Equities Start The Week In The Plunge Tank

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Equities plummeted to start the week as long-end UST yields continued to climb relentlessly, supported by a steady drumbeat of hawkish "Fed speak". 

All eyes look toward the sure-to-be-hot US CPI print. But I do not think any asset group has it all in the shop front when it comes to inflation and the wrecking ball growth damaging nature of the FOMC's inflation-fighting stance. 

With equities already starting the week in the plunge tank, assets offering diversification against higher yields are tough to come by. 

OIL 

Brent is stable around the $100/bbl mark, caught between competing narratives. The IEA release and concerns around slowing Chinese oil demand on one side versus lower Russian oil production on the other. 

And with Covid cases rising in China -there is no scope for reopening under the country's zero-covid policy.

Indeed, China's Covid lockdowns and inflation data are weighing on parts of the commodity complex, including Oil. 

And with USD's safe-haven appeal is stronger now than at the start of the year; given higher rates, Oil is pressured lower by a hawkish Fed through the US dollar channel.

GOLD

 Although trading off intrasession highs but holding above $ 1920-50 neutral territory, bullion is trading constructively as Ukraine tragedies unfold. The upside seems challenged by the inflation peak call, stronger USD, physical demand in Asia running behind expectations, and market positioning with ETF gold holdings at a 1y high and CTA's long.

But buy the dip will hold for a while as Geopolitical risk premium is minimal in my view - invasion high $1970/sanction peak $2070, so there is room to move up again. And let us face it, the Russia-Ukraine situation is likely to worsen before getting better. And given the market's current recession obsession, the next phase of the inflation/growth discussions in developed markets shifts to stagflation.

Still, I think bullion could get caught in the inflation vs rate hike wedge.

The gold market uses CPI as its primary input, but the Fed focuses on PCE. With CPI likely to slow faster than PCE, the TIPS market, aka real yields, will be pushed much higher. The market could see slowing inflation, and what the Fed will see is a need to keep tightening. Hence, I believe gold will get caught up in the inflation vs rate hike wedged. 

FOREX

USDJPY continues to bear the brunt of the US yield impact on the FX side. In contrast, USDCHF has done extraordinarily little, and neither has EURUSD. On the Swiss side, the likely reason is that 1) the market is pricing the end of negative rates this year and substantial tightening next year, 2) political risk in Europe, including from French elections and the war in Ukraine, supports the franc safe-haven bid.

I have often argued for the euro that once rates were back in positive territory, a wave of inflows (a reversal from QE/negative rates bias) would push the currency higher. However, I am now skeptical that Euro rates will become meaningly positive as, at minimum, a mild recession looks increasingly likely in H2.

French President Macron will face Marine Le Pen in the second round of the French presidential election on Apr. 24. It looks set to be a tight race leading to some downside risk for EURUSD, but with Le Pen narrowing the gap to Macron in polls over the past few weeks, the market has hedged that downside risk. Still, with EURUD trading sub-1.09, it suggests the market might be cautious about owning the euro, especially into the second round of voting on Apr. 24

Rate differentials continue to support USDJPY as US yields extend higher but Japanese yields are capped by the Bank of Japan. 

The BoJ overnight lowered its economic assessment on eight of nine regions due to covid-19. Additionally, BoJ Governor Kuroda reiterated the central bank's desire to maintain an easy policy.

While USDJPY traders are finally starting to show some mild respect for the global risk-off moves, you get the feeling; however, the only thing that will correct this move is a BoJ rate hike or, at minimum, adjusting YCC.

Bank of Japan Executive Director Shinichi Uchida stressed the importance of FX stability in parliament. These comments are not surprising given his audience. Nonetheless, Uchida's comments will be watched even more closely in the future. Uchida participated in introducing negative interest rates in 2016 and is the BoJ official tasked with planning monetary policy. If there are any changes to Yield Curve Control, for example, Uchida will be an architect of such a change.

And, of course, any alteration in the BoJ operations would be an immediate signal.