Stock Market Analysis – US stocks struggle to find direction
Stock Market Analysis Today
- US equities are struggling to find direction after a strong start to the week. But the dovish US Federal Reserve is seeing an echo in buy the dip strategies as for now anyway. We continue to live in the best of both worlds for stocks.
- US vaccinations continue and a robust economic recovery is in sight. There’s maximum policy support both on the fiscal and monetary side.
- Despite headline weakness in indices, price action remains constructive as rotation into more cyclical pockets of the market out of expensive growth remains a steady theme.
- Asia trades higher amid easing concerns that markets are too stretched. The focus turned back to the stimulus-fueled recovery from the pandemic.
- China Securities Journal reported that the People’s Bank of China (PBOC) might cut the reserve requirement ratio (RRR) for some banks in March.
- This came a day after the country’s top banking regulator said it was looking into ways to manage capital inflows to prevent the risk bubbles.
- And it seems to have reversed all the markets ills and dollar bids from yesterday’s market purview when only 24 hours ago the PBoC hinted at tightening.
- Risk markets seemed a bit encouraged by the Reserve Bank of Australia (RBA). Investors dipped their toes back into the unloved carry, and cyclical equity market pockets as rates vols decline quickly.
- The focus is on tomorrow’s QE. The Street is looking for AUD4 bn, which would be rather exciting, to say the least.
- The pound is up on expectations. Chancellor of the Exchequer Rishi Sunak will announce today colossal plans to extend the furlough scheme until September . Pledge to use the “full measure of our fiscal firepower” to save UK jobs.
Higher yields without a tantrum? US Treasury Yields
As commodity base effects, fiscal stimulus and reopening collide, it will be challenging to fight inflationist. But yields might be able to rise without creating a tantrum if the US dollar cooperated.
Assuming US 10-year inflation breakevens have settled into a 2-2.5% range, delivering the Fed’s average inflation-targeting framework at least in the eyes of market pricing, real yields (10y: -0.80%) are far too low ahead of a decisive period for economic growth.
But higher real yields need not be harmful on a cross-asset basis. After all, higher corporate earnings for equity markets and renewed upside in commodities will provide mitigating factors for the likes of AUD and commodity-heavy Emerging Markets FX.
However, a gentle rise in US real yields seems less likely if accompanied by a stronger US dollar.