Fireworks

“A risk asset revival driven by dip-buyers.”

That’s how Bloomberg described Tuesday’s theatrics in the US, where equities jumped, led by… well, led by everything that’s been falling lately, for lack of a more succinct way to describe it.

Tech surged, yes, but the real fireworks were in recently bludgeoned stay-at-home plays, which rose pretty much in unison. Tesla and the ARK Innovation ETF, poster children for the “de-frothing” stateside, soared together, joined at the hip as they are.

What you see in the visual (above) is essentially the “bear market in hubris” attempting a rebound.

The other side of this “reversal of the reversal” is weakness in banks and energy, which have outperformed handily over the past two months. Both fell on Tuesday, trimming their March gains.

It goes without saying that the “revival” in tech and pandemic winners was brought to you in part by Treasurys, which rallied. Yields were richer by about five basis. The three-year auction went great, all things considered, a relief for those still fretting over the implications of last month’s seven-year debacle.

Of course, the real test(s) come later, with the 10-year and 30-year sales. At 1.55%, “there is adequate accommodation currently priced in to assume the supply event will offer an accurate gauge of investors’ willingness to buy the dip,” BMO’s Ian Lyngen and Ben Jeffery said, of Wednesday’s 10-year reopening. “The same cannot be said for the dealer community which continues to await the Fed’s extension of the SLR exemption – if for no other reason than to lessen the burden of the underwriting commitment on the part of the primary dealers and thereby assure market functioning and liquidity,” they added. Unfortunately, that continues to be a source of event risk.

The dollar’s comeback took a breather, and that helped gold, which managed a 2% gain after sinking to levels last seen in the immediate aftermath of the pandemic shock.

It’s a tragicomedy of sorts. Gold bulls finally got the deficit explosion and concurrent unbridled “money printing” they’ve spent years insisting would drive the yellow metal to infinity (and beyond). Then, a make-believe digital token that exists only in cyberspace stole the show.

The figure (below) “should” be bullish for gold. Alas, life’s not fair.

On the stimulus front, the market is now looking ahead to Joe Biden’s infrastructure plans and the possible ramifications for the government’s finances.

Democrats may go it alone on that too, the White House suggested. Jen Psaki said reconciliation isn’t off the table.

In remarks to reporters, Kevin Walter, co-head of global Treasurys trading at Barclays, said the Fed will likely be compelled to announce WAM extension sooner or later. “It would probably make sense to coordinate that with fiscal stimulus,” he remarked, adding that while he doesn’t necessarily think the FOMC will announce any changes next week, a big infrastructure bill would mean elevated auction sizes, which will “continue to put pressure on the market to take down the supply.”

Commenting in a recent note, Credit Suisse’s James Sweeney said “the surge in household disposable income due to newly sent checks will be sufficient to exceed last spring’s stunning performance.”

Sweeney went on to suggest that due to a better, more stable overall situation, the new round of checks can both boost savings and consumption.

“Employment is higher, uncertainty is less, and the cash is sufficient to drive savings sharply higher while also driving a jump in goods consumption now and a services rebound later,” he wrote, adding that “once this bill passes, the Biden administration is likely to pursue green energy/infrastructure spending, legislation which will likely face the same practical political opposition as pandemic relief. That is: not much.”

Elections have consequences. Only this time, good ones.