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US stock markets to remain under pressure until support package



Yesterday was another day of the Nasdaq falling more than 2%. The Dow Jones’ losses were much more modest at -1.1%, as was the S & P500, which fell -1.3%. This happened against the backdrop of continued growth in the yields of US long-term government bonds. 10-year yields climbed to 1.57%, new 12-month highs, and 30-year yields are 2.32%, near their peaks since early 2020. Investors looked forward to Powell’s assurances of his willingness to contain yields, but did not hear them, which increased pressure to the markets. We have repeatedly pointed out that the markets are unlikely to satisfy the status quo from the Fed against the backdrop of the impending huge stimulus package and impending consequences. By and large, much is happening on the market now – this is the preparation of large players for a new wave of US government bond placements. It is most likely that the Treasury will offer long bonds to spread the debt burden. The potential increase in the supply of these securities lowers the price of all issues. At the same time, it is important to understand that what is happening can hardly be called a sell-off of the American government debt. During the sovereign debt crisis of the Eurozone, fear of default not only by Greece, but also by Spain and Italy, simultaneously caused a rise in the region’s bond yields and significantly weakened the euro. However, now, on the contrary, the dollar is adding to most of its competitors. In our opinion, it would not be entirely correct to describe this movement as the fact that investors began to be attracted by increased yields on US debt. Most likely, large players are accumulating dollar liquidity in order to buy future issues of long-term US bonds. That is, we are now witnessing a certain breathing of the market, something like an inhalation. This will definitely be followed by an exhalation. In the coming months or even weeks, the dollar may begin to weaken, which also happened after the first 2 trillion support package in the middle of last year. The natural course of events may also be disrupted by the actions of the Fed. The next FOMC meeting is scheduled for March 17th. If the market situation deteriorates steadily, it could force the committee to soften its rhetoric, turning to control over the government bond yield curve, a willingness to step up efforts in this direction have already been announced by the ECB and the Bank of Japan, laying the foundation for a similar move from the Fed. This could be a turning point for the markets, quickly bringing buyers back to the stock and commodity markets. However, the big question is that the Fed will take this step before the Treasury makes all the necessary bond placements in order to maintain faith in the dollar as a leading reserve currency. _______________ Alexander Kuptsikevich, Lead Analyst, FxPro

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