By Stephen Innes, Chief Global Market Strategist at Axi
The ripple effects from the replacement of Turkey’s central bank governor are fading.
Forex weakness is focused on those currencies where central banks have hiked policy rates over the past week -e.g. Brazilian Real (BRL) or where monetary tightening is priced in later this year – e.g. Mexican Peso (MXN).
So the point remains that US fiscal stimulus and resulting higher US Treasury yields are an unbalancing force for Emerging Markets central banks. Nonetheless, much-improved current account balances in the remaining four of 2013’s fragile five – Brazil, India, Indonesia, South Africa – point to greater resilience and less contagion fear.
Stocks and US yields interplay
Global equities have been more sensitive to rising US Treasury yields than Emerging Marker forex. Specifically, higher UST real yields have negatively impacted growth dominated indices (Nasdaq and Kospi).
A stabilization in UST real yields (-0.64% vs last week’s and YTD high of -0.5874%) drives Tech outperformance week-to-date. The big cross-asset question for 2021 is whether higher inflation that emerges through Q2 proves transitory or not.
According to the Atlanta Fed, US business inflation expectations are at a decade high, while anecdotal evidence points to supply chain disruptions, particularly in chips. This dynamic is evident in market-based inflation expectations, where the US 10-Year breakeven (2.32%) is at the highest since March 2013.
For equities, stable real yields and rising inflation breakevens support a renewed rotation from ‘growth’ to ‘value’. Nominal yields driven by inflation expectations, rather than real crops, are the most supportive of commodities and establish US dollar shorts.
However, the rising US Treasury term premium offers a caveat to this view.