Next Week's FOMC Meet Might Give the First Hints of Taper: Stephen Innes, AxiCorp

Gold and bonds are going to continue to come under pressure until we put a lid on rising yields over the short term, says Stephen Innes, Chief Global Market Strategist, AxiCorp.

The $1.9-trillion stimulus is done and dusted. There is the further good news of the ECB ramping up on buying. Lots are going on to pump prime the economy right now. What will be the implications of the stimulus on inflation or growth？

The US market is still getting driven by the lingering inflation fear. Things are settling down even though the 10-year bond yields are still above 1.5% and looking to go higher. The stimulus is going to drive the economy stronger but it is also going to push yields higher. This is a fundamental consequence and this is where the wall of worry is centering on. It is bringing forward rate hike expectations and this is why we have seen a quieter melt-up cycle.

Remember, given the magnitude of the moves we have had in recent days, it seems a lot of clients are still sitting on the sidelines questioning the move. This move seems to be more momentum-type triggers rather than fundamental and should have beaten the markets. It looks like the 10-year bond yields are veering towards 2% in the economic boom that manifests over the next six months. The worry is not about where yields are right now but where they can go.

You talked about a softer melt-up than otherwise. What does this imply for equities going forward？

Next weeks FOMC meeting is going to be incredibly important. The Fed has got 5 dots which means five members are suggesting that they would be open to raising interest rates in 2023. That is a legacy move that occurred back in December and that has not changed, But now the Fed is factoring in $1.9 trillion worth of stimulus and its implications. They know that it is going to hyper-stimulate the economy to a degree but we do not know if this is going to be a short burst or a long burst. That is where the balance of risk lies. If we see more than three dots get put in the 2023 threshold, that would bring it to 9 and that means if the Fed is aligning with the markets consensus, then we could get a lift-off sooner and that would be the first signal of a taper.

I do not think the markets are reacting well to that. Fed has to be very careful as they are drawing that fine line. They certainly do not want to continue holding investors hands forever. They are going to have to let go of that grip and they are going to do that sometime this year. But they have to do it in such a way that there are no taper tantrums. This is a big worry in my view. I still think yields are going higher, I still think long-duration assets -- whether it is gold or bonds -- are going to continue to come under pressure until we finally put a lid on rising yields over the short term.