indicating that petroleum demand continues to suffer as cold weather obviously hampers mobility. It’s also a moderately bullish development for WTI prices.

Speaking about the upcoming releases of EIA reports, we can expect that the upward trend in inventories will persist for some time, as production has shown that it can quickly recover, but the refinery's refining capacity is not. The growth of stockpiles is likely to have minimal impact on the market.

More important for the oil market is the upcoming meeting between OPEC and Russia to discuss the current deal on output curbs. Oil demand is recovering, but the OPEC + deal limits ability of producers to ramp up output, what results in confident growth of prices. Producers, especially the Russian Federation, have a great incentive to gradually lift curbs. Such expectations could drive pullback in prices ahead of the March 4th meeting and there is a risk for some meaningful correction in the market. The situation contributes precisely to sell on rumors (rather than buy), as the risks are clearly skewed in favor of increasing production in response to strengthening demand which should have negative impact on prices or at least make the rally less pronounced. 

Technical setup also favors meaningful bearish oil pullback ahead of the meeting:


ENG.png


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Why stock markets Thursday fall is a good buying opportunity


Consolidation of 10-year US bond yields around 1.30% turned out to be a short-lived market state. On Thursday, the yield surged to +1.55% area which brought about a massive knee jerk reaction in risk assets. Investors dumped tech shares with Nasdaq erasing 3.52% of its market cap and SPX losing 2.45% of its value. Aggressive selling began right after the NY opening on Thursday:


Bond-yields-correction-ENG.png


 On Friday, there are signs of modest downside pressure remaining - European equities trade in the red, futures on US stock trade near the opening exhibiting some correlation with Thursday returns. 

What is really important that the outflow from bonds (which led to steep rise in yields) is not limited to the US Treasury market and is a global phenomenon - the yields of German, Japanese, Australian bonds are rising as well, despite yield curve control efforts from the BoJ or the ECB:


Screenshot-2021-02-26-at-13-34-11.png

 
The chart shows that expectations of quickening inflation pace and, to a lesser extent, rise of real interest rate are also driving factors in other developed economies, which is the cause of outflows from fixed income instruments.

How long will the bond outflow last and weigh on equities? It’s difficult to give precise answer, but CTA futures positions on major government bond futures show that net short increased to 85th percentile:

 CTA-aggregate-net-position-0.jpg


In other words, only in 15% of cases since 2009, net short exceeded the current level. Therefore, from a technical point of view, investors should be tempted to buy the dip as the sell-off is quite extreme. In addition, according to JP Morgan on Monday, pension funds will have a rebalancing at the end of this month, about $ 90 billion will be available for investments, and the choice may fall on the government bonds, because they of appealing valuations. 

Fed officials Williams and Bostic, commenting on the rally in bond yields, said that it is unlikely that the Fed will somehow react to this move, since it is natural and stems from the reassessment of economic growth expectations due to positive data. They also downplayed the impact of fiscal stimulus on inflation. Judging by Powell's speech last week, the Fed's stance on inflation is that the observed inflationary effects are temporary, so no response is required. Consequently, if the FED is correct, the inflation premium in bonds would also need to adjust downward with inflation weakening later.

Let's hope that 1.5% in 10-year yields will become a psychological borderline and the “pernicious” effect of bond rout worldwide on stock assets will not develop further. A cautious buy on SPX and a short dollar is justified, despite the risk of continued slide in bonds to more extreme levels. All the same, world economy has not yet recovered enough to confidently dump bonds.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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Powell speech, upcoming stimulus talks in Congress should provide additional support for stocks


Orderly sell-off in sovereign debt markets, which flared into massive dump last week, has slowed down on Monday, but is far from over. The 10-year Treasury yield bounced off from a local high of 1.55%, however resumed advance on Monday. It looks like the bond markets entered into a state of short-term equilibrium, but the balance of forces is fragile. The Fed types gave a dry commentary on the rout last week, leaving a lot of understatement. This week there will be a number of speeches by the Fed officials, it is expected that their detailed comments on the rally of risk-free rates will become the main catalyst for movement in risk assets.

Unlike the Fed, the European Central Bank did not stand aside and came forward with “open mouth operations”, hinting at flexibility of the current main program of asset purchases - PEPP. The RBA supported Australian government debt market with concrete actions, boosting bond purchases to enhance control over long-term rates. Considering that world central banks often act in sync, there is a chance that the Fed will also hint at the opportunity, for example, to change composition of monthly QE purchases (by increasing purchases of longer-maturity bonds), which should bring peace to the Treasuries.

Nevertheless, since both inflation expectations and real rate rise in the US, with the exception of negative shocks due to high volatility, this combination should have a bullish impact on world stock markets. At least this is what history suggests:

stock-performance-real-yield-copy.png


Macroeconomic news on the US last Friday had in overall a positive tone – consumption expenditures growth (the main inflation gauge of the Fed) accelerated to 1.5% (1.4% forecast), consumer sentiment from Michigan beat forecast. As for the economic calendar this week, the focus is solely on the US labor market data - ADP report, employment component of the ISM service sector activity index. and Non-Farm Payrolls report for February.

Congress is rushing to approve new fiscal stimulus. Biden proposal were approved in the House on Saturday. None of the Republicans voted in favor, but their votes are not needed. Past stimulus measures had bipartisan support, but this time we see a complete split between the parties. It should be borne in mind that the main programs of extended social protection will expire on March 14, i.e., this date is probably an unofficial deadline for the approval of new stimulus. The highlight of the proposal is stimulus checks of $ 1,400 per person (whose income is below $ 75K per year). A good portion of this money, like last time, will likely flow into the stock market. Expectations of an impending positive retail investment shock are also pushing stock indices higher, or at least preventing them from correcting much.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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US appears to be taking lead in the global recovery, driving capital inflows

Oil quotes struggle to retain elevated mood ahead of OPEC+ meeting. Monday rally in equities, Monday rally in equities, which led to the surge of US stock indices by 2.3% on average, failed to underpin commodity prices. On Tuesday, prices stay in a downtrend thanks to strengthening USD and bearish motives in commodity markets in general. While optimism still prevails in the oil market, there are signs that demand growth has begun to weaken with downside risks growing on the demand side. For example, recovery momentum in the manufacturing sector of China, the largest consumer of oil in Asia, continued to fade in January, indicated the data on Sunday:
 
Screenshot-2021-03-02-at-13-02-55.png

The latest trade data shows that China is starting to buy less oil, both due to a slowdown in domestic demand growth and as the time of cheap prices has apparently gone. In general, it is reasonable to expect that Chinese demand will move to a plateau, since China stocked up storage facilities in the 3-4th quarter of last year, taking advantage of low prices. The season for refinery maintenance in China begins in the second quarter, which will also hit purchases.
According to Reuters estimates, OPEC oil output, despite signs of strengthening demand, declined in February. Saudi Arabia's voluntary production cuts drove OPEC's average production down by 870K in February to 24.89 million barrels per day. The consensus now is that the Saudis won’t extend the gift to the market after the upcoming OPEC + ministerial meeting. In addition, there are expectations that the output quota will be lifted by 500K barrels. Clearly, negative news background builds up for the oil market.
Greenback rally gains traction as the US economy appears to be taking lead in the pace of recovery among developed economies. If in January-early February we had a mix of a relatively weak US economy + expectations of US fiscal incentives + risk-on, now the first component seems to be replaced by a “strong US economy”, which started to draw foreign capital flows into the US assets. Previous risk-on setup contributed to investment outflows from the US in the search for yield abroad, which pressured USD. Now this trend seems to be changing sign. ISM manufacturing PMI for February released on Monday cemented idea of US economic acceleration as it surprised substantially to the upside. The index rose to 60.8 points (forecast 58.8), positive expectations about the labor market were also set by employment component (54.4 points, forecast 53). Apparently, the data release triggered a move in FX:

Screenshot-2021-03-02-at-13-54-31.png
 
This week, the dollar is likely to develop corrective momentum upwards. The focus is on the release of PMI in the non-manufacturing sector, the ADP data (due on Wednesday) and the US unemployment report on Friday.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Negative correlation of Gold with US real interest rate starts to bite the safe haven

European markets rallied alongside US equity index futures as the recent factor of bearish pressure - correction in sovereign debt markets and related volatility of interest rates - faded into the background. The themes of global expansion, bull market in commodities and fiscal impulse in the United States are apparently returning to the forefront.


After a short period of stabilization, the yields on long-term US and German bonds are on the rise again as local Central Banks stand their ground and refuse to contain the rise. And no wonder, in fact, in the past few weeks, the dynamics very desirable for central banks has been taking place in bonds - real interest rate started to rise as well. This is usually associated with "qualitative" economic growth and increasing productivity. Until mid-February, the biggest contribution to the growth of nominal rates was made by inflation expectations, which could have worried the Central Bank, but then the real rate joined the party and immediately soothed concerns. By the way, this is why gold also collapsed, since an increase in the real rate means an increase in gold’s opportunity costs:
 
Gold-US-Real-Yield.png

Gold has negative correlation with US real interest rate and therefore tend to decline when the interest rate starts to rise. 


Although the real rate has risen, it is still deep in the negative zone. It is at a historic low. It has a room to rise more. There are expectations that the rate will continue to rise, since it is believed that global economy is in the initial phase of upturn and related trends in the government bond markets can only start to emerge as well. This should have a negative impact on the Gold’s investment appeal for at least the next quarter or two.


The European STOXX 600 Index rallied for the third trading session in a row, and British assets reacted optimistically to the government's decision to extend payments to those who lost their jobs as a result of lockdowns.


The data on retail sales and unemployment in Germany made sad adjustments to the expansion story. The forecast for growth of the key item of consumer spending did not materialize - sales fell by 4.5% in monthly terms, against the forecast of +0.3%. It was also expected that the number of unemployed will decrease by 13K, but the number of unemployed, on the contrary, has increased. There has been another mini-shock in expectations for the largest EU economy, which paints an unclear outlook for European assets. European stocks are ignoring the worsening data so far, but for how long? The Bundesbank in its report on Wednesday said it expects a marked decrease in economic activity in the first quarter.


The European currency has experienced difficulties in growing amid negative data and the strong economic outlook for the United States undermines the idea that the dollar will weaken on the upcoming growth in the money supply in the United States due to fiscal stimulus, as an inflow of investors in US assets due to expectations of higher expected returns could start to counterbalance the supply factor.  The US labor statistics on Friday will provide more information on the speed and direction of the US economic recovery, but one should closely monitor the emerging trend in the US, as it has every chance of developing into a medium-term strengthening. 

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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OPEC’s extension of current output curbs is still in cards despite robust demand growth


Greenback advance eased on Thursday as bullish momentum developed earlier in the first half of the week failed to find support in key data releases. ADP report and ISM non-manufacturing PMI published on Wednesday fell short of expectations, although bull run in USD indicated expectations of a positive surprise. The number of jobs in the US in February rose by 117K according to ADP, which is less than 177K estimate. ISM index missed estimates as well with employment sub-index indicating a slight cooling in the pace of hiring. Recall that services sector employs more than 70% of the US labor force that’s why ISM employment survey data is a key for understanding pace and direction of US recovery. If Friday payrolls report misses estimate as well, the contribution of eco data in USD strength will greatly diminish, leaving USD vulnerable to concerns of money supply expansion due to upcoming fiscal stimulus.  

There are signs of USD strength on Thursday thanks to bearish mood in US equity futures and European shares.  Given the S&P 500's plans to test 3800 today, USD is likely to extend intraday advance today. 

Oil market with little effort digested EIA weekly release on commercial oil stockpiles in the United States. In the week ending February 26, crude oil inventories surged 21.5 million barrels - the highest growth in several years. When the market is in a state of contango (oil futures curve is upward sloping), oil prices often drop on the rise in inventories since inventories are hedged by selling more futures what means less demand pressures in the future. However, current situation is somewhat different: inventories rose mainly because refinery utilization dropped to the lowest level in several decades. During the reporting week, refineries were working almost at half-full capacity - utilization fell to 56%, the lowest level since the 1980s:


 Screenshot-2021-03-04-at-13-37-39.png

At the same time, oil production in the United States extends recovery - in the reporting week, it increased by 500 thousand bbl/d.

An additional point on the report, which neutralized the increase in inventories - a significant decrease in refined petroleum products. Gasoline stocks fell by 13.6 million barrels (forecast -2.3 million), distillates - by 9.7 million barrels. This is partly the result of reduced refinery utilization rates, but the dynamics also speaks of strong fuel demand, which is positive leading indicator for the market.


Oil prices were offered additional support after Reuters reported that OPEC will extend current output curbs until April. In case this outcome becomes reality, prices will likely suffer a strong upside shock, as probability of this event is low based on recent rumors and demand data. In my opinion, if OPEC extends current output settings, this should fuel prolonged price recovery, justifying short-term bets on oil growth. 


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Major global funds could start portfolio rebalancing soon. What does it mean for stocks?


China strengthened investors’ conviction in the global recovery with the latest trade data released on Sunday. The volume of exports gained impressive 60% YoY in January-February period. The reading was way ahead of market projections (40%). The February figure is a huge gain - 150% YoY. Undoubtedly, growth of China exports is also a merit of its trading partners, especially the United States, where economic growth in February could be the highest on record. This can be seen, for example, in the surge of GS Analytic Index to the highest level in many years:

 GSAI-February.jpg
 

 A similar jump is in the NY Fed Nowcast GDP forecast for the 1Q of 2021:

 Screenshot-2021-03-08-at-14-32-38.png


The forecast was revised sharply higher thanks to strong incoming data and now stands at 8.5%. And that's without taking into account forthcoming government spending stimulus!

Congress approved support measures of $1.9 trillion, but Monday moves in the US futures indicate that approval of the bill apparently has been priced in valuations. 

Equities remain under pressure as the stressful situation in US long-term rates has not gone anywhere. Moreover, last week's events (Powell speech, NFP release) only fueled the trend. I agree that the topic of erratic moves in the Treasury rates has set the tongue on edge, but the markets, in a sense, are now in unchartered waters – the good old Fed which expressed concerns about every ebb and flow in the market, has apparently gone. Therefore, repeated shocks in rates, such as the recent ones, should not be ruled out. We’ve seen their impact on equities and the risk of repeated volatility keeps buying pressure effectively in check. 

JP Morgan has discovered another channel of the impact of the recent Treasury selloff on the stock market – coming portfolio rebalancing of large pension and mutual funds. They will most likely significantly adjust the proportions of assets in the portfolio, due to accumulated overweight in equities as well as favorable conditions - stocks became quite expensive while bonds have fallen a lot. 

There are 4 big players to watch out for - balanced Mutual Funds (60:40), US Pension Funds, Norwegian Oil Fund and Japan Pension Fund. They make portfolio rebalancing at different intervals, but since some of them have called off the move, there is a risk of combined sell-off. For example, US mutual funds have a noticeable overweight in equity, which sooner or later will have to be adjusted:

 
equity-beta-2.jpg


JP Morgan estimates cumulative potential outflow from stocks caused by the sale of these funds at $316 billion. Since the event (rebalancing) is more or less likely (the fund's strategy periodically requires this procedure), other market participants may be inclined to try to get ahead of the whales, which may increase near-term pressure on equities.

Key events to watch this week:

EURUSD – the weekly report of the ECB’s purchases within PEPP (pandemic QE” program) which is due today - will the ECB respond to the rise of EU bond yields? Increased bond purchases by the ECB should have negative impact on the Euro as it will signal that the ECB is concerned. On Thursday - the ECB meeting and again the question, what does the regulator think about the recent moves in bond yields?

USD index - on Wednesday and Thursday - major auctions of 10- and 30-year Treasuries bonds. Week demand on these auctions (low bid-to-cover ratio) will likely add upward pressure on the yields, and vice versa, strong demand will bring welcomed relief to risk assets. Another report to watch is US CPI in February, which is due on Wednesday. Given the latest data on the NFP, a positive surprise is likely and should support upside movement in the USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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OPEC turns dovish on 1Q, 2Q oil demand, bond yields are on the rise again. Will stocks’ sell-off continue?


Oil prices were under pressure on Friday thanks to stronger USD, rising US oil inventories and negative short-term outlook in the OPEC monthly report. The organization expects oil demand to grow stronger in 2021 than previously thought, however, pessimism about the first two quarters increased.

Rising worries about short-term demand outlook appears to be the key reason behind extension of current output curbs in early March. According to the OPEC estimates, the demand for hydrocarbons will be noticeably weaker in the first half of the year than previously expected, but it will rebound strongly in the third and fourth quarters. The OPEC, apparently, counts on massive easing of lockdowns by that time:

 
Screenshot-2021-03-12-at-13-32-42.png

An additional constraint is created by prospects for increasing production outside OPEC - by 370K b/d in the second quarter. It seems clear that the OPEC is likely to take a pause in increasing production for another couple of months, probably till the end of this quarter. Oil prices have already taken into account extension of curbs, so further near-term growth prospects will depend on how much the mass vaccination outpace expectations in key economies-consumers of oil and resumption of activity in China after the Lunar New Year (after relatively weak PMI for January and February).

Technically, the uptrend in oil has been extremely steep. Quotes drifted away significantly from key moving averages with the divergence from 200-day moving average increasing to the highest level since 2008:


Screenshot-2021-03-12-at-16-12-54.png


Price last met MAs in November 2020 - when the markets hit a turning point - the vaccine was announced. Prices are now near their 2-year highs. In addition, the market entered a phase where key positive catalysts on demand and supply side have been priced in, which leaves little room to extend rise. In my opinion, the market is at best poised to enter on a sideways trend for 1 – 1.5 month.


EURUSD


Downtrend risks in EURUSD have risen markedly since the ECB meeting on Thursday. The recent rise in EU bond yields did worry the regulator, since Lagarde said the ECB will significantly increase PEPP asset purchases in the next quarter. In contrast, the Fed said that nominal interest rates rose in response to growth in the economy, so no intervention was needed. The resulting divergence in policy of the Fed and the ECB is a signal for further selling of EURUSD. In addition, epidemic curves and pace of vaccinations in the EU cause worries about the outlook for economy reopening. Take, for example, the reports about slow pace of vaccinations and expectations of a third wave of the epidemic in the EU. In my opinion, the pair has every chance to drift lower to 1.18 by the end of March:

 Screenshot-2021-03-12-at-16-27-23.png

Weaker-than-expected February US inflation and strong demand at the Treasury auctions failed to contain the rise of bond yields. On Friday, the sell-off on the sovereign debt markets resumed - 10-year bond yields in the US, Germany, Great Britain and Australia renewed uptrend. There is a risk of a new bearish retracement in equities and a wave of strengthening in the Dollar. Today and the beginning of next week, risk assets and gold are likely to stay in corrective mode, pushing USD back above 92.00, as it is not yet clear what could stop the renewed sell-off in bonds. 


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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EURUSD: tactical retreat continues on growing EU risks


In the past few weeks, risk assets were shaken up by wild moves in interest rate markets. The surge in volatility was caused by the dump of fixed income assets, primarily by the outflow from sovereign debt markets of developed countries. Although intensity of the sell-off eased on Monday, further upside in yields is likely if incoming data continue to point to quickening economic rebound. Consequently, risk assets remain vulnerable to potential downside caused by yield spikes, as increasing base interest rates feed into other credit markets as well, pushing up borrowing costs for firms. More expensive liquidity means higher risks:


 US-yield.png


In this regard, the main event of the week will be the Fed meeting on Wednesday. It seems that the Central Bank made it clear that the rise in yields is normal, however investors still expect the Fed at least to signal that it is ready to support the market (as the ECB did last week). The upcoming meeting in this sense will not be an exception.

Particular attention should be paid to the Central Bank decision on extension of temporary exemption from the so-called supplementary leverage ratio (SLR). If the Fed does not extend the exemption, US banks will have to look for extra liquidity to bring capital adequacy ratios to the required levels. It is believed that they will do this by selling Treasuries from balance sheets. We all know what happens when Treasuries are sold a lot and quickly. Yes, equity markets collapse.

To the day ahead the data highlights include US retail sales report. It is one of the biggest catalysts for short-term market volatility. Better-than-expected monthly growth of sales should add fuel to the US reflation story, adding bearish pressure on Treasury market, which may in turn affirm USD positions against other majors. Markets expect retail sales to nudge down by 0.6% and it is reasonable to expect that due to high-base effects. Recall that January growth was 5.3% and it should be difficult for retail sales to make additional gain.

It will also be interesting to see what happens to consumer inflation in the EU. The CPI report is due on Wednesday. Risks are skewed towards a weaker reading than the forecast (1.1%) as we saw some reports last week indicating that the EU made tactical retreat extending lockdowns due to the threat of a "third wave" and slow pace of vaccination. In general, coronavirus situation in the EU remains tough, which is reflected in the weakness of European currency. Therefore, it may be worth to expect a negative inflation surprise and downside in Euro after the release. By the way, the latest COT data showed that speculators trimmed long positions in the euro, so fast rebound in EURUSD looks unlikely. Risks are on the side of weaker euro against USD for the next couple of weeks due to Central bank’s policy discrepancy, slowdown caused by extension of lockdowns and risk of fading inflation impulse:


Screenshot-2021-03-12-at-16-12-54.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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B] Key takeaways from the Fed meeting for equity markets[/B]


The Fed meeting was not convincing enough to stop the rise in market rates. The yield on 10-year US Treasuries again renewed its local peak, exceeding 1.7% on Thursday. Acknowledging that GDP and inflation will grow at faster pace than previously forecasted, the Fed generally left its forecasts for a first rate hike unchanged - no earlier than 2024. QE at the current volume of $120 billion / month (80 billion Treasuries + 40 billion MBS) will continue until there is "significant progress in achieving unemployment and inflation targets."

The Fed significantly raised its forecast for GDP growth - from 4.2% to 6.5% (Q4 2021 compared to Q4 2020), and inflation - from 1.8% to 2.2%. Nevertheless, the dot plot showed that the majority of FOMC members would not have voted for a rate hike before 2024. That is, the opinion of the majority, compared to the last meeting, has not changed. The number of FOMC participants awaiting an increase by the end of 2023 increased from 5 to 7, and those who would vote for an increase by the end of 2022 - from 1 to 4 participants.

The situation is not easy for the Fed. On the one hand, recent economic data trumpet expansion and market participants demand that the Fed admit it by hinting at an earlier rate hike. We see this through the rise in market interest rates, growing inflation premium in bonds, various inflation swaps, etc.:

Screenshot-2021-03-18-at-14-30-09.png


If the Fed pretends that early rate hikes are out of the question, inflation expectations will accelerate growth (low Fed rate + strong economy = high inflation). On the other hand, if the Fed hints at earlier QE tapering or a rate hike - the expectation that the Fed will start selling bonds from the balance sheet earlier => another jump in yields upward (“the Fed will soon join the bond sale”). In both cases, rising market interest rates (borrowing costs) will slow recovery. It would seem, why not then declare that it is still not so rosy and low rates are justified? This would contain the rise in bond yields, but it could sow anxiety among market participants and derail the recovery as well due to wrong guidance. In general, Powell has to carry out a difficult balancing work at press conferences - to combine recognition of expansion, uncertainty about the future and, as it were, leave the possibility of an early increase in rates.

The US economy is currently experiencing an increase in consumer spending and the number of jobs in the US, but on the other hand, the economy is still 9.5 million fewer jobs than it was a year ago. The unemployment rate shows an incomplete picture, as it does not take into account the unemployed who are not looking for work. So, for example, if unemployment in the United States fell from 10% to 6%, the labor force participation rate recovered from a minimum of 60.2% (May 2020) to only 61.4%, which is below the pre-crisis level of 63.4%. And if we look at the share of the employed in the working-age population (an even broader indicator), then it recovered even worse after the crisis:

 
Screenshot-2021-03-18-at-14-01-31.png


In my opinion, the Fed would like to see this figure at 60% before starting to normalize policy. The catch is, it's hard to predict when this will happen. With fiscal incentives - maybe this year. Then the markets will have to prepare for a rate hike. This is why markets tend to get ahead of the curve now.

As a result of the meeting, one thing became clear - long-term rates will continue to grow, which will neutralize the positive effect of fiscal stimulus on stock markets. Waves of sales in bonds, which, apparently, will still occur, since the path of yields upward is open, will cause, according to the well-known scenario, corrections in the stock markets as well. Growth is likely to be, but not as smooth as we would like.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Oil, USD and Gold: trading ideas for the week ahead


Relief in the equity markets after the Fed meeting was short-lived - yet another spike in Treasury rates knocked down oil, growth stocks. Nasdaq lost 3.02%, the biggest daily drop in several months. Oil closed with 7.6% loss, with maximum decline reaching 9%. Oil market rout was the most intense since October last year. 

Markets are increasingly nervous about the situation with coronavirus in the EU countries, where lockdowns, disastrous for economic activity, are either reintroduced or extended. Increasing incidence rate in Germany does not let the government to ease restrictions, with third lockdown in sight as hinted by the local Ministry of Health today. The outlook for economy reopening deteriorates. The recent backwardation in term structure of Brent and WTI (when short-range contracts are more expensive than long-range contracts), which indicated strong current demand, is either decreasing or turning into contango (short-range contracts become cheaper than long-range contracts). Basically, time spreads in oil indicate a pause in the uptrend.

On the daily chart, the drop was picked up exactly on the 50-day DMA:


Screenshot-2021-03-19-at-14-32-52.png


In the short term, the former uptrend line (point 61.50) will already act as a barrier to growth. After such a strong fall, the shock to buyers is unlikely to pass quickly - the most likely development of the market is a sideline movement with a retest of $60 round support before the market gathers strength and continues to rise as there are plenty of reasons for this.

The dollar should also contribute to the moderate dynamics of oil. The fact of the approval of fiscal stimulus has been priced in, but it remains uncertain how much households will spend in consumption and how much will go into savings. In the data, this will manifest itself gradually. What has not been fully taken into account in asset prices is the high rate of vaccination in the United States, which will allow the lockdown to be completely lifted earlier than previously thought. We all know what consequences such expectations have for the Treasury market (continuing increase in nominal rates). By the way looking at weekly timeframe it becomes clear that the Treasury rates are at their historical low, so the recent increase is a drop in the ocean, so to speak. The growth in February-March on the scale of decades is just a minor rebound from the all-time bottom. Further expansion of interest rate differential (US rates minus other countries rates on fixed income) may turn more capital flows into US assets which is a factor in the demand for the currency.

Technically, the steep uptrend of the dollar broke off the week before last - the index went into the range, 91.40 - 92.00, the Fed could not help. Exit from the range in my opinion is upwards, we can consider the target 92.50 (the previous March high):


Screenshot-2021-03-19-at-14-51-10.png


In gold, the main driver is related to the reasoning above - real interest rates in the US. This is the opportunity cost for gold (what we miss in terms of return with the same level of risk when we choose to hold gold). The real rate is rising and based on US growth forecasts, the coming consumer boom will be higher this year. Therefore, all upward movements of gold, within the framework of close correlation with the real rate, are rebounds in the downtrend:


Screenshot-2021-03-19-at-15-37-35.png

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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 These moves in asset prices should put investors on alert


Risk assets were sold off moderately on Tuesday while there was a solid interest in debt assets, which is evident from synchronous fall of yields on sovereign debt of developed countries. This distinguishes Tuesday pullback from the dips that we saw earlier in February in March – in contrast, they were fueled by sharp sell-off in bond markets, i.e., rise in yields. If we assume that the idea of post-pandemic recovery still remains a dominant market theme, rising bond prices together with falling stocks should put us on alert, as the pattern belongs to classic risk-off environment.  So maybe investors started to doubt about recovery? Looks reasonable, considering that oil has spookingly grown a second leg down, and small-caps, which have experienced a renaissance since November, were sold aggressively:


Screenshot-2021-03-24-at-13-11-44.png
 

The yields on sovereign debt in developed countries began to decline at about the same time:


Screenshot-2021-03-24-at-14-16-28.png
 

Oil prices bounced down from the trendline after the breakout, in line with the idea described earlier:


 Screenshot-2021-03-22-at-15-53-55.png


Based on the widespread pullback movements in assets or asset indices, which were used to bet on the recovery, we can conclude that recovery euphoria gives way to more cautious markets. At least in the near-term. A key ingredient of continuation of recovery is a clear timeframe of lockdown lifting in the key economies, which markets currently lack for. With recent developments in vaccination programs and lockdowns, expected dates of getting key positive catalysts were delayed again. In my opinion, the case of consolidation in one week – one month horizon strengthens. On the technical side, some equity indices are currently playing with key resistance areas with little fundamental backdrop to expect true breakouts. Also, strong performance of equities relative to bonds let us expect a significant quarterly rebalancing of large funds which buy stocks and bonds. The rebalancing will obviously lead to paring down share of equities in portfolios and increasing exposure in well-fallen bonds.

The risks that sell-off will develop into a full-fledged bear market are small. The main recovery impetus is still in stock and has not been used up. This is the complete removal of lockdowns and release of pent-up demand. For example, it can be seen that forecasts of leading central banks and oil agencies have the biggest optimism in the third-fourth quarter of 2021 – they anticipate that the bulk of social restrictions will be lifted by that time giving essential boost to consumer mobility. 


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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spacer.png

 

EURNZD today as we see here, the price wants to turn the trend into bearish trend, so it is good if you choose to open sell position, you can start to sell when the price breaks support area at 168.332 with potential target up to 1.67399

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Oil and EURUSD set to rebound next week but it may hide a selling opportunity


The news continues to be full of headlines that discourage risk appetite. Among them – a new all-time high in daily Covid-19 cases in Poland and gloomy forecast for the course of the third wave from the German Ministry of Health without additional restrictions. Nevertheless, risk assets are successfully developing a technical rebound on Friday. Why technical? First, the intraday growth is moderate, not exceeding 1% in the main indices. Secondly, a fairly spoiled news background can be fixed only by a decline in infection rates, which obviously will not happen overnight. The peak of pessimism in this regard has not been reached. Thirdly, the quarterly rebalancing of large funds, during which they will have to reduce the weight of shares in portfolio and increase the share of cheap bonds, has not yet been completed.

The blockage of the Suez Canal counterbalanced the virus story, causing prices to rise. Risk-on in the commodity market then spread to risk assets. But let’s keep in mind that supply chain disruptions are temporary. As soon as the movement in the channel recovers (1-2 weeks), the market will again be absorbed by fears of fragile demand due to the third wave, which will certainly not go anywhere by that time.

As for the technical picture for oil, a series of recent dips have invalidated the bullish trendline that has been running since November 2020. The breakout has led to a shift in sentiment in the short term, resulting in a short-term bearish channel:

Screenshot-2021-03-26-at-15-52-18.png


The story with the blocking of the channel increases chances of a short-term rise in oil, however, the main resistance in this rise may be located at around 60.50 (the upper border of the channel). It should be borne in mind that on April 1, OPEC will again decide how to adjust production in response to the deteriorating market conditions. In my opinion, OPEC has already surprised by leaving the restrictions at the same level at the last meeting, so on April 1 there will be disappointment.

EURUSD has reached the target proposed in yesterday post - the lower border of the current trend corridor. I expect the pair to rise next week to the level of 1.183-1.185 (a repetition of the previous scenario with testing 1.1955), followed by a drop back below 1.18:

 
Screenshot-2021-03-26-at-16-16-56.png


The catalysts for the weakening could be data on inflation and the German economy or worsening epi curves or new measures in the EU to contain the virus.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Strong March NFP suggests more US data surprises to come


The US jobs market data in March were really impressive. Given momentum effect in the labor market and still incomplete recovery in consumer mobility, payrolls growth April may top 1 million. It means the odds of more economic surprises in the US from the key macroeconomic areas are quite high, which justifies elevated market expectations about US assets and USD performance. We cannot rule out that US labor market can achieve pre-pandemic levels by the end of the year which will certainly trigger premature Fed tightening. For now, it remains a tail risk.  

The solid report on the US labor market for March indicated the growth of jobs by 916K against the 660K forecast. The payroll readings for the previous two months were revised upwards by 156K. Employment in the private sector rose by 780K, while the currently not very indicative unemployment rate fell to 6%.

Employment growth overtook the forecast thanks to warm weather which additionally boosted mobility and some economic sectors like construction, strong vaccination program in the US and economy reopening efforts from individual states, which boosted consumer sentiment, business climate, activity and labor demand.

Improved weather helped construction sector to boost hiring by 110K, continuing easing of restrictions led to an increase in jobs by 280K in the leisure and hospitality industry. Public sector employment increased by 136K. However, in no industry has demand for labor recovered to pre-crisis levels.

Expectations for the jobs market performance in April are high due to two reasons. Firstly, consumers mobility still has room to recover. Secondly, it’s reasonable to expect that recovery will continue given positive trend in reopening and non-stop supportive government measures. The following shows the dynamics of restaurant reservations for some key states, as well as the number of security checks at airports:

 payrollsmarchart2.jpg
 Source: ING

It can be seen from both charts that all the curves (with the exception of Miami table reservations) are still below the pre-pandemic level, so recovery still has a room to go. Consequently, the demand for labor should continue to grow.

Despite the positive NFP update, there are 8.4 million fewer jobs in the US economy than it was before the pandemic. The Fed has signaled that it will not raise rates until 2024 until there is substantial economic progress. Given their lukewarm attitude towards rising inflation, it is clear that they want to see jobs return to pre-crisis levels.

Officials' comments make it clear that unemployment is now giving false signals due to the large number of demotivated workers. Now only 57.8% of the working population is employed:
Screenshot-2021-04-05-at-17-32-43.png

 This is very low and, in some respects, comparable to the employment rate of the 1980s. To reach pre-crisis levels (labor force participation rates above 60%), the labor market should add at least 6 million jobs.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Upbeat soft data in the EU fuels tactical retreat of USD

Indices of activity in manufacturing and services sector in the EU indicated a welcomed expansion in March. However, it came with a decent delay due to lockdown extensions. Compared to the pace of recovery in the US, it’s still just a minor uptick. Nevertheless, it was enough for Euro to break a series of falls as there was a bunch of risks associated with extended lockdown which were priced in the European currency. The March data eased concerns about worst-case scenario for the EU and helped to downplay impact of slow vaccinations and lockdown pressure on business sentiment. EURUSD is developing a rather rapid upward movement, while USD index broke the main uptrend channel which casts doubts on immediate continuation of the advance:


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Improving demand for Treasuries also played against the US currency. The yield on 10-year notes continues to decline after reaching a local peak of 1.774% on March 30. In my view it’s just another break in the broad downtrend. Labor market data, ISM indices, in particular the components of new orders and expectations, consumer mobility indices call to prepare for new surprises in April, so the positive impact of the flight from long-date Treasuries on the dollar should still remind of itself in the near future.

The recovery in the Eurozone was quite synchronous: Markit pointed to the growth of business activity in Germany, Italy, Spain and Ireland, both in services and in manufacturing. Together, these four countries account for three quarters of the Eurozone's economy. Firms see a surge in orders in the United States against the backdrop of the lifting of restrictions, so they are too very optimistic about the near future.

Today, clues about the further behavior of the dollar should be looked for in the minutes of the Fed meeting for March. Expectations are modest – reiteration of the mantra of ultra-easy monetary policy despite all the optimism taking place in the data. Still, there are fears that the dynamics of inflation will cause discomfort among officials. Therefore, if there is even a slight bias towards hawkish policy, even a hint of an earlier curtailment of QE, it will certainly resume the growth of Treasury yields and support the dollar. In general, it is too early to write off strong dollar.

On the other hand, the risks of weak vaccination rate in the European currency may be eliminated by news refuting the connection of the Astra Zeneca vaccine with blood clots. This will signal a recovery in vaccination rates - a key component of expectations that immunization targets will be met earlier and mobility will recover faster.

From a technical point of view, the upward correction in EURUSD may hit the 1.1930 - 1.1960 zone before we could start discuss resumption of USD rally:

 

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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Strong US CPI May Trigger Treasury Sell-off, Dollar Rise

Summary

- Long-dated bond yields picked up ahead of US CPI release, increasing odds of USD rebound;

- Solid China trade data, in particular growth of imports, underpinned oil prices.

Calm in the equity markets extended into Tuesday with US equity index futures swaying near the opening. However, debt markets appear to be strained. Bond yields advanced as the risk of higher inflation rates re-emerged in the past and this week’s data.

Today US consumer inflation report is due and there are good reasons to expect a surprise on the upside. The fact is that inflation on intermediate goods (PPI) in China and the United States came materially higher than forecasts in March, which is likely to affect the final prices due to cost-push inflation pressures. A strong CPI reading will most likely wake up the bears in the Treasury market, and again we will see a renewed uptrend in yields and USD. EURUSD will probably not hold at the current levels and likely go down to 1.1850-1.1860, given tepid behavior of the buyers after reaching 1.19 mark:


Screenshot-2021-04-13-at-14-33-06.png

Accordingly, a breakout of 1.70% level in 10-year Treasury Note yield may become a technical signal for resumption of the rally to new local highs. The factor of Treasury sell-off, as shown by the dynamics of USD in March and February, is probably the most import in the currency’s strength. 

ZEW report on corporate sentiment in Germany, which is usually of high importance, can be ignored, as investors focus on data on vaccination pace, as well as news on the European Recovery Fund, which still has a long way before approval and which could be the factor of Euro strength, similar to fiscal stimulus in the US.

China foreign trade showed mixed dynamics - export growth did not meet expectations, but imports accelerated significantly (38.1% versus 23.3%). Details also showed that China ramped up oil purchases, which came as a surprise. Oil prices rose moderately, but the focus is on successes or failures in suppressing the virus. The situation in this regard is very ambiguous - the deserted streets of India due to record daily growth on the one hand and the rapid recovery of mobility in the United States or Great Britain due to the weakening of the restriction on the other.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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