By Han Tan, Market Analyst at FXTM
Asian stocks are mostly tracking Thursday’s declines on Wall Street, although US equity futures are flirting with gains in early Friday trading.
This week, the VIX reached its lowest levels since August, while the futures returned to pre-pandemic levels. Meanwhile, volatility in the currency markets around the world has reached a near 4-month low, as measured by the J.P. Morgan Global FX Volatility Index.
Market sentiment is bobbing about amid the cross currents in financial markets, with investors awaiting the next tailwind that could push them significantly into riskier waters. Monday’s post-US election cheer and vaccine optimism have clearly ebbed with market participants now facing a tame end to a volatile trading week.
Central banks urge caution
Of course, dangerous undercurrents still lurk below the surface. The persistent concerns over the state of the global economy due to the alarming resurgence of Covid-19 cases across major markets, from the US to Japan, have given risk appetite reason to pause.
Investors should pay heed to the words of caution from some of the world’s most influential central banks, namely the Federal Reserve, ECB and the Bank of England, whose chiefs warned on Thursday against getting too excited about what a vaccine could actually contribute to global recovery.
There are still significant challenges ahead and the vaccine may not be potent enough to immediately heal the economic scars left by the pandemic when it eventually reaches the world’s population. Such an outlook suggests that more concerted monetary and fiscal support may be required to facilitate a full recovery, with a longer runway potentially needed before marking such an event.
Investors’ fears that this Covid-19 resurgence across major economies could derail their fledgling recovery are keeping safe havens well bid, with the Dollar index not straying far from the 93.0 mark for now.
Gold set to form death cross
Speaking of safe havens, a traditional pillar of this asset class appears to be falling out of favour. Gold prices are set to form a death cross, with its 50-day simple moving average about to move below its 100-day counterpart. Such a technical episode may herald further declines in the precious metal.
However, with US 10-year Treasury yields essentially halving their advance from the first half of the week and pulling further below the psychologically important 1% level, Bullion has some breathing space for now.
Still, gold bulls are at risk of being left at the altar waiting on more significant policy signals as to how US inflationary pressures will be boosted.
Given that Thursday’s release of the October US CPI prints came in below market expectations, the precious metal may find itself on a softer footing, curtailing attempts to push higher from current levels.
Unless Friday the 13th lives up to superstitions and investors are blindsided by an ‘unlucky’ event, this day is set to be a ho-hum day in markets.
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