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The main theme from Friday was the move higher in yields which attracted inflows into USD and pressured equities and commodities. Despite Powell’s reassurances that monetary accommodation will be with us forevermore, markets are pricing in the potential inflationary impact of all stimulus measures, and the vaccine effects.
Global equities posted large losses on the week, with the Dow in particular posting a bearish engulfing week; Copper posted a Shooting Star; Aud, Cad, Kiwi posted bearish engulfings also.
In this context, positive economic reports may pressure risk assets as it would confirm the pickup in inflationary pressures and suggest central banks are behind the curve. Watch this week’s NFP report from this perspective.
Themes for the Week
- Yields: the strong boost in yields is starting to impact risk assets as traders are now betting central banks are behind the curve and continuing stimulus will generate rampant inflation.
- Powell: traders will want to hear Powell’s perspective on recent bond market volatility. Whether hawkish or dovish, it will be hard for Powell to not upset the markets.
- Fiscal Stimulus: Biden’s fiscal package has reached the Senate, but there is speculation the bill will be reduced to $1.5Trl from $1.9 Trl.
- NFP: the main event this week will be the US employment report on Friday. In the current context, a good number may pressure risk assets further as it would play into the inflationary scenario.
Data in the Week Ahead:
Correlation Report:
Comment: The rise in yields has been the main driver of asset prices recently as highlighted by the high correlation between bond movements, commodities, JPY and to a lesser extent, global equities.
On the Radar:
Risk assets closed lower last week, so the bias switches to short on Dow and Nasdaq in particular. Gold remains locked in the bearish stance as well. In FX, the comm-dolls (Aud, Cad, Nzd) posted bearish weekly engulfings which suggest a deeper correction.