Commodities Daily - February 26, 2021

> Oil slides as stock markets tumble. Brent is descending toward the $66/bbl mark as we write amid a broad market selloff on concerns (driving US Treasury yields higher) that rising inflation could trigger a pullback in monetary policy support. Today will see US personal income and spending data, the monthly EIA 914 production report containing December data, and the Baker Hughes rig count. Reuters is also likely to publish its OPEC production estimate for February; Bloomberg publishes its assessment on Monday. We expect Brent to drift slightly lower today amid the global market risk-off and head toward $65.7/bbl now that it has broken below the $66.5/bbl support level.> Gold prices slump as US Treasury yields surge. Investors eagerly await the January US personal income and outlays report, which is likely to be upbeat and put additional pressure on gold. The University of Michigan consumer sentiment survey and the ISM-Chicago PMI are also scheduled for release. We note that gold's drop below $1,760/oz this morning sets it up for a possible further decline toward $1,726/oz, which could be triggered by the aforementioned macro data. Despite the high likelihood that the 10y US Treasury yield will continue to march higher, we think any correction in gold prices may be limited given the rise in uncertainty with stock markets beginning to tumble.OIL SLIDES AS STOCK MARKETS TUMBLEBrent was generally hovering above $67/bbl yesterday morning, and in early European trading it even peaked at $67.7/bbl amid dollar weakness. However it began to slide later on, dipping below the $67/bbl mark and heading toward $66.5/bbl. It eventually settled at $66.88/bbl, down $0.16/bbl on the day. Weighing on oil is the stock market correction that started yesterday and a U-turn in EUR/USD, following a prolonged rally in all three. Investors continue to anticipate a sharp rebound for the global economy in light of the $1.9 trln US fiscal injection, with more investors growing worried that the resulting boost in inflation could trigger a pullback in monetary policy support. Expectations of tighter monetary policy are driving the longer end of the US Treasury yield curve higher, with 10y yields now climbing even more rapidly than before. Higher yields make it more expensive to borrow money, which tends to slow economic growth and in turn is negative for stock markets. Yields have continued to rise this week despite Federal Reserve Chair Jerome Powell downplaying the risk of inflation, saying it could take three years to consistently reach the central bank's target. He said that inflation remained "soft" and that the bank has the tools to fight it if it should run hot. We think that the stock market gains to record highs following last spring's historic plunge could now be under threat, which could derail the ongoing oil price rally.Another event that could provide further headwinds for oil is next week's OPEC+ meeting, at which the group is likely to agree to boost output by 1.5 mln bpd in April via an end to Saudi Arabia's voluntary cuts and an increase in quotas for the group. OPEC+ remains broadly aligned, with relatively minor differences between Saudi Arabia and Russia. We think OPEC+ could agree to raise output by as much as 2.5 mln bpd in 2Q21. We also think the prospect of demand strongly exceeding supply in 2H21 and 2022 will soon cause pressure to build to end the deal before April 2022. We believe that Saudi Arabia will push for a cautious approach, particularly until the timing for Iran's probable return becomes clearer.Brent is descending toward the $66/bbl mark as we write amid a broad market selloff on concerns (driving US Treasury yields higher) that rising inflation could trigger a pullback in monetary policy support. Today will see US personal income and spending data, the monthly EIA 914 production report containing December data, and the Baker Hughes rig count. Reuters is also likely to publish its OPEC production estimate for February; Bloomberg publishes its assessment on Monday. We expect Brent to drift slightly lower today amid the global market risk-off and head toward $65.7/bbl now that it has broken below the $66.5/bbl support level.GOLD PRICES SLUMP AS US TREASURY YIELDS SURGEYesterday, after trading around $1,800/oz during the early hours, gold prices began to slide, eventually hitting the $1,765/oz mark by the end of the day. A further rise in Treasury yields was the key driver behind gold's nearly 2% slump yesterday. Gold prices shrugged off the advance of EUR/USD throughout most of the day, as the 10y yield surged to 1.6%, its highest level since the pandemic began, while the real 10y yield rose to -0.55%. Yesterday's mixed macro data was mostly negative for gold. Upbeat February eurozone consumer confidence and business climate indexes supported EUR/USD, as they pointed to a possible increase in consumer spending and inflation in Europe. On the other hand, US initial jobless claims fell by 111k to a seasonally adjusted 730k in the week ended February 20, the lowest level since November. This suggests that the US labor market is gaining strength, which made investors more concerned about inflation and an earlier retightening of monetary policy. Bullion prices were also pressured by upbeat January durable goods orders data from the US. Treasury yields are becoming increasingly sensitive to upbeat US macro data with the $1.9 trln in fiscal stimulus looming, as investors are worried this inflow could cause a surge in inflation, forcing the Fed to rein in its support.Gold dipped below $1,760/oz during the Asian trading session today. Investors are eagerly awaiting the January US personal income and outlays report, which is likely to be upbeat and put additional pressure on gold. The University of Michigan consumer sentiment survey and the ISM-Chicago PMI are also scheduled for release. We note that gold's drop below $1,760/oz this morning sets it up for a possible further decline toward $1,726/oz, which could be triggered by the aforementioned macro data. Despite the high likelihood that the 10y US Treasury yield will continue to march higher, we think any correction in gold prices may be limited given the rise in uncertainty with stock markets beginning to tumble. The closest resistance level is now $1,785/oz, which we think is unlikely to be tested.