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FEDUS500

Inflation concerns unleash the beast within the market

Chris Weston
Chris Weston
Head of Research
May 13, 2021
The question we have to ask is whether the US CPI print really brings the Fed closer to having to act and taper the pace of QE from $120b p/m?

The weaker non-farm payrolls print pushed back expectations of this announcement to December, but has this materially stronger CPI print – the hottest on the core measure (+0.9% mom) since 1981 – brought Fed normalisation back into play?

I'm not so sure, but more importantly the fear in the market is with the Fed focused predominantly on the labour market and inflation kicking up, the risk of policy error has risen. Fed vice-chair Clarida emphasising the ‘transitory’ nature of this US inflation print may have just accelerated these concerns. Marry this with the exuberance and froth that’s discounted, and a market that's been forced to de-risk as options positioning has dictated, and you’ve seen volatility rise up across all markets. It was a genuine risk-off affair, with funds de-risk and de-grossing in equities spilling over into risk FX with the AUD and NZD getting a working over.

AUDCAD looks a compelling ‘sell into strength’ candidate given the current structure and I would be eyeing 0.9420 as an area of interest.

13_05_2021_DFX1.png

(Source: Tradingview)

Gold was certainly interesting, with huge client flow seen. However, for those who own the yellow metal as a hedge against inflation would have been disappointed to see the downside move into 1813. Maybe that day will come, but for now, the headwind has been rising bond yields and a stronger USD. Gold remains the anti-bond and I would personally own if I thought there's going to be a disinflationary shock – the opposite of what the textbooks say.

We’re seeing the vol continue in early Asia, notably in Crypto, with Musk saying he won’t accept BTC for Tesla on the environmental angle. We’ve seen Bitcoin trade into 51,428 – it seems after Musk’s comments through SNL that Crypto is losing one of its talismans. I continue to prefer the short BTCETH pairs trade and the trend, while clearly mature, is a thing of beauty. An interesting platform then, it seems, for us to roll out a number of new coins – here’s the suit currently set up to trade as a CFD.

13_05_2021_DFX2.png

(Source: Tradingview)

Tesla is interesting and in some capacity distancing the brand from Bitcoin could win some ESG love – either way, its lost the momo crowd which is key for a name like Tesla and this may be one of the most talked up trend breaks in years.

13_05_2021_DFX3.jpg

(Source: Tradingview)

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