Buy A Dip, Any Dip

A lackluster session in the US found equities drifting lower into the afternoon following a painfully pointless virtual chat between Jerome Powell, Janet Yellen and Congress.

Powell mindlessly reiterated a series of talking points so boilerplate that they may as well have been pre-recorded. And who can blame him? The questions are always the same. It’s just different people asking them. There are only so many ways you can answer the same question.

Some asset prices are high, but banks are well capitalized, he said. The Fed has the tools to deal with inflation in the event it overshoots too much and for too long, he added. Remember, the goal is to engineer a mild overshoot for a reasonably sustained period, but not a big overshoot that lasts for years.

“We do expect inflation will move up over the course of this year,” Powell told lawmakers. “Our best view is that the effect on inflation will be neither particularly large nor persistent.”

Treasurys bull flattened, as 10-year yields dropped a second day (figure below). Unlike Monday, relief from the bond rout wasn’t enough to save stocks.

“Treasurys were able to retain the lion’s share of their bull flattening with 10-year yields reaching 1.624%, although the volume profile behind the move spoke to modest conviction with cash trading at 64% of the 10-day moving average,” BMO’s Ian Lyngen and Ben Jeffery wrote Tuesday afternoon. “It’s too soon to characterize the price action as a ‘trend’ that will leave 1.75% as the high-yield mark for Q1; although the quarter is quickly coming to an end.”

The two-year sale went fine, but that’s not what folks are concerned about. It’s the five- and seven-year sales that are seen as hurdles.

The rebalancing discussion is “in the market,” so to speak. BofA is looking for $41 billion into Treasurys and out of equities, while Deutsche Bank sees large pent-up demand for duration. Nomura’s Charlie McElligott flagged “hints of potential, much-hyped quarter-end rebalancing flows [in] recent trend reversals across assets [and] themes.”

Speaking of that, the Russell 2000 had a terrible session. US small-caps were down some 4% just prior to the closing bell on Wall Street. Tech was lower too, but the outperformance to the Russell was notable and spoke again to the kind of “churn” witnessed all year.

Big-cap tech outperformed by the most since the day after the election, when markets assumed a “blue sweep” was off the table. (That assumption turned out to be wrong, of course, which helps explain why small-caps and other laggards have surged over the past five months.)

The dollar was sharply higher on Tuesday, which generally bodes ill for risk assets, as does bad news on the virus front.

News out of Germany seems to have finally undermined sentiment, while questions around the Astra vaccine add an extra layer of unwanted ambiguity.

Oil is having a terrible time of it. WTI fell 6% Tuesday, marking the second time in four sessions that the bottom has fallen out (figure below).

“Last Thursday’s selloff probably didn’t come as a surprise but the extent of it did,” PVM’s Tamas Vargas said. “A number of bearish developments have been aligned and they have led to a fierce long liquidation in the oil market.”

Those developments include “possible revisions of economic and therefore oil demand growth, especially in Europe and rising global oil supply,” Vargas went on to remark, before suggesting that “the price fall was painful for oil bulls but the days that followed provided time for market players to reflect on whether further weakness is justified.”

Apparently, it was — justified that is. WTI dropped below its 50-day moving average for the first time since November on Tuesday.

Oh, well. At least folks are buying the dip in TLT (figure below).


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