The tail chasing noise is already deafening this week. Having spent the first part of the week in doom and gloom mode as the market ran short of bullish excuses to buy everything, equity markets staged a sharp rebound overnight. The cyclical Russell 2000 seeing most of the action, despite the three heavyweight indexes recording decent gains.
Economic recovery and post-Covid bliss were the reasons du jour for the overnight equity rally, which spilt over into gold and catalytic converting palladium. Currency markets were almost unchanged, though, but oil markets retreated as speculative bullish momentum continues to wane ahead of OPEC+’s increasing production starting in May.
In all honesty, I have a much better reason for the rebound in confidence overnight that is flowing into Asia today. The overnight 20-year bond auction had high demand that pushed US 10-year and 30-year yields modestly lower. That was enough to spur some good old-fashioned dip-buying, especially in the unloved Russell 2000. US yields continue to be the one ring that rules them all, with the fall in US yields evident in precious metals and, notably, the fall of USD/JPY over the past three weeks.
Unfortunately, the calendar in Asia today is even thinner than yesterday, with only Thailand’s Balance of Trade to break the monotony. Things get busier this evening with the latest ECB rate decision that comes a day after Germany’s Constitutional Court quashed a challenge to Europe’s pandemic recovery programme. Rates will remain unchanged, and as ever these days, it will be what the central bank says afterwards, and not what it necessarily does, that will move markets.
Canadian dollar flies after BoC trims QE
A potential insight into potential moves in the euro comes from the Bank of Canada (BoC) decision overnight. The headline rate remained unchanged, but the BoC once again trimmed its weekly bond-buying target and brought forward its first rate hike to the second half of 2022, from 2023. The Canadian dollar rallied by around 1.0%, with USD/CAD plunging over 100 points to 1.2495.
That sets up the euro for a binary outcome this evening. EUR/USD was almost unchanged overnight at 1.2445. An ECB signalling that Europe’s recovery will accelerate and hinting that inflation risks are rising should see EUR/USD rush towards 1.2150 and perhaps 1.2200. A dovish ECB is likely to see 1.1900 tested. The chart picture shows a clear bullish breakout from a falling wedge, suggesting the topside is the path of least resistance.
US Initial Jobless Claims will be of passing interest, particularly if they deviate markedly from the roughly 650,000 market expectation. A large deviations impact is harder to predict in this case, with US markets being driven by the nuances of daily tail-chasing sentiment. Readers should probably assess whether Wall Street is in we’re all doomed, or we’re all saved mode first. They can make their call from there depending on whether the Jobless Claims number fits the narrative of the day or not.
Mrs Halley presented me with a beautiful set of semi-noise cancelling wireless sports headsets for my birthday a couple of months ago. They are designed in the US, and made in China naturally, proving that international trade is alive and well despite ongoing challenges. Given the noise this week across financial markets, I shall have them glued to my ears to drown out the noise that will inevitably make up the rest of it. US yields continue to exert their invisible but powerful gravitational force on markets. Until US yields rise once again, buying the dip in everything in a zero per cent, where’s my yield world, remains the path of least resistance.