- Bond yields cool down, setting off massive rebound in tech stocks
- Dollar retreats a touch ahead of US inflation data and key bond auction
- Bank of Canada meets as well – dovish signals could bruise the loonie
Everyone is trading bonds these days
Global markets continue to be driven almost entirely by moves in bond yields. The week started with Wall Street panicking about rising yields, but the hysteria soon faded and euphoria made a stunning comeback yesterday as yields cooled down. The Nasdaq 100 led the charge higher, soaring by 4% as most tech stories with inflated valuations came back in fashion. The tip of the spear was Tesla, which gained nearly 20%.
In the FX theater, the retreat in yields translated into a softer US dollar, which in turn lifted all other major currencies. The Australian dollar was the biggest beneficiary. The euphoric mood even managed to lift gold, fueling hopes that the recent lows around $1680 may act as a short-term floor for bullion, which has taken a real beating lately.
Now to be clear, the retreat in yields wasn’t anything huge. The 10-year Treasury fell only by 5 basis points, which is not much by any stretch of the imagination. And still it was enough to completely shift sentiment in every asset class, highlighting just how sensitive markets are to rising interest rates, especially the tech sector.
Is the correction over? Crucial events today
At its heart, all this comes back to a stronger economic outlook in America forcing investors to bring forward the timeline of rate increases by the Fed. That’s what ignited all this volatility in the first place. Since the Fed hasn’t pushed back against this, whether yields continue to rise will likely depend on incoming economic data and vaccination news.
As such, today’s events could decide whether panic returns or whether calmer tones are here to stay. US CPI data for February are expected to show a meaningful rebound in the headline inflation rate, but the core rate that strips out the effects of volatile items like food and energy is expected to have held steady at 1.4% in yearly terms.
That said, business surveys like the ISM PMIs suggest that price pressures have been on fire lately amid severe supply chain disruptions and soaring commodity prices, so an upside surprise is certainly possible. In this case, the dollar could roar higher while equities might suffer another selloff, as the Fed normalization timeline takes center stage again.
The other crucial variable will be an auction of 10-year US Treasuries at 16:00 GMT. Markets will focus on demand. If the auction is strong, that could stabilize yields. Otherwise, all hell could break loose. Of course, the inflation numbers released beforehand will be a crucial element for demand at this bond auction.
Bank of Canada to play down a solid economy
The BoC will have a tough balancing act on its hands when it concludes its policy meeting today. The Canadian economy has performed well lately despite the lockdowns. The housing market is booming, oil prices have skyrocketed, and some benefits from the mighty federal spending in America are bound to spill over.
The problem is that Canadian yields have been caught in the global rally too, with the 10-year doubling this year. Hence, if policymakers sound too optimistic today, yields could surge even higher, threatening to dampen the recovery as borrowing costs rise further. Markets are already pricing in a 20% chance for a rate hike this year.
The BoC won’t be comfortable with that, so it might try to hammer home the message that rates will not rise for a long time. If it succeeds, the loonie could take a hit.
