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Stocks continue waning amid higher yields


19 February 2021

Global risk sentiment remains raw, as investors continue contending with this week’s surge in Treasury yields. US stock futures are pushing lower once more, following 3 consecutive days of losses for the S&P 500 and the Nasdaq. Asian equities are in the red at the time of writing.

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 central bank might ease up on its asset purchases, which could then pave the way for an interest rate hike.

Such a narrative has prompted a selloff in US Treasuries, with 10-year yields breaching the psychologically-important 1.30 mark this week, though they’ve moderated since.

Reflation trade stoked by US recovery optimism

Investors have been paring their exposure to equities as they attempt to sort through this conundrum. 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 today may add more colour to investors’ views as to whether the rosier economic outlook remains warranted.

Stocks to get more cues from the 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. Fed Chair Jerome Powell is set to deliver his semi-annual testimony before the Senate, and it remains to be seen whether the scheduled Fed speak over the coming days will tamper these rising yields. Then, a week from today, President Joe Biden’s $1.9 trillion fiscal stimulus package may be put through its first floor vote in the House of Representatives.

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 to lavish in the easy money flow 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 to register 7 consecutive days of losses, its longest losing streak since November 2018.

Gold is having a tough time trying to win investors over 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 of the precious metal by almost 974,000 ounces so far this year.

From a technical perspective, gold’s downtrend since posting that record high back in August remains firmly intact. Having formed a death cross just 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 psychologically-important $1700 mark.

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