Swissquote: Treasury yields surge on promising vaccine news, gold & oil recover
By Ipek Oykardeskaya, Senior Analyst at Swissquote
It’s one of these days where investors don’t know what to do with the good news. Asian markets kicked off the week on a flat-to-negative note despite the most-expected news that the immunization with Pfizer and BioNTech’s Covid vaccines do curtail the transmission of the coronavirus. In other words, it means that the Covid vaccines will actually be the game changer in 2021, allowing the economies to reopen for good, hopefully, and companies to get back to their pre-Covid pace of business.
But it also means that the huge monetary and fiscal stimulus will be harder to justify, and companies will need to fly with their own wings. The major worry is that the rising inflation worries could accelerate the end of the stimulus game.
As such, investors continue dumping their sovereign bond holdings, but not yet their equities. The US 10-year yield jumped to near 1.38%, as the Australian 10-year yield surpassed 1.60%, encouraging the Reserve Bank of Australia (RBA) to resume its bond purchases to fight back a sizeable positive shift of its yield curve as a result of the global reflation trade.
And that’s the magic of the actual co-stimulus setting. The governments – of developed countries of course - issue bonds, and their own central banks buy them. If yields take off, they just buy more.
Reflation trade or not, Bitcoin continues its journey to the moon. The price of a coin reached $58K over the weekend. Because we don’t have enough data to predict how Bitcoin would react to inflation, we can’t predict how the reflation trade would affect the cryptocurrency. Recent history shows that Bitcoin has performed well during the 2020 post-Covid-plunge risk rally. So, if it reacts well during an eventual market rout as well, then investors found a real gem.
Back to traditional assets, gold rebounded from $1760 per oz as the rising inflation worries overweighed the rocketing treasury yields, hence the opportunity cost of holding gold. There is a rising conviction that gold could soon be needed as a hedge against an eventual overshoot in inflation and it’s worth paying a higher price to have a solid insurance in hand.
The US dollar is soft across the board and the soft dollar benefits to Cable which cleared the 1.40 resistance for the first time since April 2018. The pound continues surfing on a wave of post-Brexit optimism and has potential to consolidate and extend gains above this level.
But the strong pound will likely be an additional weight on British equities’ shoulders at the start of the week. The FTSE 100 could slip below the 6600p mark at the open, despite firm energy and commodity prices.
Oil fluctuates near the $60 per barrel, with limited conviction on both directions. On the one hand, the end of the Texas weather tragedy should temper the abnormal uptick in oil demand, restore supply in the US’ biggest oil refineries and weigh on oil prices. On the other hand, the improved positive outlook on promising vaccine results should throw a floor under the price pullback, and keep oil prices on their medium-term positive trend. Under these circumstances, the OPEC’s decision on March 4th should help investors making up their minds. There are rising rumours that Russia is willing to start curbing production cuts. The last time we saw a similar disagreement between Saudi and Russia, the price of a barrel had plunged to $ -40 per barrel.