By Han Tan, Market Analyst at FXTM
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 early on Friday.
US stock futures are edging lower following three consecutive days of losses for the S&P 500 and the Nasdaq, while 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 U.S. central bank might ease up on its asset purchases which could then pave the way for a rate hike.
Reflation trade stoked by US 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 on Friday may add more colour to investors’ views as to whether the rosier economic outlook remains warranted.
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.
Federal Reserve Chairman 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, President Joe Biden’s $1.9 trillion fiscal stimulus package could be put through its first floor vote in the House of Representatives next Friday.
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 over investors 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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