Markets suffering from one case of “blues and two”



Market highlights

  • Two-year yields have hedged their previous six-month range over the past week alone – and whether this move is sustainable or not matters a lot.
  • Investors have a full data ledger to deal with this week, and signs of higher than expected inflation could hit the market like a ton of bricks
  • It was a volatile week in FX where the rally in US rates finally prevailed
  • Rising US yields continue to put pressure on gold, which remains mired in a downtrend that began last August

The coming week

2-year yields have hedged their six-month range over the past week alone – and whether this move is sustainable or not matters a lot. While the USD and risky assets might ignore equities over the long term, they will have a harder time ignoring “Blues and 2” moves (2 year returns) without a doubt.

* The blueprints are a sequence of future individual contracts grouped together over a period of 4 years. Companies use these IMM US Libor interest rate bands to hedge variable rate Libor loans, which the market speculates against.

Despite consistent messages from Fed leaders last week stepping up their “patiently accommodating” policy, interest rates continued to climb sharply, with the market forecasting a full rate hike in early 2023 and nearly three hikes. (cumulative) rates by the end of 2023.

I think it’s worth keeping an eye out for picking up steering volumes in the 1 year average curve exhibits. So far it has been focused on the September and December expirations, but if the movement continues, perhaps rate traders could start moving in June. Or is EDU3, which is currently recognized as the line in the sand for gaming on the downside?

Fed officials largely ignored recent developments in yields, viewing the rate hike as reflecting more positive growth prospects. However, the sharp reassessment of the Fed’s policy tightening – coupled with the rapid rise in real yields across the curve – poses risks of an unwanted tightening in financial conditions. Real returns have now become a source of volatility for painful trades rather than a source of support.

This week will be the last opportunity for Fed officials to change their tone in this regard, given the next blackout period ahead of the March 16-17 FOMC meeting.

Meanwhile, the RBA will have to fabricate a more convincing scenario to claim that QE is keeping yields low, even as their buying met fierce selling again last night. Many Australian bond sellers are likely punters caught offside by hard-to-keep central bank promises.

Just as the 1.2000 EURCHF floors drew speculators to the SNB line in the sand under the lure of a free money trade which, of course, ended up all but free money, the commitments of The purchase of RBA end-of-cycle bonds also attracted. a lot of long. Rule # 2 in my trading manual is “Nothing is ever free and easy when it comes to speculation.” (Rule # 1 is never to brag about winners).

Investors will also have a full data dossier to deal with this week, and signs of higher than expected inflation could hit the market like a ton of bricks. And even if the Fed minimizes the impact of base effects, traders won’t hesitate to bluff.

In addition to the inflationary revision, the core US January PCE stands at 0.3% mo and 1.5% yoy, which is 0.1% higher than expected. monthly and 1.4% year-on-year, and after 0.3% month-on-month and 1.5% year-on-year.

Oil markets

It’s a similar story for most commodities and bond currencies, with crude prices caught in the domino effect. Still, it’s quite surprising how much resilient oil has traded given the broader market moves so far, suggesting the unity of OPEC rather than a halt to management of the. offer.

The OPEC + meeting on March 4 is an increasingly essential ingredient and producers are faced with the delicate task of sorting out the different moving parts to form a strategy that makes everyone happy. But let’s not beat around the bush: more supply needs to come into the market to ensure OPEC + meets growing demand and keeps the internal discipline ducks in a row.

Evidence of a tighter oil market in 2021 prompted several brokers to revise oil price targets upwards, which helped push Brent to a 13-month high last week. While it is true that the market is likely to be under-supplied this year, what is ignored is the fact that this deficit depends entirely on supply cuts from OPEC +. The artificial shortage created by the OPEC + agreement will help accelerate the reduction of global stocks. Nevertheless, the rise in oil should be capped by the ~ 9 mb / d of spare capacity in OPEC +.

Currency markets

It was a volatile week in FX where the rally in US rates finally prevailed. The deterioration in risk sentiment over the weekend shook its foundations’ relationship sentiment, triggering a short squeeze in the USD, made worse by the fact that liquidity fell precipitously on Friday.

Gold markets

Rising US yields continue to put pressure on gold, which remains mired in a downtrend that began in August, with gold ETFs and speculative futures positioning both rising to around 80%. from last year’s range.

Technical trends manifested themselves when gold fell to $ 1756.30 from $ 1765/66 and then triggered stop losses in a cascading effect, with rising US bond yields triggering USD inflows being the strongest headwind for precious metals.



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