State of The Markets | Risk-On Continues With Caution

STATE OF THE MARKETS

Risk-on continues with caution. Nikkei (+1.73%) surged higher on Asian trading early Friday, following the lead from Dow (+0.58%), S&P (+1.04%), and FTSE100 (+0.17%) that saw investors snapped bargain stocks as ECB pledged to keep yields under control and US stimulus signed into law later. Soft demand in bonds was observed as 10Y yields climbed higher approaching 1.58% as of this writing.

Crude closed above $66.00/bl, as investors expected a robust economic recovery in second half of the year, after President Biden pledged to get major vaccination completed by May 1. Gold that climbed to as high as $1,740/oz, was met with strong supply that pushed the yellow metal lower to closed below $1,721.45, subsequently forming a bearish pin bar.

In the FX space, medium term demand for Dollar retreated as investors favored the high beta Comdolls with Swiss hedging seen across the board. Euro returned to overbid Sterling in the short-term, after ECB pledged its support to the Union economy. Risk sentiments increased with largest gain seen in the Loonie, after strong bid flooded the oil markets.

OUR PICK – No new pick.

No new pick going into weekend. Our FX risk sentiments suggested that long term investors are still skeptical of the equities rally, hence the Swiss haven hedge. ECB pledge to accelerate money supply to contain rising yields somewhat calmed investors who expect US Feds to follow suit. The new $1.9T stimulus should buoyed equities for a while as long as Feds continue its bonds repo program and willing to increase monthly purchases. At this point, we are yet to see BoJ hands in the US treasuries and this may come after the tax season ends in April.

Trades updates : MO had reached short term TP1 and broke long term downtrend line. We expect a pullback on this risk-free trade. GBP/USD had an early exit as we saw Dollar weakness started to creep in on Tuesday. Silver short-term buy limit and medium-term sell limit was not filled, but price is moving in our projected direction. COG reached short-term TP1 and stop updated to $18.40. Have a great weekend!

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Disclaimer:

This article is for general information purpose only. It is not an investment advice or a solicitation to buy or sell any securities. Opinions expressed are of the authors and not necessarily of MFM Securities Limited or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Given Biden’s decision to attack the energy sector, especially oil and gas, could we be looking to see oil trading at $100 by the end of the year? And if this happens how does this affect inflation as cost of transport for goods and services skyrockets??

Higher inflation higher interest rates and i am sure that will only make a stock market crash even more of a possibility.

Personally I have been long oil for quiet a while and I am still bullish.

Cheers

Blackduck

Hi blackduck,
Thank you for your feedback and time reading our post.

Looking at the monthly, quite obvious the black gold is trying to break out of the long term downtrend, but given current market dynamics with the vaccine rollout setbacks in Europe and South Asia, we expect a pullback in the medium term. Will it reach $100 by year end, your guess is as good as ours, honestly :slight_smile:

Yes, in such scenarios we would see higher goods and services, but at this point since people don’t run to the store and stock up, prices might remain stable; though in the last 5 years alone we can see it’s rising. For example, a big mac now, cost more than it was 3 years ago.

on this note, contrary to popular opinion, when we compare long term interest rates, the funds rate and Nasdaq, the results were mixed. Yes, higher inflation, higher rate, stocks markets took a dip because leveraged funds were reduced. But look at the picture below:

When we normalized the data, stocks still plunged back in 2000 during the dot com burst even rate were slashed closed to zero. Interesting enough, on the recent rate hike from 2015 till late 2019 before the pandemic hit…interest rate rise and stocks still rise.

For one reason, not everybody trade stocks on leverage, and most importantly even central banks are in the stock markets! We can see from the 13F filing that even SNB bought penny stocks!! :sweat_smile:

I think, very much of the high inflation that happened back in the 80s during Reagan administration and Paul Volker, the Feds chair then, who hike rate to the highest in US history (he was eventually fired by Reagan) is now factored into the stock markets. That is why we have such high valuation.

And today’s advance of technology that was not present back in the 80s, which make it easy for consumers to trade and invest, very much of those excess cash is now funneled to the markets instead of purchasing goods and services.

Hope that make sense.

Abdul
MFM Team

Yes thanks for you insight. I was around to see those high interest rates. Interest rates of about 17%. I have been watching the 10 year bond and whilst it has steadily been falling I notice some indication that the bond maybe entering a period of accumulation with the view to a trend reversal. I believe that Biden has indicated that Janet Yellen will be the next head of the Fed. I believe she will be more dovish towards inflation as she is more interested in social issues than a stronger economy.

Cheers

Blackduck

1 Like

I believe so too…and we have to remember that the debt level then when they hike the rate, was not as humongous as it is today…so the hike would be minimal and gradual as to control the interest payments…right now US debt over GDP is already over 100%…107.6% last year…now with the last stimulus stimulus, then another stimulus…this is unprecedented…I just wonder what the end game would look like… :sweat_smile:

Cheers

Abdul
MFM Team

Great point and it is very concerning. What is also troubling is these people that believe that the new safe haven for storing their cash is Bitcoin. Although I read some time ago that there will be a resurgence in people investing in gold. Gold is a very tangable asset unlike bitcoin.

Cheers

Blackduck