Sat, May 08, 2021 @ 22:36 GMT
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Stocks, Yields And Dollar Rise, Hurting Gold And EM FX

Financial markets are still signalling ‘risk on’, as stocks extend gains in early European trade, with the German DAX rallying to a fresh all-time high. Meanwhile, the US 10-year bond yields have hit a fresh high for the year, while yields on similar maturing debt in Germany and UK have extended gains for the third consecutive day. Underscoring investors’ insatiable appetite for risk, gold was continuing to struggle as it dipped below $1700 again as the opportunity cost of holding the metal rose with yields breaking out. Precious metals were also undermined by ongoing strength of the US dollar, with the greenback also pressurising some emerging market currencies.

Much of today’s focus is likely to be on rising yields:

In terms of macro data, there’s not a lot on agenda today. We have German CPI due around midday in London. Earlier, Spanish CPI beat expectations easily with a print of 1.3% y/y vs. 0.7% expected. German import prices also jumped 1.7% m/m, pointing to rising inflationary pressures.

Keep an eye on incoming CPI data from key economic regions as inflationary pressures build. If prices start rising rapidly, the Fed and other major central banks would have to tighten their belts – this could then negatively impact stocks. For now, stock market investors evidently expect that there is still a lot of spare capacity in the economy and many of them probably think it is not the time to worry about inflation. Hopes over a strong economic recovery, turbo-charged by government stimulus, is still pushing investors into riskier assets.

But with the dollar rising and putting pressure on emerging market currencies, the next domino to fall are commodity dollars I believe. One such currency is the Aussie dollar, which has a strong positive correlation with the Chinese yuan owing to the two nations’ close trade ties

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