Yields pause for breath as markets regroup

In this week's Macro Insight I discussed...

Markets gyrates around after a marginally dovish FED last week, but with disappointment on SLR relief and quarterly options expiry seeing wild sector divergences.

A pull back after the vicious spike in yields last week was to be expected. However, 1.50% will likely act as a support as we now work our way towards what looks like an inevitable 2.00% for the US 10Y yield.

Vaccine distribution has been poor in Europe and we have also seen signs of a 3rd wave leading to further lockdown extensions in Italy, France and Germany. Despite this, European equities are benefitting from the value rotation and continue to trade well even alongside US equity weakness.

I am looking for a bit more weakness into month end for equities as retail buying has likely held the market up along with expiry gamma last week. I can see another bout of tech weakness should yields reach 2.00% in the short term. I think there may be some more weaker hands to flush out of the high growth tech names before we can stage a sustainable rally into the summer. Longer term equities probably go higher but positioning is still very bullish and may need to unwind some more.

Lots of central bank speakers, European Flash PMIs and Biden’s new infrastructure bill being discussed.

Despite being quite stable against the majors and DXY being anchored to 92, the EM currencies are weakening more against the dollar, suggesting more USD strength than meets the eye. This may be a precursor to some risk of sentiment in markets.

Major commodities are correcting such as oil, copper and wheat providing dip buying opportunities to play the structural commodity bull thesis we have discussed. Still bearish gold, on the premise of higher real yields over coming months. Major resistance around 1760. Don’t expect inflation to run away based on inverted inflation breakevens curve which should keep real yields floored in the short term.

Filmed on on Tuesday 23rd March 2021

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