Ahead of Yellen – Mood is Back to Risk On.

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All markets green across the board
Yellen confirmation on deck today
Nikkei 1.39% Dax 0.32%
UST 10Y 1.10
Oil $52
Gold $1843/oz.
BTCUSD $37000/oz.

Asia and the EU
EUR ZEW -66.4 vs. -68.5

CAD Wholesale Sales 8:30
USD Yellen confirmation

It’s green across the board in both FX and equity markets today with mood clearly tilted to risk-on ahead of Janet Yellen’s confirmation hearings on Capitol Hill.

On the first full day of global trade with US markets back to business after yesterday’s MLK holiday investors were clearly upbeat about the prospect of President elect Biden’s 1.9 trillion dollar stimulus proposal.

Ms. Yellen who returns to government as Treasury Secretary after a stint as Fed chief is expected to have a very smooth confirmation hearing in which she is likely to encourage lawmakers to pass the proposed package given the low level of interest rates.

For now the background macro picture certainly remains supportive with benchmark 10 year rates at 1.10%. The recent rally in rates caused concern amongst traders that inflation worries sparked by the massive stimulus proposal would push bond yields higher threatening to end the rally in equities and dissuading lawmakers from increasing deficits. But the latest inflation reading last week remained tame with CPI at 1.4% – well below the 2% Fed target – ands that may have provided some relief for bonds. The 10 year has backed off its recent highs and as long as it remains at these levels it should continue to be supportive to risk flows.

The dollar was weaker on same risk flows with EURUSD up about 40 basis points and cable up 33 pips. In FX the story remains status quo with investors still bearish on the dollar as risk flows continue to be the dominant theme. Ms. Yellen is expected to maintain a laissez faire attitude to exchange rate fluctuations reaffirming the traditional US policy of general non-intervention. The more interesting question will be whether she makes any comments about other countries’ efforts to control the exchange rates of their currencies especially if they begin to impinge on export earrings. If Ms. Yellen does offer some stern remarks on the matter in her hearings today expect a quick flip in dollar flows and perhaps some selloff in equities as well as such rhetoric will certainly dampen the feel-good mood of the morning.

Boris Schlossberg
Managing Director

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