Claims fall to new pandemic low, déjà vu with Kaplan, BoE slows bond buying pace

Figuring out today’s market moves has not been an easy job.  US stocks initially traded lower after jobless claims fell to a new pandemic low, while continuing claims rose slightly.  It seemed everyone was content to wait until tomorrow’s NFP report but then Fed’s Kaplan triggered a reversal with real yields.  Financial markets went through Déjà vu all over again with Fed Kaplan's taper chatter.  Last week, Kaplan’s comment that it is appropriate to start talking about adjusting purchases helped send Treasury yields higher.  Before markets heard from Kaplan, the yield curve was flattening, and the dollar was weakening as commodities continued to rock-and-roll.  After Kaplan, a non-voter until 2023 said he wanted to see taper talks start sooner than later, Treasury yields reversed higher.  Kaplan noted that the Fed will hit their mandate on jobs and price pressures some time in 2022 and added that infrastructure spending will boost GDP in the long-term.  Kaplan has yet to decide if he thinks inflation is persistent or transitory, which means he could be a lot closer to voicing an opinion.   

The Dow Jones Industrial Average rallied to a fresh record high after Kaplan reinvigorated markets with optimism that the prospects for meeting further substantial progress could happen sooner.  So much for taper tantrum headlines triggering massive selloffs with stocks.  It seems Wall Street feels the economic recovery is indestructible given all the stimulus that is flowing, prospects for more to come, and since it seems Fed Chair Powell has locked himself into a corner of relentless accommodation for the next couple of months.  Powell has convinced markets that he is not ready to start talking about tapering and it will be hard to doubt him unless we see massive employment beats occur alongside scorching hot inflation numbers.   

GBP

The Bank of England kept its benchmark interest rate and asset-purchase target unchanged but signaled a slower pace of weekly bond buying.  It was not a very clean monetary policy report but overall should be viewed as mostly upbeat.  The upgraded economic forecasts show the BOE expects the UK economy to reach pre-pandemic levels in the fourth quarter.  With 7.25% GDP growth expected in 2021 and 5.75% in 2022, it shouldn’t come as a surprise that Chief Economist Haldane dissented over the asset purchase facility target.  Haldane wanted to reduce gilt purchases from 895 billion pounds to 825 billion.

A lot of that optimism was already priced in for sterling, so today’s choppy trade is clearly a reflection that currency markets still see the BOE pretty far away from tightening. 

Tesla

Tesla shares initially surged after Electrek reported that demand is through the roof and that second quarter production capacity is sold out.  The news was not all positive for electric automaker as Stellantis appears poised to reach the European CO2 target and won’t need to buy regulatory credits from Tesla.  Stellantis CFO noted that they would have paid Tesla about 200 million euros in 2021. 

Tesla’s rally was somewhat short-lived after the WSJ reminded investors of Volkswagen’s new, well reviewed EVs that could take on Tesla. Tesla’s stock has been in a downward sloping trading range over the past month and the failure to recapture the 50-day SMA has provided some technical selling pressure. 

Oil

Crude prices tentatively pared earlier losses after US weekly jobless claims fell to a new pandemic low, raising expectations for a faster-than-expected labor market recovery that will unlock a wave of economic activity.  The situation in India is still providing a major drag for oil prices.  India saw the highest daily tally of new COVID cases and while some believe the curve is starting to bend, the hospital situation remains bleak and likely leads to longer lockdowns. 

With the supply side remaining supportive of higher prices, oil just needs to consolidate for a month for India and Japan to get a better handle on COVID.  West Texas Intermediate crude could rally 10-15% once India’s COVID crisis improves.  The rest of the world is growing nervous that a prolonged crisis in India could trigger new variants and keep this global pandemic lasting much longer.  Support from the EU and US will intensify as India is roughly 18% of the world’s population.    

Gold

Gold prices are rising as the rebound in Treasuries remains muted despite some better-than-expected jobless claims and productivity data.  It appears the stimulus trade is not going away for gold after a few rate decisions showed policy tightening is still far away.  The BOE, Norges and Turkish central bank policy decisions exemplifies the unbalanced economic recovery across Europe and likely affirms the belief that policymakers are in no rush to remove accommodation. 

After the NY open, gold finally broke above the $1,800 level.  It took over a day for gold to lick its wounds after Treasury Secretary Yellen killed bullish momentum with her comment that rates may have to rise to stop the economy from overheating.  Yellen’s clarification did not provide a swift recovery for gold, but nonetheless prices remain slowly grinded higher. 

Gold is watching other commodities in envy, but with Treasury yields capped, its moment to shine appears to finally be here.  

Bitcoin 

A day filled with a wrath of central bank decisions provided some underlying support for Bitcoin's core fundamental drivers.  Some central banks will take a lot longer to remove accommodation or raise interest rates and that will continue to force traders to look for other alternative investments, such as cryptocurrencies.  The dollar is falling as the Treasury yield curve flattens and that should be good news for Bitcoin.  Bitcoin mania has cooled as other altcoins have stolen the spotlight but interest in the store of value trade for Bitcoin is not going away anytime soon.