Research

Marius Paun | London, UK | Senior dealer | Thursday, 04^th March 2021

The recent rise in US bond yields weighed on the stock markets as investors have become concerned that future inflation could run rampant. In turn, that could force the US Fed to raise interest rates sooner rather than later.

The pound sterling was also affected by the rising US yields. It did rally to 1.4241 against the dollar last week but eventually retreated under 1.40. Following dovish remarks from the Chairman of the Federal Reserve Jerome Powell on Thursday afternoon, the pound failed to post a meaningful rally as yields continued to go higher.

However, some support was offered to the pound by fresh news on the trade agreements between the US and the UK. London suspended tariffs on some US goods at the beginning of 2021. It might have been that the UK was forced to introduce them as being part of the EU, which had a trade dispute underway with the US. Washington decided to return the favour and removed tariffs on some UK goods like whiskies, cheese, machinery etc.

Politicians were quick to point out the improved trading relationship with the US and that it’s possible to have a non-tariffs agreement even if negotiating as a single country rather than a bloc. The sterling was also supported by Wednesday’s UK budget announcement as well as the ongoing vaccine rollout which many see as a success of underselling and over delivery in Britain.

By and large, it was a buy now pay later budget. The UK Chancellor Rishi Sunak expressed his views of protecting the recovery, pay for it later but be transparent and lay out the plans now. That way investors will not be spooked and taxpayers will have time to put their finances in order well in advance. He promised to extend all of the support scheme’s, furlough, universal credit, reduced VAT, stamp duty holiday until the end of September.

Chancellor Sunak also added something new, an incentive to pull forward companies spending plans. By encouraging firms to spend some extra on investment he offered a ‘super deduction’, a 130% tax relief for qualifying plant and machinery. Due to those extra incentives, the Office for Budget Responsibility said the GDP will increase by over 7% in 2022!

The payback will start in 2023 though. The corporation tax rate is going up by 6% from 19 % currently to 25% which is quite hefty despite the fact that it will remain the lowest rate in among G7 economies according to the UK Government. On the other hand, companies with profits below £50,000 won’t be affected. The full 25% will be paid by companies making a profit above £250,000.  So, the pound enjoyed a nice rally but, given the current turbulence in the US, can it last much longer?

 

The chart shows GBPUSD continuing its steady increase this year touching 1.4241 on February 24^th, last seen in April 2018. The upward trend looks intact. The short-term moving averages are still above the long-term one and both still pointing higher. For now, the price has bounced off the short-term MA.

We could see some consolidation around the current levels. Nonetheless, the bulls will want to see a close above 1.4035 to prove the rally has legs. If that comes true it could spur additional buying power and the next resistance at 1.4240 may come into focus. On the downside, sellers will want to push the price back below support at 1.3860 followed by 1.3750. Next, resistance turned support at 1.3520 should pose a more serious question for the bears as it also matches the 21 days MA (blue line).

 

 

 

Marius Paun | London, UK | Senior dealer | Friday 26^th February 2021

Bond Vigilantes Are Back With A Vengeance

Going into the weekend, the US stock markets were struggling to rebound from the sharp losses posted in the previous sessions due to rising bonds yields. And this tug of war between the reflation trade and rising yields in US treasuries is set to continue.

Fed Chair Jerome Powell testified before Congress earlier in the week and tried to ease concerns the Fed would tighten any time soon, saying the economy is a long way from employment and inflation goals. He admitted the momentum has slowed after the summer recovery and it will take some time for further progress to be achieved. He reiterated the promise to keep rates low until full employment and inflation rises to 2%. Furthermore, the Fed will clearly communicate ‘well in advance’ any shift in the bond-buying program.

Meanwhile, the US Senate majority leader Chuck Schumer promised the $1.9 trillion stimuli will be adopted before March 14^th. Now, attention will focus on a $3 trillion infrastructure package due later in the year.

China commented on the root cause of the strained relationship with the US blaming the former US administration. However, the media didn’t help by reporting Treasury Secretary Yellen saying Trump’s tariffs will be kept in place for the moment. Senior Chinese diplomat Wang Yi hopes Washington ‘will abandon irrational suppression of China’s tech progress’ and also will remove ‘unreasonable tariffs on Chinese goods.

European Central Bank’s President Christine Lagarde is keeping a close eye on the evolution of longer-term yields. It will monitor the transmission of the monetary policy and keep supporting all the sectors of the economy… on the other side of the pond, someone is getting edgy on the return of bond ‘vigilantes’?

Finally, the long-awaited ease of lockdown restrictions in the UK will commence from March 8^th when schools will re-open. The stay-at-home order will end on March 29^th and non-essential shops and hospitality will resume activity no earlier than April 12^th. The Public will be asked to work from home if possible until June 21^st. The good news sent the sterling higher against the US dollar, soaring to above 1.42, although it had dropped back below 1.40 on Friday afternoon.

Gold prices remained under pressure throughout the week dropping below $1730, an 8-month low, on the back of rising bond yields. The prospects of real interest rates moving up (rates less inflation) is never a good omen for the precious metal. Analysts were also adding that gold is losing its lustre to cryptos.

The US Oil price continued its rally reaching $63.7 this week. The OPEC+ meeting is scheduled on March 4^th with two questions on the agenda: whether Saudi Arabia will scale back its 1 million barrels voluntary cut in output due in March and whether an additional increase in supply will be adopted for the cartel?

Bitcoin reached above $58,000 only to pull back sharply afterwards to $44,000 on Friday. The culprit was a mining pool called F2 Pool, which apparently sold over 3,600 Bitcoins.