BOND MARKET TANTRUM: Equity markets finally listen to the noise that the bond market has been making, however, the Fed is still not listening. Quite the move on as the US 10yr hit the milestone of yielding 1.50%, moving above the S&P 500 dividend yield of 1.48%. Subsequently, this places a TINA (There Is No Alternative) headwind for the stock market, which has up until now, enjoyed the low rate environment. The tech sector endured most of the selling pressure with the Nasdaq falling over 3%, particularly after the worst 7yr auction in history, which kickstarted a bid in the greenback and sent EM FX heavily lower.
STERLING EXPERIENCES RARE SELLING
As I’m sure many had noticed, the Pound’s valuation had become extremely stretched on the upside with the RSI on multiple GBP crosses trading significantly in overbought territory. That said, in response to the deleveraging in risk assets, the Pound had felt much of the brunt of this in G10s, but for context, GBP/USD is only back to levels that we were trading last week, and let’s not forget, the Pound has been the best performer in 2021. The supportive narrative remains the same for the Pound, as such, with GBP normalizing, dip buying is likely to re-emerge. On the technical front, GBP/USD remains in an uptrend with the pair holding above the 20 and 50DMAs.
EUR/GBP: Trend Remains Lower Despite Bounce Back
A sizeable bounce back in EUR/GBP over the last few sessions as positioning gets washed out. However, with the cross taken out of oversold conditions and the RSI remaining below 50, this may see traders reengage with fading the uptick. As such, risks remain for a move back towards 0.86 and 0.8540 below.
BOE INFLATION THREAT: Perhaps the most notable comments I have heard from a central banker in a while is from BoE’s Haldane. The BoE Chief Economist stated that says there is tangible risk inflation proves more difficult to tame, adding that he sees a sharper and more sustained rise in inflation than expected. However, it is important to note that Haldane is the most hawkish member of the MPC, which in turn puts focus on other MPC members as to whether they share the same concerns.
NEXT WEEK: Looking ahead to next week, there is very little on the domestic front, aside from the UK Budget. However, a point to make on the budget is that it is typically more important for UK stocks as opposed to FX, while much of the details of the budget tend to be released weeks before and thus nullifying the surprise element for markets. That said, on the economic calendar, the focus will be on the US data releases with ISM PMIs and NFP due out.
