Swissquote: Hammered

Swissquote: Hammered

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By Ipek Ozkardeskaya, Senior Analyst at Swissquote 

The major US indices got hammered on Thursday, as the US 10-year yield spiked up to 1.60% adding as much as 23 basis points in a single session. The Powell effect remained short-lived, as his too easy stance regarding the rising inflation expectations didn’t get well absorbed in the market. Even the most bullish of investors questioned whether the inflation is really under control, when the Fed head couldn’t even reckon that there might be a problem in the very close future. 

The latest US data has certainly been the last nail in the coffin, not because it was bad, but on the contrary, because it was good. The US durables goods orders rose 3.4% in January versus 1.1% expected by analysts as the initial jobless claims fell to 730K last week, the lowest in almost two months. 

Investors dropped their sovereign bond holdings like a hot potato as all new piece of data pointed at improvement in economic conditions and called for rising inflation.  

Equities dived along with the sovereign bonds. Nasdaq led losses with a sizeable 3.52% drop as tech stocks fell big as a result of a mass migration from growth to value stocks. Nike, Caterpillar, Johnson & Johnson and Goldman Sachs were among the rare stocks finishing the session higher. Apple, Microsoft and Disney fell, as Tesla shed 8%.  

The VIX index rose to the highest levels since end of January, when we saw the Gamestop frenzy shaking the market sentiment. Gamestop however saw its price doubled on the back of its CFO’s resignation and on speculation that Ryan Cohen’s tweet of a McDonalds’ Sunday ice-cream may mean that he intends to fix the company’s business as McDonalds did. The whole thing is like the Theatre of Absurd. It’s fun to watch as long as it doesn’t concern you. 

Anyway, today, we will see how the US personal income and spending, which are expected to hint at a 9.5% rise in income and 2.5% rise in spending may have impacted the PCE index. And a soft PCE figure will again leave many of us scratching our heads on where on earth all this spending goes and how come it doesn’t translate into higher consumer inflation. 

Looking at the US 10-year yield, we are near a year-high levels, but still below the pre-pandemic range, and well below the prior to the US-China trade war range, where we have seen the 10-year yield reaching the 3.20% mark. So, in reality, it’s not the absolute level but the rapid pace of increase that worries risk investors.  

And we know that soaring yields is no good for the economy. So, the Fed should soon intervene to do something about it. Given its commitment to illimited bond purchases, the Fed could buy more sovereign bonds, and buy them where it is needed to stop the bleeding across the yield curve. Also, we shouldn’t forget that the Fed has not played all his cards just yet. It could soon be forced to pull the ‘yield curve control’ joker to ease the tensions in the market. 

In the FX, the US dollar gained sharply against its major peers and EM currencies as a perfect sign of mounting anxiety among investors who are selling their risk holdings and converting back to US dollars waiting for the dust to settle. We have already seen a USD rush at the beginning of the pandemic sell-off, where even gold couldn’t offer a piece of mind to investors.  

Gold fell to the lowest levels since December as soaring sovereign yields outweighed the urge for hedging against inflation. 

US crude paused its rally, although the main catalysts of the actual market turmoil, which is the positive economic outlook and expectations of higher spending, are fundamentally supportive of oil prices.