Global risk sentiment remains poor, as investors continue contending with this week’s surge in Treasury yields, with 10-year yields above the psychologically important 1.30% level at the time of writing. US stock futures are edging lower following three consecutive days of losses for the S&P 500 and the Nasdaq. Most Asian benchmark indices are currently in the red.
Market participants are willing
to bet that the swathes of fiscal and monetary support for the US economy will
lead to bigger inflationary pressures. Amid this Fed-fiscal fete, investors are
trying to pre-empt when the central bank might ease up on its asset purchases
which could then pave the way for a rate hike.
Reflation trade stoked by US economic optimism
Investors have been paring their
exposure to equities as they attempt to sort through this conundrum, and it
remains to be seen whether the reflation bet will be vindicated by a strong
showing in US inflation.
Still, investors would be remiss
if they were to already fully exclude the pandemic’s downside risks. Thursday’s
larger-than-expected US weekly jobless claims dented some of the optimism surrounding
the positive surprises earlier in the week, validating the Fed’s insistence
that the US economy remains a “long way” from a full recovery.
The February US Markit PMIs due
later today may add more colour to investors’ views as to whether the rosier
economic outlook remains warranted.
Stocks to get more cues from the Biden-Powell show next
week
In order for risk-on sentiment to
be restored over the coming week, it may require the Biden-Powell tag team to
really come through. Fed Chair Jerome Powell is set to deliver his semi-annual
testimony before the Senate next Tuesday, and it remains to be seen whether the
scheduled Fed speak over the coming days will help or hamper rising yields.
Then, a week from today, President Joe Biden’s $1.9 trillion fiscal stimulus
package could be put through its first floor vote in the House of
Representatives.
The hopes for more incoming US
fiscal stimulus remain a pillar for equity bulls, even though it may herald a
ramping up of US inflationary pressures. Should the Fed be able to convince
markets that any tapering remains a distant event, that should spell more
upside for stock markets as they continue wallowing in the abundant money flows
in the interim.
Gold losing out as inflation hedge
Spot gold has clearly languished
in the wake of this surge in Treasury yields, with the precious metal trading
around its lowest levels since July. Bullion is on course for seven consecutive
days of losses, its longest losing streak since November 2018.
Gold is having a tough time
trying to win investors over in validating its role as an inflation hedge, with
other assets currying more favour instead. The optimism surrounding the US
economic outlook also does not play into gold bulls’ hands, while the surge in
Treasury yields is eroding demand for the non-yielding precious metal.
Until investors are shown real
signs that inflation is picking up, they’re unlikely to have much reason to
hold on to the precious metal in the interim. Gold’s waning appeal is evidenced
by ETFs shedding their holdings by almost 974,000 ounces so far this year.
From a technical perspective, the downtrend remains firmly intact since posting that record high back in August. Having formed a death cross earlier this week, with the 100-day simple moving average (SMA) set to join its 50-day counterpart below the 200-day SMA, such a technical event typically heralds further declines over the near term. With momentum pointing south, coupled with the fact that prices have yet to conclusively drop into oversold territory, spot gold could yet dive closer towards the key psychological $1700 mark.
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