Markets Having A ‘Louis Vuitton’ Moment

Photo by JIMIN LAI / AFP

Indices charged ahead towards new records overnight, powered by a series of first-rate earnings and a dazzling run of US economic data. The rollout of Covid-19 vaccines and plentiful government and consumer spending also provided support, suggesting, dare I say, the market can go higher, especially if active managers start entering the buys.

Retail sales were supported by a powerful combination of tailwinds in March, as economic reopening led to solid job gains and rising household mobility.

However, the most crucial factor may have been the delivery of over US$ 280 billion in economic impact payments to households during the month following the American Rescue Plan’s enactment.

Indeed, US consumers wasted little time stuffing stimulus checks into starving retailer cash registers with stocks surging to cash register rings across the United States as consumers are made willing and able to spend thanks to the US’s speedy vaccine rollout. 

With the US Federal Reserve keeping the sugar taps open and offering up free tickets for investors to come frolic in the markets like “kids in the candy store”, the transition from policy to growth has been as smooth as silk with a benign reaction in yields suggesting that a growth tantrum is not on the cards anytime soon.

A Louis Vuitton moment

But with the markets having a bit of “Louis Vuitton” moment (best handbags to invest in), of course, all of this seems pretty surreal rushing to buy value/cyclicals that sell commodity-based products when firms have little pricing power into the winds of inflationary waves.

Bond yields lower

With solid data (inflation and retail sales) persisting but yields listing lower in a clear illustration of positioning around rates and the remarkably smooth transition from policy to growth; earnings season got underway with US banks setting the tone.

Although fixed income has been bid for the last 24 hours, things accelerated 60 minutes or so after the excellent rush of US data releases overnight as some keen resistance levels were breached across the board.

This seems to have ushered in another round of bond buying as more folks were squeezed out of some of their shorts. There seem to be mixed views on the street to the extent of the short position, but given the technical break, I would assume that it is probably the CTAs feeling the most pain out here.

The US 10-year yield is down 6.5bp today at 1.54%. It’s dropped 6bp since the super-strong charge of data. Such was the extent of the shorts built through late February and early March, so the lack of upside reaction to each successive piece of data has sent the signal.

Oil prices rise

Oil markets continued to bask in the afterglow of more bullish demand forecasts from the agencies and a more significant than expected fall in US crude inventories suggesting demand in the US is on the mend. And with miles driven on the US highways up for the first time since the pandemic outbreak, it means we are well on the way to bountiful US summer driving season that could come close to matching the summer of 2019.

Forget markets for a second, that would have to be the feel-good story of the year if families could feel safe enough to vacation again.

Lower yields, improving vaccine rollouts and easing financial conditions triggering a weaker dollar adds to the oil market’s appeal as volatility falls across the board, welcoming back passive flows to the oil market.

With the confluence of planes, trains and automobiles all picking up the pace, hinting we are mere steps away from the demand boom, energy prices appear to be turning log-normal despite a few blemishes on the card from the omnipresent Covid concerns.

But it’s time for life to go on as governments worldwide continue to shore up their vaccine protocols.

Market analysis from Stephen Innes, Chief Global Market Strategist at Axi

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