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Risk steady after Yellen clarity

May 05,2021 06:14:16

Overnight Headlines

*USD hit a two-week high as risk appetite faded  

*US equities ended mostly lower with major weakness in tech and growth stocks

*US Treasury Secretary Yellen commented that rates may have to rise to keep the economy from overheating, later back tracked

USD rose to a two-week high as stocks sold off and bonds went bid after Yellen’s comments. The US dollar index touched 91.39 before closing a touch lower as EUR/USD closed above the critical 1.20 level. USD/JPY found a base at 109 while commodity currencies extended weakness.

US equities suffered initially in a broad selloff but the day ended up as a big rotation story with investors moving out of growth/tech/momentum plays. The Vix hit 21.85 before moving lower as Yellen back tracked. Asian markets are calmer with several still closed for public holidays.

Market Thoughts – Yellen predicts but doesn’t recommend

Policymakers have a history of making slap-dash remarks, but markets wouldn’t normally expect them from the previously esteemed Fed Chair, Janet Yellen. She initially hinted that interest rates may have to rise to ensure the economy does not overheat, but later in the day clarified her remarks by saying any increases by the Fed were not something she was predicting, underscoring that the Fed was independent.

Tech especially took a hiding as their future earnings look relatively less valuable when rates are higher. The Fed is still far from hiking rates, saying full employment and 2% inflation needs to be hit for some time before any upward move. Interestingly the rates markets didn’t react as much as equities with major rotation out of growth stocks.

Chart of the Day – Oil looking at new highs

Optimism about the re-opening of European economies together with the US was a boon for oil markets yesterday. Brent traded as high as $69.50 and settled just shy of 2% higher on the day. Traders are looking beyond Covid concerns in India, the world’s third largest oil consumer though a national lockdown would likely hit sentiment.

Prices broke higher yesterday above the April peak and to levels not seen since the middle of March. The 50-day SMA has proved solid support along with the upward trendline from the March lows. Bulls are aiming for early March cycle highs at $71.36 while prices will have to go below $65.60 to negate the bullish optimism.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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