Asia Open: Looking through a higher rate environment

Stephen Innes SPI Asset Management

Markets

Lower yields have been a significant driver of stock market sentiment, so for today and ahead of "FEDSPEAK" this week, investors are trying to work out calculus around a Fed that is being given the room to keep rates higher for longer.

The move up in stocks that we have seen this year has been accompanied by a movement down in 10-year Treasury yields, which started the year up near 3.80%. But Friday's strong Payrolls report is driving a 12bp jump in yields today, suggesting the tailwind of lower rates on stock valuations may not last for much longer.

Interestingly, markets still appear willing to look through the higher rate environment. Higher rates, being driven by better growth, is a different narrative than the one we had last year: higher rates being caused by monetary tightening (i.e., the Fed). And Friday's Payrolls report and ISM Services survey were unequivocally bullish for the growth outlook.

But everyone is curious to see what post-payrolls Fedspeak brings.

More fundamentally, the Fed is getting down to the nitty-gritty with core services inflation ex-housing as the final crux in its inflation fight. Perhaps the market figures it's just a matter of time before that breaks lower too.

Indeed, we saw clear evidence of cooling wage inflation last week in the private service sector, measured by the Employment Cost Index, but a blow-out payrolls report called it all back into question on Friday. Soft landing? What about no landing?

Oil prices

Brent has sold off 10% in 5 trading days to just $80/bbl as investors upgrade their expectations for surprisingly firm Russian production, ahead of today's EU ban on refined products, as diesel margins are falling sharply.

In addition, the collapse in natural gas prices incentivizes switching back from oil to gas.

Finally, with macro-investors expressing the broader disinflation theme through oil prices, there was likely a rush to hedging last week after the US inventory build, which was likely the final nail in the coffin.

We now believe that Russian supply and switching from oil to gas will offset the China surge in demand for this quarter.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.