Brent Crude Up 2% in Early Asia Trade, Could Boost U.S. Treasury Yields

With the US stimulus package very much baked into the cake, the robust economic data inputs are trying to hold the risk on an even keel amid very mixed risk signals. But now that we are in FOMC self-imposed blackout period with markets left to their own devices, investors don’t know what to do with themselves as improving activity provides some comfort to higher yields. However, The Street can’t stop looking over their shoulder at the impending inflation storm clouds gathering in the distance.

But also hurting sentiment in Asia is China media Yicai—controlled by Shanghai city government—has published a front-page commentary saying that as the PBoC normalizes monetary policy this year, it’s unlikely that benchmark rates or the reserve requirement ratio will be cut again for banks, while less credit and stabilization of leverage will be the main policy theme in 2021, citing onshore experts in interpreting NPC work report.

is up 2.6% early in Asia, which could boost UST yields from an inflation perspective. The positive impact on prices of a more hawkish-than-expected OPEC+ outcome last week, after it left the bulk of its supply curbs in place, is exacerbated by supply concerns following attacks by the Houthi rebels on the Ras Tanura port in Saudi Arabia on Sunday.

The last thing anyone wants in a recovering global economy is higher oil prices, and we are likely nearing a point when higher oil prices become a negative rather than a positive influence over risk assets via the inflation throughput to higher yields.

ASIA FOREX

The throughput of higher prices for Asia FX suggests the ‘s outperformance over the past week could be reversed by the negative impact of higher oil prices on India’s current and fiscal deficits.

Asia EM FX, which get hit on higher oil besides INR, is and , and I’ve turned negative in this environment of higher oil for those local Asian currencies.

FOREX

The Street’s short recommendations came under further pressure over the past week on remarks from Fed Chair Powell and Friday’s solid .

Ultimately, the US dollar fate is all about repricing the Fed hikes. When FX traders start bringing forward rate hikes to the next two years, this matters for the US dollar hence the pivot higher.

More significant pushback from other central banks (RBA, RBNZ, ECB) to their respective bond markets over the last week than the Fed provided has given reason for the dollar move to broaden out.

GOLD

The interest rate pressure is likely to be a more extensive and nearer-term factor for than the positive force of expected inflation.

China Markets

China are in focus as the annual session of the National People’s Congress (NPC) continues today. These data points should be taken with a pinch of salt over the next couple of months on a combination of Chinese New Year and COVID-related base effects. Still, a trend of strong and relatively weak continues. Exports rose a better-than-expected 60.6% y/y YTD in February (cons: 40.0%) and imports increased 22.2% on the same basis (cons: 16.0%).

Taken superficially, these data prints suggest the external economy continues to drive China’s overall recovery while consumer-driven imports are lagging. That, in turn, should allay fears that the government is keen to lean against leverage aggressively. More broadly, any details in the NPC that inform expectations for rebalancing away from exports towards consumer spending should assist CNH outperformance relative to its peers.

US Markets

Rising UST yields will continue to test cross-asset risk sentiment, with the US Congress on the cusp of sending a $1.9 trn stimulus bill to President Biden for sign-off. With Friday’s employment report revealing a stronger-than-expected jobs recovery in February (379k, cons: 200k), consensus expectations for US GDP growth this year are increasing. Bloomberg’s measure is now 5.5%, up from 4.9% a month ago, and it should have room to climb.

Improving activity data should make investors more comfortable with higher real yields that could lift reflationary assets once more, including commodity prices and more value-dominated equity indices.

KEY SAUDI OIL SITE ATTACKED SENDING BRENT +$70

Oil prices have spiked higher this morning after Iran-backed Houthi rebels unleashed a coordinated attack on Saudi Arabia oil facilities and military bases.

With OPEC pursuing a tight oil policy and US Shale Oil inelastic supply response to higher prices, any disruption to the Middle East supply chain could shoot oil prices considerably higher. Indeed, this could be the flashpoint that ignites that smouldering Middle East powder keg as apparent lines in the sand got crossed when the attacks targeted civilians.

So far, there have been no reports of significant damage or oil supply chain disruptions, but this is an evolving story that will keep oil traders on their toes.

On top of the terrorists attack, Oil prices are also buttressed this morning on the back of data surprises.

While the robust US jobs data demonstrates once again that the economy is poised to accelerate as the risk from COVID recedes. China’s robust export data points to strong global demand suggesting the damage of mobility restrictions is starting to fade.

MARKETS

US yields finished little changed Friday at 1.57%, though that came after spiking as high as 1.62% immediately after the stronger than expected payrolls print. US equities ended higher, up 1.9%. Oil up a further 3.5%.

The bright finish in US equities on Friday may set the broader ton today. Despite the debate on inflation, tactically, everyone should feel reassured if higher yields are driven by growth expectations improving rather than market-based inflation repricing.

With interest volatility as the centre of everyone’s concern, thankfully, the beat on US payrolls provided welcome relief for equities and points to an inflexion in the labour market. The stronger-than-expected print demonstrates once again that the economy is poised to accelerate as the risk from COVID recedes.

Also helping assuage some of the yield fears, China’s exports accelerated far exceeding market expectations, pointing to strong global demand suggesting the damage from mobility restrictions is starting to fade.

Stimulus effect

The prospects for a turbocharged recovery in US consumer spending have increased with the passage of the Democrats’ $1.9 trn fiscal stimulus proposal and a rapid vaccine rollout that leaves the consensus forecast for 2021 US GDP growth 4.9% as much too pessimistic.

The market may be making more of a meal on yields than the Fed. And Perhaps Powell and Co will view a shakeout, especially in the frothy equity markets, as a good thing as long as financial conditions don’t tighten too much.

Still, the strong momentum in macro data heading into the likely Q2 acceleration will make it increasingly challenging to keep markets from getting ahead of the Fed curve represented by the dot plots, for instance, as already the market has priced in 2023 hikes versus the Fed 0.

And this week, the markets will have to go it on their own as the pre-March FOMC blackout period means investors are left to their own devices until the next FOMC meeting on 17 March.

But most participants welcome a move to higher rates as the front end remains awash in cash. Despite the volatility in rates out the curve, the note remains range-bound, and bills are virtually unchanged.

The pre-eminent macro question for the United States in 2021 is: Will the medium-to-large burst of inflation and economic activity that is practically baked in the cake for the next six months be durable or transitory? A quick spurt or a long boom? I don’t think we can know yet, but putting pieces of this puzzle together will be the overriding theme for “Macro” in H2 2021.

OIL MARKETS

On top of the OPEC surprise and Houthi led the attack on Saudi Arabia, Oil prices are also shifting higher this morning on the back of data surprises.

While the robust US jobs data demonstrates once again that the economy is poised to accelerate as the risk from COVID recedes. China’s robust export data points to strong global demand suggesting the damage of mobility restrictions is starting to fade.

Traders are pricing in a US economic boom, which will create a massive uptick in demand for gasoline. The USA is the most services-heavy economy globally, and once the reopening narrative goes in full swing, that will provide the icing on the cake. And the cherries on top will unquestionably be the 1.9T of stimulus passed Sunday and the massive US infrastructure package in the works

Oil prices and traders alike have booked a one-way ticket higher since OPEC surprised the market by OPEC+ surprised the market by keeping its production quotas unchanged for April, allowing Oil to take the flyover route for the start of the main reopening surge in Q2.

Although members discussed COVID demand risks, the primary takeaway is that shale producer remains highly inelastic to prices due to capital constraints allowing OPEC+ to rule the supply roost and punch their ticket higher for oil prices. Meanwhile, the US oil rig count is up by one unit to 310 wells, the highest since last May but still not at a level that will not upset the current supply and demand rosy red delicious apple cart.

OPEC’s supply strategy continues to work because catching the market by surprise, and traders are left to play catch up to OPEC’s conservative demand expectations

OPEC is now clearly pursuing a tight oil market strategy. It is causing several Oil traders and Bank analysts to raise their price forecasts for Q2 and Q3, finding a strong echo in market sentiment to the extent that not even a stronger US dollar could derail this runaway locomotive.

Oil Sands Give Prices a Boost With Half-Million-Barrel Output Cut:

Major oil sands producers in Western Canada will idle about half a million barrels a day of production next month, helping tighten global supplies as oil prices surge. Canadian Natural Resources Ltd.’s (NYSE:) plans to conduct 30 days of maintenance at its Horizon oil sands upgrader in April will curtail roughly 250,000 barrels a day of light synthetic crude output. President Tim McKay said in an interview Thursday. Work on the Horizon upgrader coincides with maintenance at other sites. (Bloomberg)

On the macro front, US payroll data point to an inflexion in the labor market. The stronger-than-expected print demonstrates once again that the US economy is poised to accelerate as the risk from COVID recedes.

FOREX MARKETS

Ultimately, the US dollar fate is all about repricing the Fed hikes up to 2023, as when FX traders start bringing forward rate hikes to the next two years, this matters for the US dollar.

More significant pushback from other central banks (RBA, RBNZ, ECB) to their respective bond markets over the last week than the Fed provided has given reason for the dollar move to broaden out.

The dollar is in demand as the USA is the most services-heavy economy globally, and once the reopening narrative goes in full swing, that will provide the icing on the cake. And the cherries on top will unquestionably be the 1.9T of stimulus passed Sunday along with a future massive US infrastructure package.

A key question for the March FOMC meeting is how participants will revise their economic and interest rate projections to reflect further fiscal stimulus. At the time of the December 2020 meeting, participants would likely have assumed that the Phase 4 fiscal package would pass but would not have believed that Democrats would win control of the Senate and pass additional budgetary measures.

The clock continues to tick on an extension of the reserve/Treasury exemption from supplementary leverage ratio (SLR) for USD bears. Front end concerns over the Fed’s lack of commentary on the upcoming expiration of relief from the SLR disrupted the short-term markets. However, the market consensus is for an extension. Despite Senators Warren and Brown’s plea to deny the SLR relief extension, the street sees such a move as ill-conceived. Given the recent in the UST market, an extension of the current arrangement makes the most sense at this time.

USDJPY

Japanese investors have net sold 3.6tn of foreign bonds over two weeks period, the largest over the past 20 years, suggesting US yields have more room to reprice, and the unwind of currency hedges could also support higher USDJPY.

GOLD MARKETS

Gold prices have fallen consistently since 25 February and have been mainly on the defensive all year, shedding USD270/oz at one point since hitting year-to-date highs of USD1,959/oz on 6 January. The jump in the USD and 10-year yields on Friday, following the better-than-expected February monthly payroll number, initially looked like gold was about to fall through the trap door. But later in the day, gold managed to pare losses and stabilize in line with softening US yields and ended the week bobbing around USD1,700/oz. Some of this may be due to end of week profit taking and short covering. The market may have fallen too steeply, too quickly. Gold has been undercut by cheerful economic optimism over a robust economic recovery and faster than anticipated rises in bond yields.

This site uses cookies to offer you a better browsing experience. By browsing this website, you agree to our use of cookies.