By Han Tan, Market Analyst at FXTM
So much for a slow start to the new year. From a pair of tense Senate runoffs, to a mob breaching Capitol Hill and even a shock oil supply cut from Saudi Arabia, investors have had plenty to take in this week. Yet, the buying momentum in stocks has continued unabated.
After overcoming the slight wobble on Monday, US equity benchmarks have since posted new record highs with futures contracts in the green in early Friday trading.
The MSCI ACWI index, which measures the overall performance of stocks across emerging and developed markets, also registered its highest ever close on Thursday. Asian equity benchmarks were climbing on Friday, with the MSCI Asia Pacific index advancing some 2% so far this year.
Reasons aplenty to look up
Stock market bulls have many reasons to expect further gains.
Investors are getting more comfortable wading further out into risk-on waters, considering that the spillover from last year’s downside risks have subsided, including Brexit concerns and the US election cycle. On Thursday, outgoing President Trump finally stated his intention for a smooth transition of power.
Now, investors are gravitating towards the increased likelihood of more incoming US fiscal stimulus in light of the Democrats’ sweep of the Georgia Senate runoffs.
The latest FOMC meeting minutes underscore policymakers’ will to stick to its supportive policy stance. Also helping the risk mood is the continuation of the Covid-19 vaccine rollout, with Moderna’s vaccine receiving the EU’s blessing this week.
Such elements are fostering a highly supportive environment for global equities, affording investors the luxury of looking past the persistent pandemic woes.
Dollar bears likely unfazed by US hiring slowdown
Fundamental investors will be focusing on Friday’s US non-farm payrolls release, amid expectations for a mere increase of 50,000 jobs in December. Such a figure is a far cry from the millions of jobs that were restored in the months after the initial national lockdown ended.
A December NFP print of 50,000 would merely be one-fifth of the jobs added in the month prior which notably was below expectations, signaling that the post-lockdown recovery in the labour market is stalling.
Still, the prospects of more fiscal stimulus under the incoming Biden administration should help tide the US economy over. After all, the President-elect did vow this week to mail out those US$2,000 checks “immediately” if the Democrats won the Georgia Senate runoffs. With such expectations intact, the Dollar index may not have many legs left in its recent rebound.
Gold supported by hopes of faster US inflation
The 10-year Treasury yields breached the psychologically important 1% mark this week, and along with the Dollar rebound have dealt a slight setback to Gold prices. Yet, the precious metal is still trading above the key $1900 level and it remains on course for a sixth straight weekly gain.
Bullion remains supported by the reflation trade, amid expectations that Democrats’ control of the White House, Senate and the House of Representatives should pave the way for more incoming fiscal stimulus that can drive up US inflationary pressures.
However, should December’s non-farm payrolls report offer more evidence of a stalling US jobs market, that may dampen Gold prices in the immediate aftermath, while waiting for more inflationary boosters to come through. The Federal Reserve’s conveyed tolerance for an inflation overshoot also bodes well for the precious metal’s upside.
Spot Gold still harbours the potential to reclaim the $2000 handle, especially if the precious metal’s tailwinds can gather pace as 2021 unfolds.
However, as commented by Fed officials this week, there appears to be a risk of a pullback in the Fed’s asset purchasing programme should a US economic outperformance crystalise in the latter part of the year. Another massive yields spike may then trigger the further unwinding of Gold’s recent gains.
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