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U.S. stocks regained steam after Fed “dovish” rescue
Lucia Han
2021-03-22 363

Abstract: U.S. stocks rose briefly after the Fed played down inflation fears. Yields on Treasuries have soared, while the outlook for gold has darkened. Oil prices were falling and supply risks remained. AUD was facing upside risk as RBA continued to be 'dovish'. Can GBP go to 1.4 amid increased uncertainty about vaccine supply?


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Yields on U.S. bonds rose sharply, causing U.S. stocks in turmoil

Early last week, U.S. bond yields briefly dropped from their previous highs, causing U.S. stocks to rebound after falling. Jerome Powell's disregard for inflation in interest rate decisions and the Fed’s continued quantitative easing helped the S&P 500 and the Dow hit new highs, while the Nasdaq rallied strongly. However, the rescue efforts seemed to have only a half-day's notice. Then, the yield on the 10-year and 30-year Treasury bonds surged above 1.7% and 2.4%, their highest levels in more than a year, as inflation fears returned, triggering sharp declines in the three major U.S. stock indexes. At last week's close, the S&P 500, Nasdaq and Dow were at 3,915.46, 13,116.17 and 3,2862.3, respectively, down 0.61%, 2.11% and 1.16% for the week. See S&P500 Chart Below:

Source from: Mitrade

On the economic front, the number of Americans filing new claims for jobless benefits rose to 770,000 last week, higher than economists' expectations of 700,000, another sign that the economy is out of step with the labor market recovery. Separately, U.S. retail sales in February fell by 3% compare with the prior month due to supply chain disruptions caused by winter storms, but the new stimulus package Biden signed into law last week is likely to boost consumer demand in the coming months. U.S. GDP data will be released this week, and it will be worth keeping an eye on as there is a market view that the figure may have hit 10% in the first quarter.

Have oil prices fallen to the point where the "supercycle" ends?

Last week the oil market was deeply gloomy. Oil prices fell for the fourth day in a row, mainly due to the following: 

1. The strong rise of the U.S. dollar put pressure on crude oil prices. 

2. The suspension of the AstraZeneca vaccine in many European countries have added to market worries about the region's economic recovery and oil demand. 

3. The sharp rise in oil prices had prompted some traders to take profits. 

On top of that, concerns about oversupply intensified after API and EIA crude oil data diverged by recording a drop of 1 million barrels and a rise of 2.396 million barrels, respectively. U.S. crude and Brent crude traded sharply lower after the data. Not only that, the IEA reported last week that the oil market is unlikely to see a supercycle because the market is well supplied and there is plenty of spare oil capacity around the world, and that oil demand would not return to pre-pandemic levels until 2023. Crude oil losses accelerated after the IEA report. At last week's close, U.S. crude and Brent crude were trading at $61.42/BBL and $64.51/BBL, down 6.33% and 6.74% for the week. See WTI Live Chart Below:

Source from: Mitrade

Despite a strong rally in price spurred by OPEC + production cuts and accelerated vaccination, the uneven recovery in global demand for crude oil in the future leaves no doubt that supply risks remain.

Gold slowly rallied after the Fed's dovish moves

Gold edged up last week. At the start of the week, the metal was trading almost sideways on light volume as it awaited the decision by Fed, which then kept interest rates close to zero despite an improved outlook for the economy. Gold received a significant boost after the decision. At last week's close, it traded at 1,744.86, up 1.04% for the week.

Despite the Fed's dovish tone, gold's upside remained limited as the economy continues to recover and Treasury yields may move higher. And Treasury yields spiked ahead of the Fed decision, pushing the dollar index above 92, but the dollar suffered as the Fed continued its quantitative easing. The U.S. Dollar Index ended last week at 91.744, up 0.09%. The decision eased market fears that the Fed might raise interest rates sooner than expected after a surge in bond yields triggered by a faster-than-expected U.S. economy and inflation fears. In the short term, however, the dollar is likely to remain supported by higher Treasury yields.


AUD turned positive after surprising jobs data

AUD/USD came under pressure early last week on the back of higher USD and the "dovish" minutes of the latest RBA meeting. In the minutes, the central bank reiterated that it would keep interest rates low in the longer term until the economy fully recovers and unemployment falls. After the decision, the Aussie reversed losses and recovered to 0.78 against the U.S. dollar. In addition, the Australian employment data released last week also brought a pleasant surprise, which showed the number of Australian jobs increased by 88,700 in February, far exceeding the market expectation of 30,000, and the unemployment rate fell to 5.8% from the previous 6.3%. AUD/USD closed the week at 0.7742, down 0.19%. 

At the same time, retail sales dropped by 1.1% in February, but the outlook for the economy is likely to remain strong as employment continues to rebound and the virus is contained. Going forward, the RBA's follow-up to the Fed's large-scale quantitative easing and the control of bond yields are likely to be the headwinds for the Aussie. But the bullish sentiment in financial markets may still help boost the risk currency Australian dollar.

Was sterling still bullish as BoE maintained quantitative easing?

Last week, the BoE announced its interest rate decision, keeping its asset purchase programme unchanged and starting to buy £150 billion ($195 billion) of government bonds it had previously announced. Moreover, it agreed with the Fed that the current surge in bond yields was an improvement in market sentiment. GBP pulled slightly higher against the dollar after the decision. It ended the week at 1.3868 against the U.S. dollar, down 0.35%. 

On top of that, Britain was in a growing dispute with the EU over vaccine supplies. Last week, the chairman of the European Commission threatened to halt vaccine exports to the UK, raising uncertainty about supplies and tensions between the EU and Britain. So far, four times as many people have been vaccinated in the UK as in the rest of Europe, with around 37% of them having had one dose of the vaccine. As a result, the UK's economic recovery will pick up as the vaccine is widely vaccinated in the country, which will be positive for GBP, but the UK's post-Brexit relationship with the EU could become a potential drag on the growth.


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