Market Commentary – February 25, 2021

Kevin Jock

25th February 2021

Second day of testimony by Jerome Powell, saw the Federal Reserve Chairmen nip elevated inflation risk in the bud. Powell emphasized “policy is accommodative because unemployment is high and labour market is far from maximum employment” whilst rising inflation does not equate its persistency towards the medium term.

A sigh of relief on Wall Street with investors welcoming the Fed’s remarks as the Dow 30 surges 1.4% into all-time highs. Meanwhile, the Treasury market is not buying it with the 10-year yields edging to a 1-year high at 1.39%. Whilst the U.S. dollar depreciates against a basket of majors like the AUDUSD, up 56 pips and just a touch below the 0.80 level.

Benchmarks across Europe ended in positive territory with the French CAC outperforming to levels untouched since 2020 February. Breaking news from Moderna revealed the first vaccine designed to target the South African variants with clinical trials set to begin in coming days. Elsewhere, overnight sentiment seeped into Asia as indices cautiously pointed higher.

In focus today, the Turkish Lira slipped as much as 1,466 pips intra-day following the central bank’s less hawkish decision to increase reserve requirements as opposed to an outright increase in policy rates. Investors fear pressure from President Erdogan, whom is of the belief rate hikes is an inappropriate course of action in fighting inflation, is overshadowing the bank’s decision making.

Following a no-change rate decision, the New Zealand government has announced the RBNZ will now consider house prices as an additional objective to monetary policies. The government hopes to reign in on the booming housing market which has seen 8 consecutive monthly increases averaging 2.2% a month. In response, the Kiwi rose 96 pips to 0.7435 as investors push forward more hawkish expectations.

Crude higher to $63.40, gold unchanged and bitcoin bounces back above 50,000.

Dow Jones-1

Figure 1 (Source: IS Prime) Dow Jones Monthly : Rotation away from Tech and into blue chips see’s Dow finally hitting records of its own.

Headliner to Review

  • Fed Vice Chairman Richard Clarida said that he is optimistic about the outlook for the U.S. economy. It is expected that U.S. inflation can rise to the 2% target set by the Fed by the end of the year under the base effect, but it will be affected by fundamental factors in the future. He also pointed out that the current monetary policy of the Fed is appropriate now and for the rest of this year. The biggest risk in the current economic outlook is the new crown epidemic.
  • The new homes sales in the United States rose for two consecutive months in January this year, increasing 4.3% month-on-month. It continued to increase to 923,000 at an annual rate, which was much higher than market expectations.
  • US crude oil inventories for the week ended February 19, 2021 unexpectedly stopped falling for four consecutive weeks, rising from the previous low of nearly a year to a total of about 46305 million barrels. It expected to drop 5.19 million barrels.

Headliner to Watch

  • Plethora of data out of the U.S. expected to show continuing signs of economic recovery:
    • GDP expected to increase from 4.0% to 4.2%
    • Durable goods order set to continue to expand but at a faster pace from 0.5% to 0.9%
    • Consensus in unemployment claims sees a slight improvement to 828k from 861k
  • Japan expected to post consecutive declines in retail sales following a state of emergency declared in January.

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Authors:
Antony Tan
Ben Li
Kevin Jock