Global equity markets rallied as sovereign markets stabilized. The S&P500 (+2.38%) recorded its biggest one-day rally in nine months. Nasdaq closed 3% higher as investors returned to their growth darlings at cheaper prices. The US dollar extended gains against its major peers.
Softer sovereign yields couldn’t convince gold bulls to return to the market. The yellow metal plunged to the lowest levels since June on the back of a strong US dollar, and is preparing to test the $1700 support. We will certainly see a solid buying interest near the actual levels, given that the rising inflation expectations and uncertainty regarding what to make of last week’s sovereign carnage should encourage some inflows to the safe haven asset.
Speaking of yields, there are many theories regarding the cause behind last week’s sovereign yield shower. Some, including the Federal Reserve (Fed) head Jerome Powell say that rising yields could be due to an increased optimism regarding the future and prospects of a strong economic recovery. It could, but not in this fashion. Let’s not lie to ourselves, what we’ve seen last week in sovereign bonds seemed more like a panic sell-off than an optimistic portfolio rotation. The yields spiked as a sign of stress as investors were left unconvinced regarding Jerome Powell’s testimony before the Senate. Moving forward we will, of course, see the yields rising as the economic picture improved, yet a move backed by optimism is supposed to be soft and sweet, not like a carnage.
Nonetheless, for now, the market volatility eases and equities gain. This is a sign of optimism, but we have important data on the economic calendar this week, especially the US jobs data that could shake the sentiment yet again. A strong read could well spur the ‘ yield optimism’ and wreak havoc in the market.
Finally, last week’s surge in sovereign yields gave a valuable insight on which central banks were comfortable and which ones were not regarding the rising sovereign yields. The Fed and the Band of England (BoE) seemed relaxed faced with the fast rising sovereign yields and didn’t really want to intervene to stop them from soaring. The Reserve Bank of Australia (RBA) and the European Central Bank (ECB) on the other hand, restated their commitment to keep rates at low levels and acted in consequence.
The data showed that the ECB accelerated its bond purchases over the two weeks preceding last week and said it would do more if necessary. But the fact that the ECB’s sovereign bond purchases fell last week raised questions on whether the ECB walks to talk. The decline in purchases volumes could well be due to redemptions, which came at a very unfortunate moment. But if not, the ECB will need to do more to rectify its position. In this respect, the French Central Bank head Villeroy said the ECB could well consider lowering deposit rates to keep yields low. The European policymakers’ commitment to low yields could back a move below 1.20 in the EURUSD. Also, it’s worth noting that the Eurozone is a low-inflation zone and we can see the ECB do more before anyone brings up the question of excessive inflation on the table.
Finally, Bitcoin surged to $50K in Asia as Goldman Sachs said it’s restarting its trading desk for cryptocurrencies and Citigroup stated that Bitcoin could become the ‘currency of choice’ in future international transaction. Goldman probably has demand for trading cryptocurrencies, and has a lot profit to make given the massive volatility in this market. But Citigroup’s reasoning that Bitcoin would become your currency of choice in international transactions because of its ‘decentralized design, lack of foreign exchange exposure and traceability’ is soft. There is also need to explain how the global policymakers will adopt the idea that trades will be done in a currency that they can’t control the value, and how on earth we are going to find enough energy to execute Bitcoin transactions that demand so much energy to happen.
