Risk-off sentiment continues to percolate, with Markets in Asia trading lower today. There still seems to be a plethora of confusion about the aggressive move yesterday. Likely driven by a toxic brew of Delta variant concerns, economic growth peaking, and tech sector scrutiny in China. Oil prices turned lower after surging amid an OPEC deadlock; there now seems to be growing concern there could be a price war similar to Q1 2020.

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The rally in UST yields shows no signs of decelerating in Asia, with the 10y close to the overnight low of 1.3464%. It is hard to discern whether lower yields reflect UST shorts stopping out or fundamental drivers related to a more pessimistic take on the US and global economic outlook. The underperformance of EM equities and US Value to US Growth equities on Tuesday hints at the reopening/reflation trade concerns.

The slide in US 10-year yield- the lowest since mid-February, they are down 15bp in the past fortnight and 25bp in two months. The peculiarity is that this is happening as the economy gains momentum. And it is comprised of an 8bp decline, 6bp from real rates, and 2bp from breakevens. In turn, the decline in reals reflected another reduction in implied Fed pricing. Indeed, Fed pricing is now back to where it was in mid-February before the late February / early March shake.

And the increased chance for a step-up in implied oil volatility is a more likely malefactor for greater cross-asset risk aversion - albeit from very tempered levels - amid hotchpotch at OPEC+.

Oil initially tested the downside but failed to clear critical technical support levels. The selloff in risk led by US yields coming under pressure a sharp prompted a sharp turnaround in oil prices, which weighed heavily on NOK and CAD. 

There is likely more to lose from higher oil prices in this current market dynamic than lower prices. As lower prices today would support the global recovery with a downside in prices limited by the reopening of the worldwide economy.

Higher prices at an early stage of the tremendous global economic reopening are more of a problem, particularly for import-dependent EM nations. And for the inflationists in the US, higher oil prices make higher headline inflation appear less transitory, which risks a hawkish Fed response and a stronger USD that would leave EM assets vulnerable.