AM Notes: Risk On, Risk Off, Pause, Repeat

Risk sentiment on the up again this morning

In Asia:

06:30 BST

U.S. futures in the green... NQ leading the way, up 0.8%

Everything's a bit Groundhog Day right now. My inbox is filling up with inflation takes, and every day there's a new spin on how the latest Fed official has said it's too soon to talk about tapering.

The ratio of inflation bad Fed hike ASAP: Supply chains, everyone CTFO is off the charts.  

 if you drew a venn diagram of the people surprised we're having shortages on supplies in a reopening economy after the supply chains, some with long lead times, shut down for basically a year and people who misunderstand QE and its role in inflation it would simply be a circle— Lily Francus (@nope_its_lily) May 18, 2021 

But where's the next positive catalyst?

And even if we find one is it priced in already? 👇

And what if it's over-priced?

BoE's Vlieghe reminded markets yesterday that:

  • Growth this year should not be viewed as a boom, but as a return to normal

  • QE cannot deliver a great amount of extra stimulus at a time of normal market conditions and low rates.

  • The neutral rate of interest is very low relative to past decades and that if the UK economy does not grow very fast, significant spare capacity will open up when the furlough scheme ends.

  • Vlieghe welcomed the fact the BoE would soon be able to cut interest rates below zero if needed

He is one of the more dovish members (and he's leaving the BoE in a few months), but the comments are a strong reminder that the economy is in the recovery phase, while markets have already shifted focus to the expansion...

His comments are as applicable to other developed economies as they are to the UK.

Back to the 'boom'...

Some commodities are starting to roll over...

@AvidCommentator

Iron ore & copper remain strong.

China's rhetoric against Australia hasn't really come to much even as they encourage companies to "actively and prudently" develop overseas iron ore mines while expanding import channels

The state planner said it was working together with the market regulator to look into the steel and iron ore market, where prices have soared 30-40% in 2021.

Regulators in Shanghai and steel hub Tangshan warned local mills last week against price gouging, collusion and irregularities, and said they would shut down business at those seriously disrupting market orders.

PPI is expected to cool in the second half with commodity prices "gradually back to the supply and demand fundamentals"

I am increasingly convinced that risk will take a sizable hit in the coming weeks, but it still seems a little early.

The next NFP & CPI prints should increase uncertainty, and all roads lead to stagflation and/or Fed tightening risks.

Put another way, they lead to uncertainty.

Timing is the issue.

No permabear here, but tactical risk shorts are starting to look more appealing.

I'll put a more detailed piece on this out later today.

Looking ahead, not much on the calendar...

🗣 ECB’s Lagarde, BoE’s Bailey, Broadbent, Ramsden, Fed’s Bostic, Kaplan

USD/CHF: 0.9140 (740M)

GBP/USD: 1.4000 (202M)

AUD/USD: 0.7750 (1.2BLN), 0.7800 (201M)

NZD/USD: 0.7225 (343M), 0.7260-70 (1.4BLN)

USD/CAD: 1.1950 (887M), 1.2025-30 (280M)

USD/JPY: 108.60-75 (400M), 109.50 (205M)