Βy Han Tan, Chief Market Analyst at Exinity Group
Equities are on a slippery slope as markets hold fast to expectations that the Federal Reserve’s tapering should commence next month. Asian and European stocks are in the red, while US futures are also lower and set to pare Tuesday’s advance.
The 100-day moving averages for both the S&P 500 and Dow Jones have gone from offering support to resisting gains. Gold prices are being suppressed around the mid-$1700 region by a US dollar index that’s consolidating near its year-to-date highs, with the greenback supported by rising Treasury yields.
US jobs print to green-light tapering
Market participants worldwide will be using Friday’s nonfarm payrolls (NFP) print as confirmation of the Fed’s tapering timeline. An official print around the median forecast of 488,000 should pave the way for US policymakers to start easing up on their bond purchases.
After all, Fed Chair Jerome Powell has already stated that the inflation criteria for tapering has been met; all that remains are further gains in the US labour market.
The better-than-expected Markit and ISM readings on the services sector for September also suggest that the US economic recovery has enough resilience to justify the Fed slowing the pace of its bond buying programme.
Tougher resistance for stocks
Investors must remain vigilant over upcoming major risks, including stagflation fears stemming from surging commodity prices that fuel runaway inflation and erode economic recovery.
Germany’s steeper-than-expected contraction in August factory orders is only amplifying concerns that supply bottlenecks could persist and continue to ramp up consumer prices.
Inflationary pressures that last for longer than expected could hasten policy tightening by major central banks, with the RBNZ being the latest to hike interest rates, while the Bank of England is open to such a move before the end of 2021.
Uncertainties surrounding the US government’s debt ceiling and President Joe Biden’s longer-term spending plans are only adding to the headwinds for stock markets, while geopolitical tensions continue bubbling beneath the surface.
Such risks leave equities with a propensity for more declines, having exhausted many of the reasons for substantial gains.
Oil benchmarks surge higher
Crude oil continues to march north, despite Saudi Aramco lowering its oil prices to customers.
OPEC+ refrained from loosening the oil taps beyond what was initially planned at its recent meeting. The extra 400,000 bpd of incoming supplies is seemingly not enough to satiate a world that’s desperate for oil ahead of the winter season and “fuel switching”.
However, should Wednesday’s EIA data show an unexpected build in US inventories, defying whispers of a 550,000 barrel drawdown, that could prompt some unwinding of oil’s recent gains and delay WTI’s ascent to the $80 mark.
Overall, the uptrend for oil prices remains very much intact as long as natural gas prices carry on rising and global oil supplies struggle to keep pace with surging demand.
NFP could trigger next move for gold
So far this month, spot gold has been confined within a $23 dollar range around $1750, with markets unwilling to make a decisive move ahead of the upcoming US jobs report.
Gold prices are subdued as markets grow more accustomed to the heightened prospects of the Fed’s tapering which is boosting the dollar and US real yields. Should Friday’s NFP exceed market expectations, we could see spot gold break down through its month-to-date range and retest the end-September lows of $1720.
While stagflation fears and physical bullion demand may offer support for the precious metal, a stronger floor may only arrive around $1670 which held up well in the first quarter of the year. That implies more room to the downside for gold which could be realised upon further advances in Treasury yields and the US dollar.
For information, disclaimer and risk warning note, visit: https://exinity.com/en-ae
Exinity ME Ltd, a company registered under the Laws of the Abu Dhabi Global Market (ADGM), is authorised and regulated by the Financial Services Regulatory Authority (FSRA)
