Bye-bye frenzy, back to the familiar

By Han Tan, Market Analyst at FXTM

Global markets are now revisiting a familiar script, with investors pushing broad asset classes higher on more signs pointing to the US economic recovery.

Stock markets Stateside posted new record highs and the futures contracts are holding steady at the time of writing. The S&P 500 is boasting a year-to-date gain once more, led by energy and financial stocks last week. Tech companies remain favoured by investors amidst a string of better-than-expected earnings, pushing the Nasdaq 100 to its highest-ever close.

Oil prices are also getting in on the act, with WTI futures set for a fifth consecutive daily gain to reach its best levels in over a year. This return to the way things were is also marked by signs of subdued day-trader mania, with GameStop having plummeted almost 90 per cent from its 2021 peak amid the WallStreetBets-fueled frenzy. However, the stock is still showing gains of 184 per cent so far this year.

Stronger jobs recovery to set base for more gains in risk-asset

Risk sentiment has been buoyed by Thursday’s lower-than-expected US jobless claims data, which marked its third weekly decline and lowest reading since late November.

This positive surprise has already prompted economists to make upward revisions to their forecasts for the January non-farm payrolls data due later today(friday). Markets are expecting the headline print to increase by around 105,000 jobs, which would be an about-turn from the 140,000 positions lost in December.

But, the unemployment rate is set to remain unchanged at 6.7 per cent, which is still some three percentage points higher compared to pre-pandemic levels. This elevated figure still underscores the need for more government support, even though President Biden’s $1.9 trillion proposal risks being diluted if we see evidence today [Friday] that the job market recovery is truly underway.

With more states easing their respective virus-curbing measures as the Covid-19 vaccine continues to make its way through the US population, the labour market may find itself on firmer ground in the weeks and months ahead. On top of that, economic conditions are expected to be restored at a faster clip once more fiscal stimulus is unleashed upon households and businesses.

Such a risk-on narrative is what’s prompting market participants to push risk assets higher and this momentum in the markets could gain more impetus with a better-than-expected NFP print.

Gold declines on Dollar resilience

However, the US dollar and gold are apparently not singing the same tune as the rest of the choir.

The greenback has defied consensus calls for weakness this year, which in turn has sent bullion to its lowest levels since early December. The precious metal has also struggled against the steepening US yield curve. The idea that the US economic recovery would lead to faster inflationary pressures has not played out in gold’s favour, to the chagrin of the precious metal’s bulls.

With spot prices now trying to claw their way back to the psychologically important $1800 level, gold is set to have a battle on its hands over the near-term in trying to get on the market’s good side. A technical death cross, when the 50-day moving average crosses below the 200-day moving average, looks imminent which indicates the potential for a major selloff.