The stock market hot streak is over. After numerous hedge funds threw in the towel scrutinizing this historic stock market rebound, it seems now the financial markets are ready to focus on the economic recovery and when the Fed will contemplate the curtailment of the COVID-19 emergency programs.
Global equities are softening as investors are using several geopolitical risks as their excuse to succumb to profit-taking. Rising tensions between North Korea and South Korea, risks of losing a free and open IndoPacific (Taiwan/China), and the never-ending saga that is US-Chinese relations will keep investors on their toes over the coming months.
US stocks pared losses as investors piled back into safe-haven technology stocks. The morning rebound is nothing to brag about and still reflects a concerning outlook for reopening stocks.
Fading risk sentiment sent the Japanese yen, Swiss franc, and Treasuries higher. Investors kept a close eye with the 10-year Treasury yield as it was getting very close to 1% at end of last week. The Fed wants a low interest rate environment and yields will likely be kept in check.
Fed
This should be an easy FOMC decision, as the Fed is in holding pattern waiting to see how the economic recovery unfolds. Investors will grow nervous now that the Fed transferred the US economy from the ICU to a rehabilitation facility. Powell will likely welcome the shockingly better-than-expected nonfarm payroll report but highlight that recovery will take longer and remains vulnerable to several risks to the outlook. Policymaker watchers will want for further hints about adopting yield curve control.
Oil
Oil prices are playing “tug of war” between improving crude demand prospects and deteriorating supply-side fundamentals. WTI crude will likely struggle recapturing the $40 level again unless a surprise production disruption occurs. Oil producing nations are eagerly anxious to ramp up production that might not match the slow pickup energy markets are seeing with the demand side.
Gold
Gold’s best friend, risk aversion is back. Gold is about to breakout even higher after the stock market rally ran into a brick wall after it added $21 trillion to global equities. The valuations in equities make no sense and investors are skeptical that risky assets have reached the end of their rally. Hertz has erased all their post-bankruptcy losses, while Macy’s has recovered the majority of losses following their recent liquidity concerns and batter consumer due to the coronavirus pandemic.
Overstated confidence with the stock market rally has many 12-month targets already reached (indexes and individual companies) and investors that got in on the rally seem ready to head for the sidelines and wait for a pullback. A plethora of risks to the outlook should help keep gold prices climbing higher in the short-term. Gold should climb its way toward $1800 on Presidential election uncertainty, Far East political strains, and as coronavirus pandemic appears to be worsening.
