Markets

In your typical "Turnaround Tuesday" fashion, US equities recovered Tuesday, S&P up 1.5% after the 1.6% fall Monday. US10Y yields also up 3bps to 1.22%, and oil recovered 1.5%. The quick snapback led by Cyclicals and the Reopen trade accompanied by reportedly high ETF volumes again suggesting hedges are getting reduced as quickly as they were increased yesterday. Financials flows also leaned generally bullish after the move higher in US yields. 

A bounce in UST 10y yields provides an " Alka Setzer" moment for the global reopening trade. But beyond the US  risk-on trading rebound, global growth concerns should continue gurgling in the background, with the Delta variant looming large in investors' minds. That explains the underperformance of Asia equities today. It also spells out the underperformance of both commodity currencies and GBP over the past week.

Image Source: Unsplash

Bonds

US 10y yield is back above 1.20 area, catching up the rebound in Equities. The more exciting thing is UST 5s30s is steepening ahead of the Fed next week as the front-end market is repricing Fed hike expectations. The recent rise in delta variant concerns will give the doves in Fed more reasons to argue for a longer accommodative monetary policy. But will they delay the QE tapering because this is a big question mark? Also, there are no Fed speaks in the next week due to the blackout period. So, it seems the street is less inclined to chase the dollar further. 

Still, this week's risk-off tone in markets, which is unlikely to abate for a while, has triggered further positioning unwinds, rising volatility, unstable FX betas, and significant risk premia in stock market valuations. And despite a considerable bias to own the US dollar as a safe have to hedge, it's not implausible that currency markets are leading equities or commodities here, which warns against chasing the dollar higher on these specific market correlations. 

As long as the bond market continues to price Fed tightening in coming years and the yield curve remains very flat, the environment will remain dollar supportive.

Aussie weakness persists

Australia's mobility levels were already the worst in G10 a week ago. But the extent of lockdowns has accelerated since then, especially over the weekend, as policymakers pursue a COVID elimination strategy. Indeed, a policy approach which significantly worrying for currency traders. These moves have prompted the market to turn very bearish on the AUD. 

Gold Markets

Gold is having difficulty establishing a convincing trend these days as US 10-year yields continue to yo-yo around 1.2 %

Gold remains entrenched in current ranges and perhaps a tad better bid than initially envisioned at the start of the week. I suspect we can attribute this to the surge in Delta case counts, which could keep global central banks erring on the dovish side of the fence. And the UK reopening experiment which could set the tone for global growth into Q4. If the reopening experiment is successful, then growth assets would surge; however, gold may provide a decent hedge against an upward explosion in UK case counts, which could undoubtedly topple risk assets and drive US 10-year bond yields below 1 %

While sentiment gauges and a less dovish Fed tell a story of fading bullish sentiment, there is no apparent emergence of bearish sentiment either, acknowledging that the contemporary twist flattening in the Treasury curve is historically ambiguous for the gold price.