Fed feelgood factor fades

2 mins read

By Han Tan, Market Analyst at FXTM

Asian stocks are in the red after US benchmark indices pulled back from record highs on Thursday, with stocks on the Nasdaq unable to hang on to their year-to-date gains. 10-year Treasury yields have posted a new high not seen since January 2020, much to the chagrin of stock market bulls, while the VIX index climbed back above the 20 level.

However, with 10-year yields having eased below the psychologically important 1.70% line early Friday, the futures contracts for major US benchmark indices are marginally higher, suggesting that US equities might be offered some reprieve before the weekend.


No rest for the weary

Concerns over Friday’s quadruple witching may yet give rise to heightened volatility during the US session, but unruly bond yields are still likely to be the main culprit going forward.

The slew of Fed speak in the upcoming week could also act as a volatility trigger point, especially if any of the officials offer different views from what had been conveyed by the Fed Chair himself after this week’s FOMC meeting.

Jerome Powell & Co certainly have a fine line to tread in conveying their collective policy bias moving forward, as this high-stakes game of chicken heats up between the Fed and the markets.

Despite Powell’s repeated insistence ad nauseum that policymakers intend to look past the green shoots of the recovery and maintain their ultra-accommodative stance, the Fed’s credibility risks being challenged by the glowing economic prints and investors’ seemingly unrelenting expectations of faster inflation.

It remains to be seen who will ultimately blink – the Fed or the bonds market. And that eventual swerve by either party is set to cause another massive reaction across global assets.

With both the FOMC and the Bank of England passing up on the chance to dampen the yield surge this week, bond traders had little qualm in continuing their challenge against the central banks. As long as Treasury yields persist higher, tech stocks will likely continue experiencing downward pressure.


Brent set for biggest weekly loss

Commodities are not being spared from the threat of faster inflation either, with Brent futures plummeting almost 7% on Thursday with the oil benchmark now hurtling towards its 50-day simple moving average.

Markets are concerned that inflation rates are rising too high, too fast and could in turn crimp global demand for the commodity. Brent futures are on course for a sixth consecutive day of losses, which has erased 14% of their gains so far in 2021.

With US stockpiles returning to December’s levels above 500 million barrels, coupled with the IEA’s latest assessment regarding the still “ample” global inventories, traders had already walked back some of the gains in oil benchmarks earlier this week before being slammed by another yield surge.

Much of the optimism pertaining to the latest round of US fiscal stimulus and OPEC+ output decision had already been baked into oil prices. Hence, demand-side factors need to yield further signs of a recovery in order for Brent to reclaim the $70 handle level.

Still, as the coronavirus vaccine continues coursing its way throughout the world, with major European countries resuming the use of AstraZeneca’s dose, a sustained global demand recovery is expected sometime soon.


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