It’s not a market for the faint of heart is it? Last night the Australian dollar surged as DXY was thumped with bond yields and tech stocks roared back in a typical bear market rally. My charts are down this morning so we’ll have to stick with text.
The Australian dollar ripped out of its funk, lifting to 0.772, up about 1% on the night.
Crucially, oil fell as the EIA forecast a strong rebound in US shale to 12mb/d. If so, it will likely break OPEC discipline as well. In that event, then the entire bond back-up may already be over.
Base metals were bashed again with copper down 2% despite a falling DXY. This could either be technical or the market becoming skeptical of Chinese growth.
EM stocks were down hard but junk bonds rallied a little.
Treasuries were well-bid with yields down materially across the curve which enabled stocks to fly, especially the growth areas that have been hammered recently. Nasdaq was up 4% including notable moves such as Tesla up 18%!
In any normal circumstances, I would be very comfortable that this being no more than a bear market rally. Such wild moves are typical of such. As well, US inflation is yet to even flow through in the data. Oil supply hasn’t switched yet, either. There is plenty of scope for yields to rise further yet as US growth, yield and inflation advantages all widen through mid-year. That remains the base case.
But there is also what comes after. As I noted yesterday, with the passage of the stimulus bill, there is a nine-month boom ahead but beyond that, there is now a gigantic fiscal cliff on the other side of it:
US fiscal cliff
So, before we get too entrenched in one market view, that the bond back-up has more ahead of it as oil prices march on and the US dollar with them, we have to acknowledge that this is no ordinary market. As noted many times, this market cycle is pumped full of amphetamines, and is capable of crashes down and crashes back up without so much as a second thought.
It is possible, therefore, that the taper tantrum is already over, DXY has had its run and equities might revert to growth with a bullet! If so, the Australian dollar correction is also over. If that were the case then we’ll see everything that has recently been bashed begin to price a lowflation future once more.
One reason why we might see the bond back-up as done, and DXY set for further weakness, is that last night commodities and EMs did not fire up with the rest of the risk trades. If we see this as a signal rather than bear market rally noise then it could be argued that the market has begun to price both a weakening US and a weakening China for 2022.
That said, if that were the case, then the Australian dollar would also probably still have peaked given commodities would be fighting fundamental headwinds even as the financial flows were intact while DXY weakened again.
The base case remains further inflation worries with all of the market moves that that entails. The big inflation pulse is still to even hit the data and it will take an almighty market act of one-eyed discounting of the future to ignore it as it hits. As well, I do expect the Biden Administration to move quickly to pushing its new round of fiscal spending aimed at infrastructure and any “new green deal”. That would mitigate the 2022 fiscal cliff and entrench US growth, yield and inflation leadership into the medium-term giving DXY more strength.
Although it would also give commodities a lift, the benefit is marginal given the bulk of volumes in developed economies are recycled material so it’s not a game-changer for the AUD amid US growth leadership.
So, let’s not jump at the shadows thrown by a market cavorting on disco biscuit. My best guess is that last night is a classic bear market rally for tech and the AUD and weakness will return before long as the catch-up inflation pulse hits the US.
