The massive ascent in yields is prompting investors to cast serious doubt over their exposure to equities, especially for tech stocks. The Nasdaq Composite index has seen its February gains whittled down to 0.37%, with US equity futures pointing to further declines at the Friday open.
Asian benchmark indices are
ending the month on a downer, while the rising yields are giving reason for the
dollar index (DXY) to keep its head above the 90 psychological level for the
time being. The VIX index, also known as Wall Street’s fear gauge also shot
above the 30 mark shortly before the US session ended.
Markets paying little heed to the Fed narrative
Investors clearly have a hard
time buying into the Fed speak insisting that it’s too early to talk about
tapering. Despite repeated attempts this week by Fed Chair Jerome Powell and
other Fed members to reframe the narrative, saying that the rising yields are
indicative of a rosier economic outlook, investors are instead interpreting the
economic data through the US monetary policy lens.
While cognisant of the Fed’s
desire to avoid the same policy missteps following the global financial crisis
over a decade ago, markets are of the opinion that improving US economic
conditions will cajole the central bank into tightening their policy settings
sooner than expected. Fed funds futures are already pointing to an interest
rate hike that’s brought forward to the end of 2022, from 2024.
The better-than-expected economic
prints released this week, including the weekly initial jobless claims, January
durable goods orders and February consumer confidence are only adding fuel to
expectations that the Fed will have to bring its tapering plans forward,
despite policymakers’ insistence otherwise. And with President Joe Biden’s $1.9
trillion fiscal stimulus programme still in the pipeline, investors are ramping
up the chances of an overheating US economy. They expect this will be
accompanied by the desired inflation overshoot, which in turn shortens the
runway for the Fed’s eventual policy pullback.
With such a debate raging, we can
expect to see more volatile days ahead until markets can reach a greater
consensus and a firmer understanding over the Fed’s next policy steps, which
should in turn offer a new equilibrium for Treasury yields.
Gold set to post second straight monthly drop
Spot gold is on course to
register its sixth monthly loss from the past seven, with rising Treasury
yields dealing a blow to the non-yielding precious metal. Bullion’s
year-to-date losses stand at 7.12% at the time of writing.
Despite the threat of rising
inflation, investors are clearly willing to ditch gold in favour of other
assets that can better ride on the economic recovery’s coattails, as well as
the subsequent overshoot in prices. Gold ETFs have shed their holdings by more
than 2 million ounces so far this year.
The bulls have it all to do in
attempting to break the precious metal out of its current downtrend, barring
any Fed intervention in quelling the surge in yields.
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