InvestMacro

Asian markets are climbing on the back of Thursday’s gains for US benchmark indices, following fresh signs that the US economy is healing from the wounds inflicted by the pandemic.

The S&P 500 is now just 0.23% away from its record high, while the Dow Jones Industrial Average posted a fresh record high. The Nasdaq 100 ended a 4-day losing streak, though remains about 3% lower from its highest ever closing price recorded on 16 April.

At the time of writing, the futures contracts are pointing to further gains for US and European stocks before the weekend.

Nonfarm payrolls to validate risk-on sentiment

Yesterday, the US recorded its first sub-500k weekly jobless claims since the pandemic forced lockdowns across the country. With more Americans re-entering the workforce, that would help bring the US economy further along into the post-pandemic era.

Such optimism has to be endorsed by today’s US nonfarm payrolls data, with markets forecasting that one million jobs were added in April.

While anything above March’s print of 916,000 would still demonstrate an improvement in the US jobs market, a payrolls tally that’s higher than the-expected one million could well trigger another wave of risk-taking activities across global markets.

Investors will also be monitoring how US consumer price pressures would react to more slack being taken out of the jobs market. More importantly, markets want to know whether such inflation would persist once the low base effect fades, and force the Fed’s hands into adjusting its policy settings earlier than what these central bankers have conveyed to the markets so far.

The Fed’s commitment to its ultra-accommodative stance is arguably the biggest theme in play at the moment, despite the concerted attempts by officials to play down any talk about a premature paring of its stimulus measures.

Gold breaches psychologically-important mark

Spot gold has broken above the $1800 level for the first time since February, and is set to register its biggest weekly gain of the year so far. Gold’s climb has been aided by stabilizing Treasury yields, which in turn has led to a US dollar that’s been moderating since April, noting the inverse relationship between gold and the greenback.

The precious metal is now up by almost 7.8% over the past two months, since it registered its year-to-date low on 8 March, and has now broken above its 100-day simple moving average.

Real yields on 10-year Treasuries remain firmly in negative territory, while its breakeven rates are now around their highest since 2013. Such conditions have implored gold prices to pare its year-to-date losses, considering its trait as a zero-yielding asset.

In order for gold to push higher from current levels, spot prices must carve out an extended presence above $1800 in order to encourage more bulls to get off the sidelines, especially those who cling to the belief that the precious metal is a worthy hedge against faster inflation.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

US equity futures are struggling for direction this morning after a late tech selloff yesterday sent the Nasdaq lower for a fourth consecutive session. But the Dow Jones Industrial Average managed to advance to a new record high with the support of cyclical industries. European markets are also set for a subdued open following a mixed Asia session which saw Japanese stocks outperforming on their return from holiday, while shares in China and Australia dropped after Beijing announced a suspension of regular economic dialogue with Canberra.

US bond yields are back under pressure with 10-year yields falling for a fifth straight day, preventing the dollar from further rallies. Meanwhile in commodities, Brent is still attempting to break above $70 a barrel as crude stockpiles in the US fell more sharply than anticipated.

Key trends for equity investors haven’t changed a lot so far this year. Value and cyclical stocks remain the main beneficiaries from the reopening of economies, while growth and tech firms with overstretched valuations continue to suffer. In an expensive equity market and with anticipation of higher interest rates, value tends to benefit the most and investors are sticking to this narrative.

Surprisingly though, the bond market is still doing holding up despite all sorts of talk about an overheating economy and soaring inflation expectations. The 10-year breakeven inflation rate which measures expected inflation over the next 10 years reached 2.47% on Wednesday, the highest in eight years. Meanwhile five year breakeven rates approached 2.7%, the highest in a decade.

If Friday’s US jobs report comes out strong enough to force the Federal Reserve to announce tapering of asset purchases later this year, we could see the upward trajectory in long term bond yields resume after its latest pause. However, looking at recent economic data releases, it seems the economy is failing to surprise to the upside.

The employment component of the US PMI Manufacturing and Services indices both came in slightly above market expectations this week. Private payrolls rose by 742,000 jobs in April posting its biggest gain in seven months but still fell short of the 800,000 forecast. Today’s initial jobless claims will also provide more information about the recovery in the labour market. But it is Friday’s non-farm payrolls report that will determine how bond yields could move and possibly take the dollar in the same direction.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.