Equities start to look overvalued as inflation concerns increase
|Investors are now worried that a faster than expected economic recovery could lead to a surge in inflation. This is causing commodities to rise and bonds to fall with rising yields making equities look overvalued in comparison.
We have speeches from key monetary policy makers today. Federal Reserve Chair Jerome Powell delivers his semi-annual testimony before Congress this week and is likely to reiterate a commitment to keeping policy super easy for as long as needed to drive inflation higher. In Europe, Central Bank President Christine Lagarde is expected to sound dovish in a speech later today.
With the current focus on commodities and the talk of a supercycle the only one not doing well at the moment is gold, partly due to rising bond yield, but most importantly because cryptocurrencies now a preferred bet against inflation. Bitcoin surged to $59000 this weekend while gold remains below $1800 per ounce.
Commodity-linked currencies such as CAD, NZD, and AUD are all expected to continue trending higher in the near-term.
Yields on 10-year Treasury notes have already reached 1.40%, breaking the psychological 1.30% level with 30-year bonds now at -9.5% year-to-date, the worst start of the year since 2013.
UK Prime Minister Boris Johnson will lay down a roadmap to exit lockdowns in England with schools expected to reopen on 8 March and outdoor after-school sports and activities to be allowed to restart as well.
Rising Treasury yields have helped USDJPY to rise to 105.80 given the Bank of Japan is actively restraining yields at home.
Equities in Asia sharply lower this morning after China's central bank left interest rates unchanged again for the 10th month in a row and withdrew liquidity vis-a-vis today's repo
The economic calendar on Monday has the German IFO business climate at 0900 GMT.
Our overview and outlook of the key trading pairs and indices is as follows
EURUSD – With the US 10-year yields climbing toward 1.40%, the euro edged lower towards the 1.21 support, ahead of today’s President Lagarde Speech. Looks like the 200-SMA is still acting as resistance and limiting any further upside for now, therefore price could pull back towards 1.2060s in the short-term if the Dollar remains supported.
GBPUSD – The pound dips back below 1.40 amid rising US bond yields. However today, UK PM Johnson is set to lay out a highly anticipated reopening plan later in the day, which will boost the pair higher with optimism. Also, UK’s Health Minister Matt Hancock said that they are confident that the vaccination program will free the country from lockdown sooner than planned. Therefore, buying the dips remains our strategy for now, targeting much higher than 1.40.
USDJPY – Dollar bulls found support at the 50-SMA and reversed higher, tracking the US-10 year yields higher. With yields elevated, US equities will remain weighed down, pushing USD/JPY higher. The risk sentiment and the Treasury yields price-action will be closely monitored today for further directional clues.
FTSE 100 – Investors are now worried that a fast economic recovery could lead to a surge in inflation with the FTSE100 now back at our important support area at 6575/90 ahead of UK Prime Minister Boris Johnson laying out a roadmap to exit lockdowns in England that were announced on January 4th. A breach of this key support area will trigger accelerated selling with 6550 and 6520 as next near-term support levels.
DOW JONES – Stocks are likely to continue dropping today as inflation concerns are causing commodities to rise and bonds to fall with rising yields making equities look overvalued in comparison. The Dow Jones index is now back below near-term and long-term moving averages, on the hourly timeframe, forming a lower-highs-lower-lows bearish pattern, with 31300 and 31210 as next key support levels.
DAX 30 – German stocks are seen opening lower today following a sharp drop in Asia after the People's Bank of China once again left interest rates unchanged. The next levels of support to watch for the DAX30 are the 13900 multi-week support and last week's lows around 13862 as investors monitor the German IFO business climate due at 1100 EET.
GOLD – Gold ended Friday’s session in the green, hitting our resistance target at 1780, and 1790 in early trade today along with a strengthening greenback and US10Y yields rising to one-year highs. An hourly close above 1790 resistance will favour further upside with 1800 and the 200-period SMA as next targets, as investors demand picks up on the yellow metal inflation hedge ahead of Powell’s policy report and testimony on Tuesday and Wednesday.
USOIL – WTI Crude oil traded between 59/60 support/resistance level on Friday, retesting $60pbl resistance in early trade today after Goldman Sachs raised their forecast on Brent to $70-75, as optimism around recovery pushed prices to their highest settlement in over a year. An hourly close below $60 resistance level will confirm bearish momentum with the 200 period SMA and $59 as the next support targets.
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