By Han Tan, Market Analyst at FXTM
Asian markets and US stock futures are taking a hit, following China’s tit-for-tat decision to order the US consulate in Chengdu to close. This follows the US government’s similar order on China’s consulate in Houston earlier this week.
The escalating tensions between the world’s two superpowers come at a time when US equities have been struggling to maintain their stellar rise. The Dow’s attempts to better its June 8 high have been found wanting, the Nasdaq is seeing a technical pullback and the S&P 500 can barely hang on to its year-to-date gains.
For equity bulls, a much-needed boost may arrive early next week with Senate Republicans set to unveil their proposal for a $1 trln stimulus plan. Although markets have been pricing in the prospects of more US fiscal stimulus, its official passage could still push riskier assets higher, as was the case earlier this week with the EU Recovery Fund.
The world’s largest economy is in need of more support, a call amplified by Thursday’s unexpected rise in initial jobless claims, while billions of dollars of unemployment measures are set to expire next week.
Further signs of dithering in Washington would test investors’ patience potentially prompting market participants to take some more risk off the table, as the political brinkmanship threatens to dampen the US economic recovery.
Gold bulls in seventh heaven
Bullion bulls were also given added impetus as US-China tensions returned to the fore this week, while concerns over the global economic recovery refuse to go quietly into the night.
Gold’s rally this week has been driven primarily by real yields pushing deeper into negative territory in US Treasury markets, making the precious metal that much more appealing, as it is a non-yielding asset. The weakening US Dollar has also paved the way for more upside in Gold.
The yellow metal is set to notch its seventh consecutive weekly advance, extending its climb after seven straight quarters of gains. Early Friday, spot Gold was trading around a new nine-year high, having added over 4% this week, which would be its highest weekly gain since April. Bullion is now less than $40 away from its record high of $1921.17 posted on September 6, 2011.
At this pace, setting a new all-time high seems like a foregone conclusion. After all, we are now in a tremendously supportive environment for Bullion, a notion not lost on ETF investors who have raised their holdings of the precious metal by record amounts.
Gold clearly stands out among its safe-haven peers because of its historical role as a store of wealth and a hedge against waning purchasing power, which lends itself well to the potential for further gains going into 2021.
However from a technical perspective, spot Gold has ventured into overbought territory so don’t be surprised if we see a pullback over the near-term. Still, any such declines could prove to be nothing more than a mere footnote in Gold’s relentless climb to historic highs.
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