- Stock markets conquer new heights as usual themes remain in play
- Dollar continues to retreat, unable to draw power from rising yields
- UK turns into the G10 vaccine champion, Cable breaks higher
- Gold gets its feet under it as inflation whispers depress real rates
The party that never stops
The stock market has gone on an absolute rampage. All of the major US indices continued their incredible bullish run to reach new record heights on Monday, with stimulus hopes and some encouraging vaccine news acting as the usual jet fuel.
Markets have become more confident that the final price tag of Biden’s $1.9 trillion relief proposal won’t be axed much, as the new President refuses to play ball with Republican negotiators and is instead trying to fast track the stimulus bill. Separately, a new study shows the Pfizer vaccine is effective against the South African covid variant, unlike the AstraZeneca one.
The brighter outlook for US economic activity likely explains why value and ‘old economy’ stocks are spearheading this latest charge higher, while the stay-at-home tech heavyweights like Amazon, Facebook and Apple have fallen behind.
In the bigger picture, the avalanche of stimulus has been the real driving force behind the stock market’s stunning run this past year. Promises of low rates ‘forever’ and astronomical government spending are an elixir so incredibly potent that it eclipses most risks. Unless new variants of the virus that can’t be suppressed by existing vaccines are discovered or an inflationary outbreak forces the Fed to close the liquidity taps, this party is likely to continue.
Dollar crumbles under the weight of risk-taking
In the FX ocean, it was a classic case of a sinking dollar lifting all other boats. Last week, the greenback showed signs of decoupling from risk sentiment and re-aligning with US fundamentals, but this week it is back to trading like a safe-haven.
Treasury yields retreated a touch yesterday, yet remain near their highest levels in a year, which would typically make the dollar more attractive from a rate differential perspective. One reason this hasn’t played out is that inflation expectations have taken flight as well, pushing real yields back to record lows.
This is a dichotomy that only exists because of the Fed’s new inflation overshoot regime. Markets are bracing for an episode of higher inflation – driven by consumers spending a good chunk of the savings they’ve accumulated, soaring commodity prices, and supply chain disruptions – but expect the Fed not to react. The jury is still out on the final part, as policymakers will have trouble justifying $120bn per month in QE if inflation truly accelerates.
Pound shines, gold returns to life
Capitalizing on the dollar’s troubles was sterling, with Cable climbing to an almost three-year high. The stars have aligned for the pound, as the UK has been crowned the G10 vaccine champion, BoE rate cuts have been priced out, Brexit risks have receded, and risk sentiment remains constructive.
The softer US dollar was also what the doctor ordered for gold, which is set for its third day of gains, recovering from last week’s slump. This is essentially a Goldilocks environment for bullion as inflation expectations are marching higher but the Fed is resisting calls for normalization, keeping real Treasury yields depressed at record low levels. If inflation whispers grow louder, gold could have one ‘last hurrah’ left, before QE tapering talks really take center stage and inflict permanent damage.
Elsewhere, the kiwi is advancing after the RBNZ’s inflation expectations jumped, diminishing the prospect of any more rate cuts. Finally, an honorary mention to Bitcoin, which exploded higher to top $48,000 after Tesla announced it has purchased massive quantities and will accept it as payment in the future.
