A rather downbeat week in the markets is ending on a more positive note, with US stocks opening a little higher and Europe heading for decent gains into the close.
Concerns about sharply rising yields appear to have abated for now, despite the fact that the direction of travel continues to be upward and at a slightly faster pace. Perhaps fears will return next week and weigh a little on sentiment once more but for now, we’re seeing some of the damage of the last few days being unwound.
Ultimately, rising yields are what we want and expect as it means we’re seeing a powerful recovery from the pandemic but as ever, the pace is important. If it’s driven by fear of above target inflation and the central bank being forced into premature rate hikes, it’s naturally far from ideal and triggers the kind of taper tantrum we’ve seen before.
We’re not quite seeing that but we may be seeing a little apprehension as a result of the pace being picked up a notch. US 10-year yields have been gradually trending higher since August with the vaccine-inspired recovery trade further fueling the moves. As ever though, it’s a balancing act and the Fed may be called upon more in the coming weeks to provide investors with more reassurance.
We’ve seen plenty of data recently to suggest economies are in a better shape than envisaged earlier in the pandemic and with the amount of stimulus out there – and another bazooka on the way from Washington – a turbo-charged, consumer-led recovery is now on the cards.
That’s obviously great news for all those that have suffered throughout the pandemic, with Yellen previously suggesting full employment could be achieved as early as next year, but it brings with it potential headaches for policy makers. And when policy makers have headaches, investors get nauseous.
Oil enters profit taking territory
We’ve entered into profit taking territory in oil markets, with WTI easing back below $60 before recouping some of those losses. Some may say it’s been a long time coming. A 77% rally in WTI since early November is the kind of returns you’d typically only associate with cryptos, or Tesla.
While the moves are probably justified given what’s happened in that period, a mild correction has been coming. Vaccines and the impressive rollouts we’ve seen have delivered strong gains, as have the efforts of OPEC+ – Saudi Arabia, in particular – and the big freeze in Texas, which gave oil prices one final kick this week.
With so many bullish factors now priced in, it seems we’re seeing some of these positions being unwound, which pushed WTI below $60 at one stage. It may dip below there once more, given how long this market has been.
Gold at its lowest since July
Gold is having a torrid time. Even the pullback we’ve seen in gold the last couple of days couldn’t save it, with higher real yields in the US instead piling the misery on the yellow metal. It fell below $1,760 today, the lowest it’s been since early July, in another sign that its near-term outlook is looking far from bright.
The greenback has been struggling to gather strong upward momentum which may have provided gold some relief but unless the dollar index falls below 90, the outlook for it remains bullish which is bad news for gold. Especially in a rising US yield environment.
