MSCI’s world stocks benchmark fell 0.23%, and all of the major U.S. stock indexes were down by mid-afternoon New York time. European shares closed 0.1% lower, dragged down by mining, banks and luxury stocks, which followed Asian luxury stocks in falling on a new spike in COVID-19 cases in Fujian, China.
The Labor Department said on Tuesday its Consumer Price Index (CPI) was up just 0.1% last month, compared to an expected increase of 0.3%. That was the smallest gain in six months, and it indicated that inflation has probably peaked.
However, concern that inflation could remain high for a prolonged period has pressured stocks in September, and the data included warning signs that some bottleneck issues have not entirely gone away.
“Today’s CPI data came in a bit weaker than expected, but (the Producer Price Index) is at a record high and inflation continues to be a key challenge for investors,” said David Petrosinelli, Senior Trader at InspereX.
The U.S. Federal Reserve will meet next week. The August CPI data lifts some of the pressure the Fed faced to announce it would begin tapering its massive bond-buying program.
Further delaying this key Fed announcement is “distorting” the economy and throwing off markets, said BlackRock’s Chief Investment Officer of Global Fixed Income Rick Rieder.
“Continuing to stimulate demand higher increases the risk of a severe supply/demand mismatch across economic as well as financial assets,” said Rieder, also the head of BlackRock’s global allocation team.
The Dow Jones Industrial Average fell 262.72 points, or 0.75%, the S&P 500 lost 20.69 points, or 0.46%, and the Nasdaq Composite dropped 33.25 points, or 0.22%.
The prospect of a corporate tax rise in the United States from 21% to 26.5% as part of a $3.5 trillion budget bill is also front and center for investors.
Investment bank Goldman Sachs Group Inc estimates that if Democrats succeed in raising the corporate tax rate increase to 25% and get half of the hike proposed in foreign income tax rates, it could shave 5% off S&P500 earnings in 2022.
In Asia, China’s tightening grip on its technology companies again kept investors on edge after authorities told tech giants to stop blocking each other’s links on their sites.
MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.43%.
The dollar index fell 0.161 points or 0.17%, to 92.514.The euro was last up 0.09%, at $1.1819 .
The yield on 10-year Treasury notes US10YT=RR was 1.282%.Bond yields in the euro area moved up, with Germany’s 10-year yield, the benchmark for the bloc, at -0.34%, hitting a two-month high.
Oil prices rose, extending gains as Nicholas weakened into a tropical storm and the International Energy Agency said demand would rebound in the remainder of the year.
Brent crude settled up $0.9, or up 0.12%, at $73.60 a barrel. U.S. crude settled up $0.1, or up 0.01%, at $70.46 per barrel. Spot gold prices rose $12.7509 or 0.71 percent, to $1,806.24 an ounce.
Leading U.S. House of Representatives Democrats said they are seeking to raise the tax rate on corporations to 26.5%, up from the current 21%.
The U.S. consumer price data due out on Tuesday will give a broad picture of the economy’s progress ahead of the Federal Reserve’s meeting next week.
The MSCI world equity index, which tracks shares in 45 nations, shed 0.22%, while U.S. stocks were mixed.
The Dow Jones Industrial Average rose 0.4% and the S&P 500 fell 0.17%. The Nasdaq Composite dropped 0.4%, as investors pivoted away from major technology stocks to sectors more likely to benefit from an economic bounce later this year.
The dollar climbed to a two-week peak against a basket of major currencies as investors priced in the possibility that the Federal would reduce its asset purchases.
“Investors are grappling with an unusually wide range of potential economic outcomes beyond the post-pandemic restart, reflected in frequent shifts in equity market leadership and volatile bond yields,” said Vivek Paul, senior portfolio strategist at BlackRock Investment Institute.
The yield on 10-year Treasury notes was down 2 basis points to 1.321%.
European stocks ended higher for the first time in five days on hopes that a strong euro zone economic recovery can outweigh risks of a global slowdown. The pan-European STOXX 600 index was up 0.3% after hitting a three-week low last week.
Asian stocks fell earlier in the day following news of a fresh regulatory crackdown on Chinese firms.
China fired a fresh regulatory shot at its tech giants, telling them to end a long-standing practice of blocking each other’s links on their websites. The Financial Times also reported that China is aiming to break up the payments app Alipay.
The Chinese blue-chip index fell 0.5% and MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.78% lower. Japan’s Nikkei rose 0.22%.
The core reading of the U.S. consumer price index is expected to show a rise of 0.3% in August, down from 0.5% the previous month and 0.9% in June.
The U.S. Federal Reserve is paying close attention to price pressures as it mulls when to begin to reduce its massive bond holdings and how soon to begin lifting rates from near zero. It also remains on the lookout for any signs that price pressures may broaden.
The general air of risk aversion helped lift the dollar index to 92.69, up 0.12%.
Oil prices rose to six-week highs as U.S. output remains slow to return two weeks after Hurricane Ida slammed into the Gulf Coast and worries another storm could affect output in Texas this week.
Brent crude settled up $0.59, or up 0.81%, at $73.51 a barrel. U.S. crude settled up $0.73, or up 1.05%, at $70.45 per barrel.
(Reporting by Sujata Rao in London and Elizabeth Dilts Marshall in New York; additional reporting by Wayne Cole in Sydney and Dhara Ranasinghe in London; editing by Emelia Sithole-Matarise, Will Dunham, Chizu Nomiyama and Dan Grebler)
U.S. stocks closed lower for the fourth consecutive day on Thursday, putting all three major cash market indexes in a position to close lower for the week.
The best performer in the benchmark S&P 500 Index during the holiday-shortened week has been the Consumer Discretionary Sector, up about a quarter of one percent. The other ten sectors are all lower. Industrial and real estate stocks are the biggest losers, with each sector down more than 2%.
The weekly unemployment claims report from the Labor Department on Thursday, the timeliest data on the economy’s health, also showed the number of people on state unemployment rolls plunging to levels last seen in mid-March 2020 when the economy was reeling from mandatory shutdowns of nonessential businesses to slow the first wave of COVID-19 cases.
Initial claims for state unemployment benefits dropped 35,000 to a seasonally adjusted 310,000 for the week-ended September 4, the lowest level since mid-March 2020. Economists polled by Reuters had forecast 335,000 applications for the latest week.
Unadjusted claims, which economists say offer a better read of the labor market, fell 8,005 to 284,287 last week.
Claims have dropped from a record 6.149 million in early April 2020. They are closing in on the upper end of the 200,000-250,000 range viewed as consistent with healthy labor market conditions.
Treasury Yields Fall after Weekly Jobless Claims Drop to COVID-Era Low
U.S. Treasury yields fell on Thursday as last week’s initial jobless claims dropped to a new COVID-Era low in the face of the highly contagious delta variant.
The yield on the benchmark 10-year Treasury note fell 4 basis points to 1.295%. The yield on the 30-year Treasury bond dropped 6 basis points to 1.888%.
New York Fed Bank President John Williams said that more progress is needed in the labor market to achieve the “substantial further progress” for the Fed’s maximum employment goal.
He added, however, that it may be appropriate for the Federal Reserve to start reducing the pace of its asset purchases later this year if the economy continues to improve.
“The Fed is clearly in wait-and-see mode over the next couple of months to see how the economy holds up. Fed’s Williams delivered some dovish comments that support the idea that the soonest the Fed could taper is December,” Edward Moya, senior market analyst at OANDA in New York, said in a report.
Separately, the Fed said in its latest Beige Book that the U.S. economy “downshifted slightly” in August as the renewed surge of the coronavirus hit dining, travel and tourism.
The dollar index, which measures the currency against six rivals, gained 0.14% to 92.66, after earlier rising to 92.86, the highest since August 27.
Benchmark 10-year Treasury note yields fell to 1.33%, after earlier trading at 1.38%. The yields have risen since data on Friday showed that U.S. jobs growth slowed while wage inflation was higher than expected.
An uptick in inflation is complicating the picture for Fed officials who want to see further progress in employment before reducing bond purchases.
“At its very worst, there is some concern that nominal wages are still lagging consumer price increases by cycle extremes … and that nominal wages are struggling to keep up with prices, which is how a wage-price spiral develops,” Alan Ruskin, a macro strategist at Deutsche Bank, said in a report on Tuesday.
Data on Wednesday showed that U.S. job openings rose to almost 11 million in July.
The euro dipped before the European Central Bank meeting set for Thursday. The ECB could tighten policy sooner than many anticipate as inflationary pressures could prove to be persistent, ECB policymaker Robert Holzmann said in a contribution to Eurofi Magazine on Wednesday.
Analysts polled by Reuters see PEPP purchases falling possibly as low as 60 billion euros a month from the current 80 billion, before a further fall early next year and the scheme’s end in March.
The single currency was last down 0.13% on the day at $1.1823.
The greenback also gained against Canada’s loonie on worries that the global economic outlook is deteriorating even as the Bank of Canada looked past a soft patch in the domestic economy.
Sterling dropped after the British government on Tuesday announced a tax hike to fund health spending and social care.
Meanwhile, cryptocurrencies struggled to rebound from hefty losses from Tuesday, when El Salvador became the first country to adopt bitcoin as legal tender and several trading platforms said they experienced performance issues.
Bitcoin dipped 1.22% to $46,283 after sinking as low as $42,900 on Tuesday. Earlier that day it had touched an almost four-month high of $52,956.
Accommodative central bank policies and optimism about reopening economies have pushed equities to record levels but concerns are growing about the impact of rising coronavirus infections due to the Delta variant.
Markets are also still assessing data from last week which showed the U.S. economy created the fewest jobs in seven months in August, and wondering how the U.S. central bank will respond.
The Fed should move forward with a plan to taper its massive asset purchase programme despite the slowdown in job growth, St. Louis Federal Reserve Bank President James Bullard said in an interview with the Financial Times on Wednesday.
“Everything is tapering, tapering, tapering. We are looking at every single central bank – when is the next one?” said Eddie Cheng, head of international multi-asset portfolio management at Wells Fargo Asset Management, though he added: “The Delta variant impact is still running like a wild card”.
The Dow Jones Industrial Average fell 76.74 points, or 0.22 percent, to 35,023.26, the S&P 500 lost 7.8 points, or 0.17 percent, to 4,512.23 and the Nasdaq Composite dropped 87.96 points, or 0.57 percent, to 15,286.37 by 2:17 p.m. EST (18:17 GMT).
MSCI’s world equity index fell 0.41% by after seven consecutive days of gains.
European stocks fell 1% and hit their lowest in nearly three weeks. Britain’s FTSE 100 struck two-week lows, down 0.75%.
“September is the month investors confront reality,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, pointing to uncertainty over the Fed’s tapering plans and inflation fears as a reason investors are taking profits or reallocating funds.
The coronavirus Delta variant and concerns over the economic recovery were also weighing.
“What is likely ahead of us is a continued but temporary deceleration of economic activity of one to three months which likely started in August,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.
Federal official Robert Kaplan was due to speak later on Wednesday.
In Europe, markets are focused on whether the European Central Bank will this week begin to scale back its bond purchase programme.
The dollar paired some gains after jumping to a one-week high against a basket of other major currencies. It also hit a one-week peak against the the single currency and was trading at $1.1826.
The dollar’s strength offset investors’ risk aversion to pressure bullion to a two-week low. Spot gold prices fell 0.1%.
Longer-dated U.S. government bond yields slipped on Wednesday coming off a two-day climb after labor market data and ahead of an auction by the Treasury in 10-year notes. Yields on 10-year Treasury notes fell to 1.3495%, retreating from this week’s eight-week highs.
Germany’s 10-year Bund yield also hit eight-week highs before edging lower to -0.32% .
“Fears that central banks might start to taper their asset purchases seems to have knocked away a little confidence, particularly given tomorrow’s ECB decision where many expect we’ll begin to see the start of that process, not least with inflation there running at its highest levels in almost a decade,” Deutsche Bank analysts said in a note.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.77%, stemming an eight-session string of gains.
Chinese blue chips dropped 0.41%, weighed down by recent soft data in the world’s second-biggest economy.
But Japan’s Nikkei jumped 0.89% and hit a five-month high, helped by revised gross domestic product growth figures beating expectations.
Bitcoin continued its rout, down 1.1%.
Shares of Coinbase Global Inc dropped over 2% after the firm revealed it has received a legal notice from the top U.S. markets regulator.
U.S. crude oil jumped 1.39% to $69.32 a barrel and Brent crude rose 1.4% to $72.69 per barrel, with prices supported by a slow restart to production in the Gulf of Mexico after Hurricane Ida hit the region.
Labor Department data that showed wages increasing more than expected in August raised inflation fears and led longer-dated Treasury yields to jump, while gold advanced to a more than a 2-1/2-month high as the dollar eased.
MSCI’s all-country world index, which is heavily weighted to big U.S. tech, notched a new record as Apple Inc, Amazon.com Inc, Google parent Alphabet Inc and Facebook Inc advanced. The tech gains also helped the Nasdaq set a fresh closing high.
The Dow Industrials and S&P 500 fell as slower U.S. jobs growth raised questions about the pace of the recovery. But a Fed taper announcement is off the table in September, said Lee Ferridge, North American head of multi-asset strategy at State Street Global Markets.
“Support from the Fed for these markets is going to persist. Taper starts later rather than sooner. That’s positive for equities, that’s positive for risk,” he said.
“As long as the Fed is printing, then that means that the equity markets are supported by the whole QE liquidity argument,” Ferridge said.
U.S. employers created the fewest jobs in seven months in August as the Delta variant hurt the leisure and hospitality sector, but a 0.6% increase in wages showed underlying strength in the economy, the jobs report showed.
Nonfarm payrolls increased by 235,000 in August, well short of the 728,000 forecast by economists in a Reuters poll. But the unemployment rate fell to 5.2% from 5.4% in July.
MSCI’s ACWI, which is 60% U.S. equities, rose 0.11% to 746.46, while the Nasdaq gained 0.21%.
The S&P 500 index edged 0.03% lower and the Dow Jones Industrials fell 0.2%. The broad STOXX Europe 600 index of pan-regional stocks closed down 0.56%.
Euro zone business activity, meanwhile, remained strong last month, IHS Markit’s survey showed, suggesting the bloc’s economy could be back to pre-COVID-19 levels by year-end despite fears about the Delta variant.
The European Central Bank meets next week amid callsfrom several hawkish members to slow its pandemic-era asset purchase program. A Reuters poll sees the bank announcing acut to its asset purchases, given a recent spike in inflation.
Yields on the benchmark 10-year Treasury note rose 3 basis points to 1.324% as the U.S. labor report showed a jump in hourly earnings, a potential sign of future inflation.
The dollar index dropped to a low of 91.941, its lowest level since Aug. 4, and was last down 0.09% at 92.1320.
The euro traded flat at 1.1875. Markets are starting to react to the potential for more sustained euro zone inflation and reduced stimulus from the ECB.
The yen slid 0.19% to 109.72.
JAPAN JUMPS, CHINA EASES
Japanese shares jumped after officials said Prime Minister Yoshihide Suga would step down, setting the stage for a new premier after a one-year tenure marred by an unpopular COVID-19 response and rapidly dwindling public support.
Japan’s TOPIX stock index rose to a 30-year high and was last up 1.61%, with the Nikkei gaining 2%. Asian shares are still off their peaks from earlier in the year however, and lagging those elsewhere.
Meanwhile, Chinese blue chips were down 0.5% and Hong Kong was off 0.72% after activity in China’s services sector slumped into sharp contraction in August, a private survey showed on Friday, hurt by restrictions imposed to curb the Delta variant.
Oil prices slipped on the U.S. labor report showing a patchy recovery from the pandemic, but losses were capped by concerns U.S. crude supply would continue to be limited in the wake of Hurricane Ida, which cut offshore U.S. production.
Brent crude futures fell 42 cents to settle at $72.61 a barrel. U.S. crude slid 70 cents to settle at $69.29 a barrel.
Gold advanced more than 1% to its highest in 2-1/2 months as weak U.S. jobs growth drove the dollar lower and cast doubts on the Fed’s tapering timeline.
U.S. gold futures settled 1.2% higher at $1,833.70 an ounce.
(Reporting by Herbert Lash in New York, additional reporting by Huw Jones in London, Alun John in Hong Kong and Kevin Buckland in Tokyo; Editing by Andrea Ricci and Rosalba O’Brien)
Professional money managers use several technical, fundamental, and sentiment indicators to determine the future direction of gold prices. The Metal is both precious and industrial and is viewed as both a commodity and a currency. The yellow metal, as it is often referred to as, is generally quoted in US dollars and trades both as an exchange-traded instrument as well as over the counter.
Gold is considered a safe-haven asset that appreciates in value when investors are looking for an alternative to other currencies that are depreciating. When interest rates are declining around the world, the demand for a currency that will sustain its value provides a backdrop for rising gold prices. Gold is traded in the cash, futures, and forward markets.
Gold has a forward interest rate, like dollar rates or Euribor rates. This interest rate called the GOFO rate increases relative to the US dollar when gold demand rises. Officially, the Gold Forward Offer Rate, or GOFO, is the interest rate at which contributors are prepared to lend gold on a swap against US dollars, they can use gold as collateral and potentially pay a much smaller rate of interest to borrow the cash than otherwise.
Cash, futures, and forward traders will evaluate three dimensions that provide them with a view of the gold market. These include the technicals, the fundamental backdrop, and sentiment.
Technical Analysis of the Gold Market
Professional gold investors attempt to analyze the long-term trend in gold prices by evaluating a weekly chart. Gold prices trend and trade sideways like other capital market instruments. By using different tools you can determine if the price is likely to trend or remain in a range.
Weekly continuous gold futures prices in August 2021are trading sideways to lower based on its position relative to the 50 and 10 Weekly Moving Averages.
Momentum is confirming this assessment as the MACD (moving average convergence divergence) index is generating a crossover sell signal, while the relatively tight distance between the moving averages suggest nearly flat momentum. The indicator is also suggesting momentum may be getting ready to accelerate.
The MACD is a very useful momentum index that uses moving average to generate a crossover signal that describes when positive as well as negative momentum is accelerating.
Momentum is Important
An often used momentum indicator is the Relative Strength Index (RSI). This momentum oscillator describes whether prices are accelerating relative to the last 14-periods.
After peaking during the week-ending August 7, 2020, the RSI has been trending lower. With a reading of 70 the high threshold and a reading of 30 the low threshold, the current reading of 47.56 indicates nearly flat momentum with a slight bias to the downside. Bullish gold traders are now waiting for the market to cross over to the strong side of the 50 level. This will give them an early jump on a shift in momentum to higher.
The key to using the RSI is to look at prior highs to determine how far momentum has accelerated in the past. The weekly RSI has hit levels of 82, 77 and 75 in the past, which means that positive momentum can still accelerate over the upper threshold at 70 as gold prices break out.
Gold Market Sentiment
There are several ways to determine market sentiment within the gold market. One of the best indicators is using the Commitment of Trader’s report released by the Commodity Futures Trading Commission (CFTC). This report helps traders understand market dynamics.
The COT reports show position data that is reported by category. This information is reported to the CFTC by brokers and clearing members. While the actual reason that a trader has a position is not reported, experts make certain assumptions that provide information about those positions.
Positions are reported by category. For gold futures and options, the categories include swap dealers, managed money, and other reportables. Swap dealers include banks and investment banks as well as industry-specific merchandisers. Managed money includes hedge funds, pensions funds, and mutual funds. Other reportables is retail trade.
The CFTC staff does not know specific reasons for specific positions and hence this information does not factor in determining trader classifications. For example, the CFTC does not know if a swap dealer is taking a speculative position or hedging risk. What experts need to evaluate is why positions are increasing or decreasing.
Professional traders generally assume that all the swap dealer positions reflect hedges from deals transacted with gold producers and refiners. Those positions are offset with speculative positions taken by managed money.
Managed money takes positions that provide you with information about sentiment. There are two concepts that you need to evaluate. The first is a trend in place. If the COT information shows that managed money or large specs are increasing their long positions, sentiment toward gold is increasing. If they are increasing their short positions, then the negative sentiment is increasing.
The second concept is whether the open long or short positions in managed money is overextended. If managed money is overextended, sentiment is too high and prices could snap back quickly.
The two most important gold fundamental indicators are the direction of US Treasury yields and whether the US dollar is likely to rise or fall.
Higher Treasury yields or interest rates raise the opportunity cost of holding non-interest-bearing gold. In another way to look at it, since gold doesn’t pay interest or a dividend to hold it, rising or high interest rates make gold a less attractive investment. When interest rates fell to near zero as they did in 2020 – 2021, gold became a more desired asset.
Since gold is priced in US dollars, when the dollar rises, it makes gold more expensive to holders of foreign currencies. This means gold prices need to fall to accommodate the higher cost of purchasing it in dollars. The reverse is true when the dollar declines.
A third fundamental factor to watch is consumer inflation. Gold is viewed as a hedge against inflation, which can be caused by massive stimulus measures. When inflation is on the rise, gold prices will offset increases in a basket of goods or services.
Gold prices fluctuate weekly, and over the long term either trade within a trend or consolidate. There are several technical indicators, such as the MACD, RSI, and Moving averages that can help you determine the future direction of gold prices.
In addition, professional traders use a combination of technical analysis, sentiment analysis, and fundamental analysis to determine the future price of gold.
Sentiment analysis can include the Commitment of Traders report released weekly by the CFTC.
Additionally, professional investors will track the direction of Treasury yields and the value of the US dollar, which are the driving forces behind the value of gold.
Dallas Fed President Robert Kaplan said on Thursday it is still his view that the Fed in September would announce a plan for tapering to start in October or shortly thereafter.
His remarks followed comments by St. Louis Fed President James Bullard, who said the bank is “coalescing” around a plan to begin reducing its $120 billion in monthly bond purchases.
Powell is due to speak on Friday at the Federal Reserve’s annual Jackson Hole, Wyoming, policy symposium, which is being held virtually due to the spread of coronavirus cases in the region.
Minutes from the Fed’s July meeting released last week showed that the bulk of the bank’s policy-setting committee expect the Fed will start tapering its bond purchases later this year, though consumer sentiment and economic data have weakened since that meeting.
Following Kaplan and Bullard’s comments, benchmark 10-year Treasury note yields were at 1.3593%, the highest since Aug. 12.
“You’re going to see continued commentary around deciding when to start tapering. I think they want to have that digested by the market so it’s not a surprise when it begins later this year,” said Ryan Jacob, chief investment officer at Jacob Asset Management.
The MSCI world equity index, which tracks shares in 50 countries, was down 0.27%, while the pan-European STOXX 600 index fell 0.32%.
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.65%.
On Wall Street, all three major indexes were trading lower in early afternoon, with stocks in consumer discretionary, technology, financials and consumer staples among the biggest losers.
“Trading is very thin today, so it doesn’t take much to move the market,” Jacob said.
The Dow Jones Industrial Average fell 0.15% to 35,353.56, the S&P 500 lost 0.22% to 4,486.23 and the Nasdaq Composite dropped 0.15% to 15,019.20.
The U.S. dollar jumped from one-week lows after Kaplan and Bullard’s comments on bond tapering, pushing the greenback toward a key resistance level.
The dollar index, which measures the greenback against a basket of six major trading currencies, was up 0.2% in afternoon trading.
Gold prices stabilized after a sharp retreat on Thursday, taking a firmer dollar in its stride as investors looked forward to the Fed’s stance on tapering of its economic support at the Jackson Hole symposium.
Spot gold rose 0.1% to $1,792.16 per ounce. U.S. gold futures were up 0.2% at $1,794.10.
Oil fell 1% on Thursday as renewed concerns about demand due to rising COVID-19 infections cut short a three-day rally, and as Mexico restored some oil production after a fire disrupted supplies.
Brent crude was down 0.48% at $71.90 a barrel. U.S. West Texas Intermediate oil fell 0.48% to $65.03 a barrel.
The dollar index, which measures the greenback against a basket of six major trading currencies, was about 0.06% higher just before the remarks by James Bullard, the president of the St. Louis Fed who is considered a hawk on policy.
Bullard said in comments to CNBC that he was skeptical that inflation would moderate and for that reason the Fed needed to start tapering its bond-purchasing program.
“We have to get going on taper, get the taper finished by the end of the first quarter of next year. Then we can evaluate inflation, what the situation is,” Bullard said.
The dollar index jumped to above 93, a key resistance level, before easing a bit to trade 0.15% higher at 92.958. On Wednesday, the index had dropped to 92.801 for the first time since Aug. 17.
Two weeks ago the dollar index rose above 93 and has been testing that level since as a support level, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC.
The market will likely discount what Bullard said, in part because he’s a non-voting member of the Fed’s policy-setting committee, but “his voice is heard in the room and you have to assume therefore it does have some impact”, he said.
“I don’t think we’re likely to reverse (the dollar’s trend higher) too quickly,” he said.
Bullard’s comments came as the Fed’s annual symposium in Jackson Hole, Wyoming opened, with the highlight expected to be Fed Chair Jerome Powell’s speech on Friday. Powell is unlikely to offer few new hints about when the Fed may start to reduce its massive asset purchases, analysts said.
Benchmark 10-year Treasury note yields were last at 1.356%, after reaching 1.375% following Bullard’s comments, the highest since Aug. 12.
The yen traded up 0.09% at $110.0900.
Currency market swings have eased ahead of Powell’s speech, with implied euro-dollar volatility at a one-week low.
Markets are assessing how the Fed will react to signs inflation could be less transitory than it had flagged and whether it will stick to its new policy framework of letting inflation run hot.
Signals of a taper starting this year had lifted the dollar index to a 9-1/2-month high of 93.734 last Friday.
Meanwhile, more central banks worldwide are exiting or contemplating exiting from ultra-easy accommodative policies. South Korea’s central bank on Thursday raised interest rates for the first time in three years.
The won gave up initial gains, however, to fall 0.6% after the hike which had been well-flagged.
Risk appetite in global markets improved after the U.S. Food and Drug Administration fully approved the COVID-19 vaccine developed by Pfizer and BioNTech in a move that could accelerate U.S. inoculations.
Dr. Anthony Fauci, the top U.S. infectious disease expert, said on Tuesday that the United States could get COVID-19 under control by early next year.
But the focus has turned to the Jackson Hole symposium and what Fed Chair Jerome Powell may say about tapering the U.S. central bank’s bond-buying program when he speaks on Friday.
The markets expect Powell to sound dovish and echo concerns last week by Robert Kaplan, the Dallas Fed president, who said he might reconsider the start to tapering due to the Delta variant of the coronavirus, said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
“The risk is that Powell does not really say anything too different but by virtue of not backing up Kaplan, comes across as more hawkish,” Osborne said.
The dollar picked up support as Treasury yields nudged higher, he said. The benchmark 10-year Treasury note rose 4.4 basis points to yield 1.33%.
The dollar index, which measures the U.S. currency against a basket of six major trading currencies, rose 0.028% to 92.941.
The euro gained 0.03% at $1.1757, while the yen rose 0.36% at $110.0200.
The greenback had rallied until the start of this week, with the dollar index hitting a 9-1/2-month high of 93.734 on Friday, on fears over the Delta variant’s economic impact and as the Fed signaled its tapering of monetary stimulus was likely this year.
Vasileios Gkionakis, global head of FX strategy at Lombard Odier Group, said there’s been skittishness over growth and sector rotations, which has boosted the dollar because of its safe-haven status.
“In the short term, we’re still going to be trading in ranges, with upside bias,” Gkionakis said.
Dollar underperformance after Jackson Hole could be a buying opportunity ahead of the release of U.S. data next week, including the non-farm payrolls report for August, said Valentin Marinov, head of G10 FX research at Credit Agricole.
“Potential positive surprises from the NFP in particular could put QE (quantitative easing) taper back among the main FX market drivers and support the USD,” Marinov said.
Sterling traded 0.03% lower at $1.3723 after rising to as high as $1.37475 on Tuesday, its strongest since Nov. 19.
Australia’s dollar dropped 0.09% to $0.7265 after touching a one-week high of $0.7271 in the previous session.
The dollar gained 0.3% to 1.2624 against the Canadian dollar as commodity prices, and especially crude oil, have moderated.
Brent crude, the international benchmark, rose $0.37 at $71.42 a barrel after gaining 9% on Monday and Tuesday from last week’s close.
The Canadian currency still looks fundamentally undervalued but the case for a significant rebound after recent volatility has weakened, Osborne said. The narrowing of U.S.-Canadian spreads will make it harder for the Canadian dollar to strengthen materially for now, he said.
“Generally, we expect the U.S. dollar to grind higher in the next few weeks and months,” he said.
(Reporting by Ritvik Carvalho; Additional reporting by Kevin Buckland in Tokyo; Editing by Jan Harvey, Bernadette Baum and Barbara Lewis)
MSCI’s broadest index of Asia-Pacific shares outside Japan spent most of the day near flat, but was last up 0.34%, and about 4% higher so far this week.
Australia’s market rose 0.22% and South Korea gained 0.16%, though Chinese blue chips fell 0.07%, and U.S. stock futures, the S&P 500 e-minis, were down 0.02%.
In early European trades, the pan-region Euro Stoxx 50 futures and FTSE futures were both up 0.04%
Japan’s Nikkei was also flat, but a Reuters poll of analysts and fund managers showed Japanese shares are expected to recover from their eight-month low marked on Friday to near a 30-year high by the end of this year.
“Sentiment (is) positive but vulnerable to shifts ahead of the Jackson Hole conference which features Fed Chair Powell on Friday,” said Rob Carnell, ING head of Asia research in a note.
“Part of the sentiment improvement may lie with recent thoughts that this weekend’s conference will not deliver any further insight into the timing of any Fed taper.”
This marks a change from last week, when MSCI’s Asia ex-Japan index fell to its lowest in 2021, spooked by a combination of fears about slowing growth in Asia amid outbreaks of the Delta variant of the new coronavirus, and worries the Fed might to begin shrinking its monetary stimulus sooner rather than later.
Chinese regulatory crackdowns that have roiled sectors from technology to property, also weighed on shares in Hong Kong and mainland China, dragging on the broader Asian index.
On Wednesday, the Hong Kong benchmark fell 0.16% after posting its best day in a month the day before.
The Hang Seng TECH Index, which reached its all time low last week amid worries about the regulatory crackdowns, gained 0.4%, building cautiously on this week’s strong gains as investors piled into oversold stocks.
“It’s been a fairly obvious trade to go back to neutral particularly on stocks that have been oversold,” said Rob Mumford, a Hong Kong based investment manager at GAM Investments.
“How it progresses from here, I don’t think is as much about China and Asia but what the U.S. does. If it’s a benign scenario out of Jackson Hole I think you’ll definitely see China mean revert,” he said.
On Friday, the Federal Reserve will have its annual economic symposium, traditionally held at Jackson Hole, though this year it will take place virtually due to the spread of COVID-19 in the country.
The focus remains squarely on Chair Jerome Powell’s remarks at the event for any clues regarding the timeline for Fed’s tapering of asset purchases, an issue that has buffeted financial markets in recent months.
The yield on benchmark 10-year Treasury notes was last 1.2919% little changed from their US close of U.S. close of 1.29%, having touched as much as 1.304% earlier in the session.
The dollar gained a little ground in Asian trading on Wednesday but was still not far above a one-week low versus major peers on Wednesday.
“If Powell speaks about the policy outlook and more specifically, hints at the time and/or pace of tapering, the USD could get a boost in our view,” wrote analysts at CBA in a note.
“In the meantime, the USD will remain guided by broader market mood.”
U.S. crude dipped 0.28% to $67.36 a barrel, while Brent crude fell 0.15% to $70.94 per barrel – both are up around 8% on the week, however, after posting their biggest weekly decline in more than nine months last week. [O/R]
Safe haven gold fell in tandem with the broad increase in risk appetite, with the spot price dropping 0.35% to $1,796.03 per ounce.
In simple terms, an interest rate is the percentage of principal charged by the lender for the use of its money. The principal is the amount of money loaned.
Interest rates affect the cost of loans. As a result, they can speed up or slow down the economy. The Federal Reserve manages interest rates to achieve ideal economic growth.
Banks and other institutions charge interest rates so they can run a profitable business. They borrow money at a lower rate than the rate that they charge. This generates a profit.
Credit card companies charge interest on the goods and services that you purchase. Mortgage companies charge interest on the money borrowed to buy a house.
Banks and the U.S. Treasury also pay interest to investors who put money into savings accounts, CDs, Treasury bills, notes and bonds. In these cases, the investors lends the money to the bank or Treasury.
An interest rate is either the cost of borrowing money or the reward for saving it. It is calculated as a percentage of the amount borrowed or saved. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).
The annual percentage rate (APR) is the total cost of the loan. It includes interest rates plus other costs. The biggest cost is usually one-time fees, called “points.” The bank calculates them as a percentage point of the total loan. The APR also includes other charges such as broker fees and closing costs.
Both the interest rate and the APR describe loan costs. The interest rate will tell you what you pay each month. The APR tells you the total cost over the life of the loan.
Understanding Interest Rates
Interest is essentially a charge to the borrower for the use of an asset. Assets borrowed can include cash, consumer goods, vehicles, and property, according to Investopedia.
Home buyers borrow money from banks when they take out a mortgage. Other loans can be used for buying a car, an appliance, or paying for college.
Banks also become borrowers when an investor deposits money into a savings account. They pay the investor interest on the money deposited. They then use the deposited money to fund loans that they charge a higher rate to borrow. The difference between what a bank pays and what a bank receives is their profit.
How Interest Rates Work
When an individual borrows money from a bank, it applies the interest rate to the total unpaid portion of his loan or credit card balance, and he must pay at least the interest in each compounding period. If not, the outstanding debt will increase even though the individual is making payments.
Bank interest rates are very competitive, and their lending and savings rates aren’t the same. A bank will charge higher interest rates if it thinks the borrower is a credit risk. For that reason, it assigns a higher rate to revolving loans such as credit cards. The interest rate a bank pays a savings account holder is usually determined by market conditions usually set by the Federal Reserve.
Fixed Versus Variable Interest Rates
Lending institutions charge fixed rates or variable rates on their loans. Fixed rates remain the same throughout the life of the loan. At first, your payments consist mostly of interest rate payments. As time passes, the borrower pays a higher and higher percentage of the debt principal. An example of a fixed-rate loan is a conventional mortgage.
Variable rates change with the prime rate. This is the interest rate an institution charges to its best borrowers. The prime rate is based on the Fed funds rate. This is the interest rate the Fed charges to its best banking customers.
How Are Interest Rates Determined?
Interest rates are determined by the Federal Reserve, or the Fed funds rate, or by Treasury note yields, which are determined by the financial market conditions.
The Federal Reserve sets the Federal Funds rate as the benchmark for short-term interest rates. The Fed funds rate is what banks charge each other for overnight loans. The banks consider other banks their best customers.
Treasury note yields are determined by the financial market’s demand for U.S. Treasurys, which are sold at auction. Under certain economic conditions, demand for Treasurys will be high. When investors are willing to pay more for Treasurys, interest rates move lower. There are certain conditions like an economic recovery when interest rates increase, this drives down U.S. Treasurys.
Impact of High versus Low-Interest Rates
High interest rates have a negative effect on the economy because they make loans more expensive. When interest rates are high, few consumers and businesses can afford to borrow. This slows down economic growth. At the same time, it encourages people to save because they get paid more for their savings deposits. This takes money out of the economy and slows down growth.
Low-interest rates have the opposite effect on the economy. Low mortgage rates, for example, increases home buyer demand. This tends to drive up home prices. Savings rates fall and investors move money into assets that pay higher yields like the stock market. Basically, low rates increase liquidity that helps the economy expand.
Fed Tries to Hold Rates Steady
Consumers and investors often ask, “If low-interest rates provide so many benefits, why wouldn’t the Federal Reserve keep rates low all the time?”
It is generally accepted that the U.S. government, the Federal Reserve, some businesses and consumers prefer low-interest rates.
The U.S. government likes low interest rates because it borrows tremendous amounts of money to run the country. Capital intensive companies like technology firms prefer lower rates as well as consumers who want to buy houses, cars, appliances and clothes on credit. Banks, however, prefer higher rates because they tend to increase profits due to the high rates of interest they can charge on loans.
But low-interest rates can cause interest rate. If there is too much liquidity, then the demand outstrips supply and prices rise. Some inflation is good for the economy because it shows growth, but runaway inflation tends to be detrimental to the economy.
Some investors said the data bolstered the Fed’s assertion that jumps in inflation will be relatively fleeting, partly reflecting supply chain bottlenecks that will ease with time.
But they added that inflation remains elevated, which can sap profit margins and erode the value of bonds.
Other concerns: corporate earnings growth appeared to be hitting a peak; rising coronavirus cases could threaten the economy; and stocks are generally trading at historically high valuations.
The inflation data would help the Fed feel a “a little bit more confident that they can let inflation run a little bit hotter in the near term without having to worry about overshooting,” said Gennadiy Goldberg, senior U.S. rate strategist at TD Securities. “Markets are reacting with a bit of relief, which I think makes a lot of sense,” Goldberg added. The Fed has dropped interest rates to rock-bottom levels and is currently making $120 billion in monthly bond purchases, as it has aimed to spur spending and borrowing. The question of when and at what pace it expects to taper those purchases looms large over markets.
“The concern has been how soon and how quickly will the Fed begin to taper its bond purchases and this lends some credence to the argument that the inflation pressures we are seeing are transitory,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said after the inflation data.
In a research note, Morgan Stanley economists said Wednesday’s CPI data “supports the view that the last few months likely marked the peak rates of inflation.”
A peak in inflation rates would coincide with an expected peak in earnings growth for the second quarter. As of Friday, with over 440 companies reported, S&P 500 second-quarter earnings are expected to have climbed 93.1%, according to Refinitiv IBES data.
Steep increases in inflation and earnings growth “are telling you the same thing, which is a year ago things were really dire and this year things are rebounding,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis.
Samana said stocks remained attractive over bonds as he still expects S&P 500 earnings growth of about 10% in 2022 while interest rates remain low.
Concerns about inflation early this year drove a selloff in Treasury bonds, lifting yields, while the stock market saw a rally in cyclical and value stock groups such as financials and energy.
Since the end of March, however, the yield on the 10-year Treasury note has fallen over 40 basis points, while the Russell 1000 value stock index has climbed only about 7% against a 17% rise for a counterpart index of tech and other growth stocks.
Ark Invest’s Cathie Wood, whose Ark Innovation ETF was the top performing U.S. equity fund last year, made the case in a webinar Tuesday that falling lumber and oil prices signal that inflation has peaked and that growth stocks will start to once again outperform as they did during the economic lockdowns in 2020.
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said the inflation data on Wednesday was positive for stocks. But he added, “Is the inflation scare over? Not by a long shot.”
The concept of real interest rates or real yields hit the headlines last month, raising growth concerns for global investors. To everyday consumers, the phrase meant little, but to professional investors, it meant returns investors expect to earn after inflation.
Everyday consumers are conscious of interest rates. They know they are earning very little by putting their money in the bank. They are also aware of rising inflation, which has dominated the headlines for several months.
What they haven’t done is put together the concept of how little they really earn on their money in the bank when one strips out the inflation rate. That number is the real rate they are earning.
Investors didn’t pay much attention to the real yield when inflation was low in the sub-2% area. This is because the benchmark 10-year U.S. Treasury yield was trading in the essentially the same area. But since the start of the global economic recovery, yields have stayed near historical levels, while inflation has soared to multi-year highs. This has pushed real rates into negative territory.
Many consumers know the interest rate on their savings account, or the money they earn on their balance. However, they probably don’t know what their real interest rate is. This article will explain real interest rates.
Simply stated, a real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
In equation form, the real interest rate is simply equal to the nominal interest rate minus the actual or expected inflation rate.
To understand real interest rates, you have to first understand inflation. Inflation is a general, sustained upward movement in the prices of goods and services in an economy.
Inflation matters when making decisions related to interest rates on savings accounts and other financial assets. For example, when you have a savings account, interest is at work increasing the amount deposited, while inflation is at work reducing its value.
What is Your Real Rate of Return?
Knowing your real interest rate gives you an idea of what your investment is paying you after factoring in inflation. It also gives you a better idea of the rate at which their purchasing power increases or decreases.
Treasury bonds are fixed-rate U.S. government debt securities with a maturity range between 10 and 30 years.
Treasury Inflation-Protected Security (TIPS) is a Treasury bond that is indexed to an inflationary gauge to protect investors from the decline in the purchasing power of their money.
To estimate their real rate of return, an investor compares the difference between the current Treasury bond yield and the current Treasury Inflation-Protected Securities (TIPS) yield of the same maturity, which estimates inflation expectations in the economy.
What are Real Yields Telling Us about the State of the Economy and Investments?
Currently, the U.S. economy is in a low-yield, high-inflation environment and is likely to remain there until inflation starts to decline and the Federal Reserve begins to raise interest rates. Because of this, the yield on 10-year Treasury Inflation-Protected Securities (TIPS) is hovering near record lows.
In July 2021, yields on U.S. Treasuries eased after the auction of $16 billion in 10-year TIPS was bid at a record low of -1.016%.
Some analysts believe this means investors are pricing in higher inflation going forward. Other analysts believe this reflects concerns about slowing growth after a strong first half of the year. Still others are saying it’s just a function of mathematics and may not mean anything.
In other words, negative real yields are a function of the expected path of short-term interest rates set by the Fed compared with current and forecasted inflation. So there is no way that term real yields could be anything but negative in July 2021.
With yields this low, investors are throwing money at the stock market. This is driving up prices to unwarranted levels. Although stocks, for example, are overpriced using traditional indicators, investors don’t have a lot of choices if they want to beat inflation.
Negative real yields pose a big problem for pension funds and other long-term asset allocators that are also grappling with equity markets trading at high valuations.
One effect of deeply negative real yields is to buoy a range of other asset classes, as they make the returns they offer more attractive in comparison to bonds.
Real Yields Reflect the Future Investment Environment
Monitoring the direction of real yields offers investors a chance to gauge the state of the economy.
If real yields remain near record lows then this likely means investors believe elevated inflation levels are going to linger and the Fed is going to stand pat on policy. It could also indicate investor expectations of a weakening economy.
If real yields start to move higher then this will tell investors that the Fed may be getting ready to tighten policy by raising rates in the near future. It could also be an indicator of economic growth and lower inflation on the horizon.
Non Farm Payrolls report indicated that U.S. economy created 943,000 jobs in July compared to analyst consensus of 870,000.
This is a surprise as ADP Employment Change report showed that private businesses hired just 330,000 workers in July. However, it should be noted that Non Farm Payrolls and ADP Employment Change reports often paint different pictures.
Unemployment Rate declined from 5.9% in June to 5.4% in July.
S&P 500 futures are little changed after the release of strong job reports. It is not clear whether Non Farm Payrolls report will serve as an upside catalyst as traders may begin to worry that Fed will reduce support to markets in the upcoming months.
WTI Oil Gets Back To The $70 Level
Oil traders managed to shrug off virus worries, and WTI oil moved back to the $70 level. In case WTI oil manages to settle above this level, it will gain additional upside momentum which will be bullish for oil-related stocks.
The situation on the coronavirus front has not improved in recent days, but it looks that the oil market is confident that demand for oil will continue to increase. The negative impact of recent crude inventory reports was also short-lived.
The oil market remains in a bullish mode despite recent setbacks, and oil-related stocks will have a good chance to gain upside momentum during today’s trading session.
Treasury Yields Continue To Rebound
The yield of 10-year Treasuries is currently trying to settle above 1.27% as bond traders sell U.S. government bonds amid worries that Fed will cut its asset purchase program sooner than previously expected.
Rising yields may put some pressure on tech stocks, but it remains to be seen whether stock traders will react to higher yields as the stock market remains in a bullish mode.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.91%, though markets in Hong Kong and mainland China saw milder losses after a sharp sell-off in the previous sessions.
U.S. stock futures, the S&P 500 e-minis, were down 0.26%, pan-region Euro Stoxx 50 futures dropped 0.11%, and FTSE futures fell 0.3%.
Asian shares have fallen in each of the three previous sessions as broadening regulatory crackdowns in China roiled stocks in the technology, property and education sectors, leaving international investors bruised.
Chinese state-run financial media urged calm on Wednesday morning, and while Chinese shares swung back and forth in early trading, they did not repeat the sharp plunges seen earlier in the week.
Chinese blue chips were last 0.46% lower, having had a volatile day, and the Hong Kong benchmark gave up early gains to fall 0.82%. Both were pinned around eight-month lows.
The embattled Hang Seng Tech Index also gave up early gains to fall 0.4%, a day after touching its lowest level since the index’s creation in July 2020. It is down over 40% from its February high.
Japan’s Nikkei slid 1.73%, with shares in SoftBank Group, a major investor in Chinese tech, falling 4.7%.
“China and the Fed are the two key things for today,” said Tai Hui, chief market strategist for Asia Pacific, at JPMorgan Asset Management.
“We are still trying to digest the news from China, what’s going to be new is how the Fed view the latest round of (COVID-19) infections and whether they need to readjust their view,” he said.
The statement from the Fed policy meeting is due at 2 p.m. EDT (1800 GMT), with a news conference by Chairman Jerome Powell expected a half hour later.
Markets will be watching closely for any hints on when the Fed will start reducing its purchases of government bonds and any fresh insight into its views on inflation and economic growth.
The declines in Asian equities on Tuesday spread to other markets overnight, causing Wall Street to retreat a little from the record highs set earlier in the week.
The Dow Jones Industrial Average ended Tuesday down 0.2%, the S&P 500 shed 0.5% and the Nasdaq Composite slid 1.2%. [.N]
After the U.S. close, Google parent Alphabet Inc, Microsoft, and Apple all reported record quarterly earnings, though the smartphone maker’s shares slid in after-hours trading on the back of a slower growth forecast.
In currency markets, things were fairly quiet in Asian trading hours, with the U.S. dollar sitting below recent highs after a month-long rally.
The safe-haven yen held onto earlier gains and the risk-sensitive Australian and New Zealand dollars dropped back, but while analysts at CBA attributed the earlier moves to falling risk sentiment on the back of the Chinese regulatory crackdown, they said market participants were now turning their attention to the Fed.
The yield on benchmark 10-year Treasury notes was little changed from the U.S. close at 1.236% compared to 1.234%.
Oil prices rose as industry data showed U.S. crude and product inventories fell more sharply than expected last week, outweighing worries that surging COVID-19 cases would curb fuel demand. U.S. crude rose 0.56% to $72.05 a barrel and Brent crude rose 0.36% to $74.81 per barrel. Gold strengthened, with spot prices above the key psychological level of $1,800, while Bitcoin rose around 1.3%, trading either side of $40,000.
(Editing by Ana Nicolaci da Costa and Kim Coghill)
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.97% to its lowest level since December, having slid 2.45% the previous day.
The Hong Kong benchmark fell 2.84% on Tuesday, its third day of declines, with the Hang Seng Tech index down 6.46% to its lowest since its inception in July 2020. It has fallen around 14% in three days and has lost 41% from a February peak.
Big decliners included Meituan and Alibaba, whose shares fell 12.7% and 5.5% respectively. Both were down for the third successive day with investors expecting the companies’ food delivery arms to be affected by new regulations guaranteeing workers above minimum pay.
In onshore markets, Chinese bluechips dropped sharply in afternoon trading, falling 2.93% after closing at their lowest since December on Monday thanks to regulatory crackdowns in the education and property sectors.
“The market seems to be uncertain whether there will be more policy changes for fintech, social media platforms, delivery platforms and ride hailing platforms,” said Iris Pang, chief economist for Greater China at ING.
“Each has their own issue and faces different regulatory actions, so the market is looking for ‘which technology subsector will be next?'”
Elsewhere in Asia, investors were more optimistic, with Japan’s Nikkei rising 0.49%, and Australian shares closing up 0.46%.
Other markets were set to open lower with S&P 500 futures dipping 0.21%, Euro STOXX 50 futures down 0.09% and FTSE futures off 0.19%.
U.S. corporate earnings and the Fed’s monetary policy meeting were also on investors’ minds.
“It’s profits and the Fed. The next couple of days are going to be monumental as everyone tries to figure out how strong corporate fundamentals are at the moment and in what context that is happening in terms of the economic outlook and policy settings,” said Kyle Rodda, market analyst at IG Markets.
Alphabet Inc, Apple Inc and Microsoft Corp < MSFT.O> are set to publish quarterly results late on Tuesday, with Amazon.com Inc’s due later in the week.
In addition, the Fed will begins its two day meeting on Tuesday, with investors set to scrutinise a statement and press conference from Chair Jerome Powell due late Wednesday.
They will be looking to see how the central bank will balance fast-rising prices with the complication of increased coronavirus infections.
All three major U.S. stock indexes closed at record highs for a second straight session on Monday
However, the looming Fed meeting kept a dampener on major moves in other asset classes.
The dollar hovered around its recent peak during Asian hours, the Aussie dollar weakened and sterling gained amid worries about a worsening COVID-19 situation in Sydney, compared with a decline in new daily cases in the UK.
U.S. Treasury yields wobbled in Asian trading on Tuesday, following a choppy Monday, but ended little changed.
The yield on benchmark 10-year Treasury notes was last 1.2795% compared with its U.S. close of 1.276%, while the two-year yield touched 0.2134% compared with a U.S. close of 0.196%.
Gold was slightly lower, with the spot price trading at $1,794.5 per ounce, while U.S. crude ticked up 0.31% to $72.13 a barrel.
Bitcoin dropped to around $37,000 from a Monday peak of $40,581 after Amazon.com offered a qualified denial of a weekend news report that said it was preparing to accept cryptocurrencies.
(Reporting by Alun John; Editing by Lincoln Feast, Ana Nicolaci da Costa and Sam Holmes)
Megacap tech stocks and positive corporate earnings helped drive main U.S. indexes up again. Yields on U.S. Treasuries were also up, as was the dollar, with investors eyeing next week’s Federal Reserve meeting for hints on the U.S. economic recovery from the COVID-19 pandemic and when the central bank will pull back support for the economy.
“It’s certainly been a really strong run. For now it looks justified based on the strong earnings results. We got interest rate stability, which was helpful. As the economic recovery continues, as long as people are continuing to get out there despite the Delta variant, we think stocks can go higher,” said Jeff Buchbinder, equity strategist for LPL Financial. “We think the ride will get bumpier in the second half, but we think the bull market continues.”
The Dow Jones Industrial Average rose 238.2 points, or 0.68%, to close the week at 35,061.55, while the S&P 500 gained 44.31 points, or 1.01%, to 4,411.79. The Nasdaq Composite added 152.39 points, or 1.04%, to close at 14,836.99.
The greenback on Friday booked a second week of gains after a volatile few days as risk appetite waxed and waned.
The dollar index, which measures the greenback against a basket of six major currencies, was slightly higher on the day at 92.894. That was off a 3-1/2-month high of 93.194 hit on Wednesday.
For the week, it was up 0.1%, after rising 0.6% previously.
The yield on 10-year Treasury notes hovered around 1.3%, or almost 17 basis points higher than a five-month low set on Tuesday, but was still at the low end of a recent range. The benchmark note traded up 2.1 basis points to 1.288% after briefly rising above 1.3%.
“We’re closing out the week on a very nice trade, and it’s being driven by earnings primarily and earnings specifically in stocks that speak to the consumer, which is not a new story but it’s a story that adds momentum to the trade in the second half of the year,” said Peter Kenny, founder of Kenny & Co LLC, the parent company for Strategic Board Solutions and Kenny’s Commentary, a subscriber-based political and economic newsletter.
After declining earlier in the trading session, oil was set to end the week slightly up.
Investors have been assuming “things will improve, travel will increase,” said Steve Massocca, managing director at Wedbush Securities. “There are concerns about the Delta variant.”
Massocca added, “If that thesis is thrown into jeopardy, it put a hitch in the ‘giddy up’ in the market.”
Some parts of the United States are implementing mask mandates again due to new COVID-19 cases, while others have not, leading to confusion.
U.S. business activity grew at a moderate pace for a second straight month in July amid supply constraints, suggesting a cooling in economic activity, a report from data firm IHS Markit showed on Friday.
Positive corporate earnings helped the stock market. American Express Co jumped 1.7% after posting second-quarter profit that beat expectations.
Social media firms Twitter Inc and Snap Inc gained 3.8% and 24.5%, respectively, after their upbeat results.
Financial markets have swung from one direction to another this week as investors try to assess what the surging Delta variant means for the world economy.
After recording its steepest one-day drop since May on Monday, the S&P 500 stock index went on to post the biggest one-day jump since March a day later. Currency, bond and commodities markets have seen similar gyrations.
Recently it has been struggling successfully to stay above $1800 per ounce. On Monday as well as today, gold prices came close to testing the 100-day moving average, which is currently at $1792.10, and on both occasions closed just above $1800.
In the case of today’s intraday low of $1794.30 for gold futures, it was dollar strength in trading overseas last night that took prices to that low. However, the dollar closed lower in New York trading, which resulted in gold moving back above $1800. As of 5:30 PM EST gold futures basis, the most active August 2021 Comex contract is fixed at $1803.80, which is a net decline of $7.50. Concurrently the dollar index has come off of the highs of 93.19 achieved last night and is currently trading at 92.84, which is a net decline of -0.015%.
Yields on the 10-year Treasury Note gained 0.0710 or 5.87% and is currently fixed at 1.28%, creating another strong current that is curtailing any upside movement in gold.
There is also a case to be made that investment dollars today were flowing into U.S. equities markets. The S&P 500 gained 0.82%, the Dow gained 0.83%, and the NASDAQ composite gained 0.92% in trading today.
Cryptocurrencies also showed significant gains today, with Bitcoin Futures gaining 7.07% and Ethereum gaining 8.85%.
Investors always look to have their money in asset classes that will return the greatest results. With strong U.S. equities markets and the potential for cryptocurrencies to have found tentative support, it makes it more difficult for gold prices to rise.
Market participants await the FOMC conclusion meeting on July 28
The future direction of gold prices could certainly be influenced by the upcoming FOMC meeting, which begins on July 27 and concludes the following day when a statement is released, and Chairman Powell has a press conference. The statement, along with Chairman Powell’s press conference, will reveal any change in their current monetary policy.
Market participants are also waiting for any announcement by the European Central Bank on Thursday. According to an article by James Hyerczyk written in FX Empire said, “Gold futures are edging lower on Wednesday, pressured by a firmer U.S. Dollar ahead of the European Central Bank (ECB) announcements on Thursday, another rise in U.S. Treasury yields and increasing demand for riskier assets with U.S. equity markets hovering slightly below record highs. Despite having its gains capped, the market appears to be underpinned by some inflows into the safe-haven metal due to concerns over a surge in COVID-19 cases.”
The fact that gold remains above $1800 is bullish. Especially as we have seen the dollar move higher, yields in 10-year notes and U.S. equities markets both exhibiting gains.
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The number of Americans filing new claims for unemployment benefits fell to a 16-month low last week as the U.S. labor market steadily gains traction while other data showed import prices rose solidly in June but have probably peaked.
Wall Street traded lower even as the four largest U.S. consumer banks posted blockbuster second-quarter results earlier this week that were above analysts’ estimates.
Investors are looking for visibility into future earnings as stocks have already surged in anticipation of stellar growth.
“We had the rally going into the earnings season. Now that we’re actually here, we’re seeing some softness. I wouldn’t be surprised if we don’t see a lot of strength during this reporting season,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
Analysts expect strong earnings, with IBES data from Refinitiv showing consensus looking for a 65.8% gain from a year ago, making corporate guidance more important than results.
‘NAME OF THE GAME’
Energy and technology stocks led the decline on Wall Street, with defensive consumer staples and utilities the only two of 11 S&P 500 sectors to gain. Staples have pricing power that could help Procter & Gamble Co, Coca-Cola Co and others rise, once it is clear their margins remain intact, said Tom Hayes, founder and managing member of Great Hill Capital LLC.
“Guidance is the name of the game. A lot of good news is already baked into the market and even with strong guidance, you may get a breather here,” Hayes said.
The MSCI world equity index, which tracks shares in 50 countries, closed down 0.33% to 723.66 after touching a record high on Wednesday. Europe’s broad FTSEurofirst 300 index closed down 0.92% at 1,761.30, less than 20 points from an all-time peak set Monday.
Losses in Europe were broad-based, with economically sensitive stocks such as banks, automakers and travel down between 0.3% and 1.6% as investors grew wary of rising COVID-19 cases and their potential economic impact.
Official data showed that the United Kingdom reported the highest daily increase in COVID-19 cases since Jan. 15.
On Wall Street, the Dow Jones Industrial Average eked out a 0.15% gain but the S&P 500 fell 0.33% and the Nasdaq Composite slid 0.70%.
Shares in emerging markets rose, bucking the global trend, with MSCI’s index gaining 0.77%.
The 10-year Treasury note fell 5.9 basis points to yield 1.2972%, while the dollar index, which tracks a basket of six currencies, rose 0.19% to 92.586.
The rally in U.S. and European bond prices, which show the inverse of yields, suggested growing investor caution.
The dollar has climbed in recent weeks as investors take stock of the Fed’s increasingly upbeat assessment of the U.S. economy, which for some investors has brought forward the timeframe for its next rate rise. Rates have fallen on Japanese buying and investors selling long-dated maturities for shorter-duration government debt, which has pushed prices up.
The euro fell 0.21% at $1.1810, while the yen traded slid 0.18% at $109.7900.
Oil prices fell as investors braced for increased supplies after a compromise agreement between leading OPEC producers and after a surprisingly low weekly reading on U.S. fuel demand.
Brent crude fell $1.29 to settle at $73.47 a barrel, while U.S. crude slid $1.48 to $71.65 a barrel.
Gold hit a one-month peak, spurred by Federal Reserve Chair Jerome Powell’s dovish comments that squashed market interest rates.
U.S. gold futures gained 0.3% to $1,830.00 an ounce.
COVID-19 VARIANT FEARS
China’s economic data showed average growth surpassed the first quarter, while June retail sales and industrial output beat expectations. But it also showed authorities, which only last week injected 1 trillion yuan into the financial system, will ensure that conditions stay loose.
The World Health Organization (WHO) COVID-19 dashboard reported the first weekly rise in global deaths from the virus in 10 weeks and a 5.6% jump in daily case numbers on Wednesday.
“The market is fearing the Delta variant could take a hold of different economies so you are almost seeing that we are back to the ‘bond yields lower, tech doing well’ scenario,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.
The likes of Amazon and Google are up 6-8% this month, while China’s biggest tech firms Alibaba and Tencent have surged more than 12% since China’s central bank made a supportive policy tweak for the first time in nearly a year on Friday.
The Chinese yuan dipped to 6.4628 per dollar in Asia after hitting a three-week high of 6.4508 overnight.