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Daily Market Comment – Fed minutes take pressure off soaring yields but stocks slip



  • US yields pull back as Fed says it will take “some time” to achieve its goals
  • Stocks mostly down but Dow Jones rises amid rotation out of tech shares
  • Dollar holds onto gains after huge jump in US retail sales

Fed minutes restore some calm in bond markets

Treasury yields fell back from one-year highs on Thursday as worries about higher inflation and Fed tightening subsided somewhat. The Federal Reserve played down the growing threat of inflation making a comeback in its January meeting minutes yesterday, indicating that it will overlook any “temporary factors affecting inflation”. Policymakers also tried to allay concerns about an early tapering of asset purchases, saying it will “take some time” for substantial progress to be made towards their inflation and employment goals.

Long-dated Treasury yields steadied after the minutes, having already started to retreat earlier in the day. The 10-year yield is currently settled around 1.2750%, down from a high of 1.3330%, while the 30-year yield is at 2.04%, down from 2.1120%.

Rising yields turn spotlight on valuations

The Fed’s assurances lifted some stocks on Wall Street but not all. Although the reflation trade has generally been positive for equities, the recent spike in yields has turned the spotlight on the sky-high valuations of companies that have benefited the most from the almost one-year-old risk rally, namely, the tech giants.

The recent frenzy with the so-called meme stocks was perhaps the strongest sign yet of a stock market bubble in formation and even caught the attention of the Fed staff, with the minutes making a reference to asset valuations being “elevated”.

But while nobody seems ready to give up on the stock rally just yet, there’s been a bit of a rotation taking place this week out of tech stocks and into cyclicals, which stand to gain more from the recovery when economies fully reopen.

The Dow Jones Industrial Average, which is mostly made up of old economy stocks, rose for a third straight day on Wednesday (+0.3%), but both the S&P 500 and Nasdaq Composite closed in the red. It’s a mixed session so far in Europe and US e-mini futures point to modest losses on Wall Street today.

Dollar stands firm on data boost

While stocks seem to be lacking direction, the US dollar is resisting the slide in Treasury yields, having surged yesterday on the back of stronger-than-expected data out of the US. Retail sales shot higher in January, as Americans started to receive their $600 stimulus checks. The retail control group measure of retail sales, which is used in calculating GDP, jumped by an impressive 6.0% m/m in January. Producer prices and industrial production also rose more than forecast.

The upbeat data could be a glimpse as to what to expect when the next stimulus package arrives. President Biden is currently trying to draw support for his $1.9 trillion proposal as Democratic Senators are split on some aspects of the bill.

The dollar was last trading down on the day against a basket of currencies, but not too far off from Wednesday’s one-week top of 91.06.

Pound leads gainers, loonie struggles despite soaring oil prices

The euro has perked up today after two straight days of losses and was edging above $1.2050 in early European trade. The EU appears to be getting its act together on the vaccine front, placing orders for 350 million additional doses for delivery in 2021.

The pound was also back in a buoyant mood and the best performer so far today, though the $1.39 area is proving to be a tough resistance barrier to overcome.

The Australian dollar was another strong performer, being lifted from solid employment figures. But the Canadian dollar continued to struggle following the greenback’s bounce back and the ongoing ascent in oil prices is providing only limited support.

Both WTI and Brent crude are powering ahead to levels last seen in early January 2020, testing the $62 and $65 levels respectively. The deep freeze engulfing the Permian Basin in the United States has cut oil production by almost 40% and the disruptions could last for several more weeks. Combined with the optimistic stimulus and vaccine backdrop, it’s hard to see oil’s bullish momentum running out of steam just yet.

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