J&J News boosts Treasury Yields, Powell Day 2, Dollar turns positive, Gold drops, Oil climbs higher

It is all about the bond market today.  Global bond yields are rising across the board after the FDA staff endorses Johnson & Johnson’s single shot vaccine for emergency use.  Expectations are high for the J&J vaccine to be distributed in the US over the next month. Basic refrigeration and the fact that it is a single dose vaccine could be a gamechanger in the global fight against COVID. 

Global bond yields are suggesting financial markets are much more optimistic about the economy than the Fed.  Powell is strongly optimistic about the economic outlook for the second half of the year, while the Treasury market seems to indicate that the recovery could take off in the second quarter.  If bond market selloff deepens with the 10-year breaking past 1.50%, that could prove to be disruptive for financial conditions.  

Powell

Fed Chair Powell’s day with the US House Financial Services Panel provided no major revelations.  The Fed firmly believes there’s a long way to get back to maximum employment as 10-million jobs will likely take a while to comeback.  Powell reiterated optimism for the outlook later this year.  

FX 

The dollar won’t break if Treasury yields continue to rise.  Bearish dollar bets might have to wait until we see the Fed become uncomfortable with the rise in yields.  All eyes are on the 10-year Treasury yield and how soon it breaks past 1.50%.  ECB Chief Lagarde on Monday stated the ECB is closely monitoring longer-term nominal yields and the Fed can’t be too far behind.  

Oil

Crude prices are rising again as energy traders continue to pile into the reopening trade.  The energy market shrugged off a surprise 1.28-million-barrel build from the EIA weekly crude oil report.  Expectations were for a 6.7-million-barrel draw, but the surprise increase came from the West and was a result of shocks due to the storm.  

The impact from the deep freeze sent crude production tumbling 10.2% to 9.7 million bpd.  Crude exports fell 40.1% and imports posted a 29-year low. 

The reflation trade and vaccine optimism has given the energy market to keep pushing oil prices higher.  Despite a stronger dollar, oil prices are still looking attractive for many traders.  

Gold 

Gold can’t handle the spike in global bond yields.  Gold bulls got another dovish commitment from Fed Chair Powell yesterday, but the move in yields will keep the dollar supported in the short-term.  Adding to gold’s woes is the steady unwind of ETF gold holdings for a seventh consecutive day.  

Gold is having a terrible start to the New Year and further pain appears on the horizon, but a complete collapse is unlikely.  The Fed wants to see higher bond yields but not at the current pace.  A steepening of the curve will continue to happen, but it won’t get out of control because the Fed has signaled they are committed to their bond buying program.  Gold’s longer-term bullish trend will reassert itself once the yield surge is over and dollar weakness resumes.   

Bitcoin 

Bitcoin is rebounding after Square and MicroStrategy placed big bets following a two-day plunge.  Bitcoin volatility seemed elevated at the start of the week as some crypto followers believe many whales got ahead of Bitfinex and Tether settlement with the NY Attorney’s office.  The speculation stems from blockchain trackers that saw a significant number of transactions move cryptocurrencies to the exchanges, which could imply big selling is about to take place.  

Fed Chair Powell said this will be an “important year” for learning more about the digital dollar, and that they will engage with the public.  The crypto market views Powell’s comments as short-term bullish since legislative authorization won’t be coming anytime soon.  Digital dollar hearings are coming and big restrictions could be down the road, but nothing in the immediate future.