Stimulus expectations diminished
Stocks are mostly lower after strong US economic data dampened the argument that the economy still needs massive stimulus and as rising inflation expectations start to weigh on valuations. Technology stocks are leading the decline as pricing pressures will likely have the biggest impact on their bottom line. The skyrocketing move in yields is triggering some investors to take off some of their most profitable frothy trades. Even the Warren Buffett-led Berkshire Hathaway reduced their holdings in Apple. The Oracle of Omaha also exited his stake with JPMorgan Chase and increased holdings in oil, pharmaceutical, and telecom stocks.
The steady rise into uncharted territory could end for US stocks if the 10-year Treasury surges beyond 1.45%. Stocks won’t see relentless buying if yields continue to rise and that makes next week’s testimony by Fed Chair Powell the biggest risk event of the month. The FOMC minutes delivered no surprises but offered some reasons to suggest the Fed is still on auto-pilot despite the current surge in yields.
The Fed’s minutes for the January 26-27th meeting delivered no surprises. Temporary inflation is expected and will unlikely shift their policy in the short-term. The pace of improvement in the labor market has slowed and that should remain the case until we see how virus mutations impact the reopening of the economy. The Fed won’t change their purchases until a substantial progress is made with their goals and that confirms the belief taper talk won’t happen for a while, possibly queuing up the Jackson Hole Symposium at the end of summer as a key event.
The streak of three consecutive months of declining sales during the 2020 holiday shopping season has been snapped. The biggest economic release of the week was January Retail Sales rebound sharply 5.3%. Despite job losses in January, stimulus payments kicked in and Americans shopped. Shoppers spent on electronics and appliances.
Producer prices rose sharply even after you remove energy prices. The headline producer prices reading for January printed at 1.3%, significantly higher than economists’ forecast of 0.4% and the prior 0.3% print.
Energy markets are focusing more on the deep freeze that is curtailing US production by a third and less on Saudi Arabia’s plan to ramp up production in the coming months. Despite a strong dollar and expectations the Saudis will quickly take back their surprise 1 million barrel a day production cut, oil prices continue to creep higher.
The Saudi plan to increase production however is being spun as a sign that there is a lot of optimism for the global economic recovery. The crude demand outlook should warrant the Saudi increase in output since Asia is winning the war on COVID, the US is headed in the right direction and Europe is slowly getting everything in order.
The debate on whether this is the beginning of a commodity supercycle is growing and that could support another 10% higher for crude prices.
Gold appears to be in freefall as the dollar rallies, Bitcoin hits fresh records, and as Treasury yields pulled back from one-year highs. The global economic outlook got a boost after European Commission secured hundreds of millions of COVID vaccine doses. Virus mutations remain a risk to the outlook and could derail the reopening of the global economy, but for now that risk appears to be low.
If the brunt of the surge in Treasury yields is over, gold prices could start to show some signs of stabilizing, but right now technical selling remains strong. If the $1750 level does not provide an ounce of support, selling pressure could get ugly for gold.
Bitcoin is rallying after MicroStrategy had robust demand for their bond offering which will buy more Bitcoin and after Gartner reported 5% of finance executives they polled are willing to invest in cryptocurrencies. MicroStrategy priced $900 million in its convertible debt sale, much higher than the planned $600 offering. Demand is strong for cryptos and MicroStrategy is completely taking advantage of this rally.
Gartner, a leading research and advisory company, reported that just 5% of finance executives polled in February 2021 said they planned to hold Bitcoin as a corporate asset in 2021. The poll showed “77 finance executives (including 50 CFOs) this month showed that 84% of respondents said they did not plan to ever hold bitcoin as a corporate asset.” The biggest risk for the executives was that Bitcoin’s volatility posed a financial risk.
If you are a Bitcoin bear, this confirms the laundry list of reasons that this speculative mania will end abruptly. The top concerns from the Gartner poll were: financial risk due to volatility, board risk aversion, slow adoption as an accepted form of payment, and regulatory concerns. However, if a low percentage of companies are willing to bet on Bitcoin or become crypto-friendly that could suggest prices could still run much higher.
This commentary is kindly contributed by Edward Moya, Senior Market Analyst, New York, OANDA