Stocks set for more record highs

By Han Tan, Market Analyst at FXTM

So much for a slow start to the New Year. From a pair of tense Senate runoffs, to a mob breaching Capitol Hill and even a shock oil supply cut from Saudi Arabia, global investors had plenty to take in lad week. Yet, the buying momentum in stocks has continued unabated.

After overcoming the slight wobble on Monday, US equity benchmarks have since posted new record highs with futures contracts in the green at the time of writing. The MSCI ACWI index, which measures the overall performance of stocks across emerging and developed markets, also registered its highest ever close on Thursday. Asian equity benchmarks were climbing on Friday, with the MSCI Asia Pacific index advancing some two percent already so far this year.

Reasons aplenty to look up

Stock market bulls have many reasons to expect further gains. Investors are getting more comfortable wading further out into risk-on waters, considering that the spillover from last year’s downside risks have subsided, including Brexit concerns and the US election cycle. On Thursday, outgoing President Trump finally stated his intention for a smooth transition of power.

Now, investors are gravitating towards the increased likelihood of more incoming US fiscal stimulus in light of the Democrats’ sweep of the Georgia Senate runoffs. The latest FOMC meeting minutes underscore policymakers’ will to stick to its supportive policy stance. Also helping the risk mood is the continuation of the Covid-19 vaccine rollout, with Moderna’s vaccine receiving the EU’s blessing last week.

Such elements are fostering a highly supportive environment for global equities, affording investors the luxury of looking past the persistent pandemic woes.

Dollar bears likely unfazed by US hiring slowdown

Fundamental investors would have been focusing on the US non-farm payrolls release on Friday, amid expectations for a mere increase of 50,000 jobs in December. Such a figure would be a far cry from the millions of jobs that were restored in the months after the initial national lockdown was ended. A December NFP print of 50,000 would merely be one-fifth of the jobs added in the month prior which notably was below expectations, signalling that the post-lockdown recovery in the labour market is stalling.

Still, the prospects of more fiscal stimulus under the incoming Biden administration should help tide the US economy over. After all, the President-elect did vow last week to mail out those $2,000 checks “immediately” if the Democrats won the Georgia Senate runoffs. With such expectations intact, the Dollar index may not have many legs left in its recent rebound.

Gold supported by hopes of faster US inflation

10-year Treasury yields breached the psychologically important one percent mark last week, and along with the Dollar rebound have dealt a slight setback to Gold prices. Yet, the precious metal is still trading above the key $1900 level and it remained on course for a sixth straight weekly gain.

Bullion remains supported by the reflation trade, amid expectations that Democrats’ control of the White House, Senate and the House of Representatives should pave the way for more incoming fiscal stimulus that can drive up US inflationary pressures.

However, if December’s non-farm payrolls report offered more evidence of a stalling US jobs market, that may dampen Gold prices in the immediate aftermath, while waiting for more inflationary boosters to come through. The Fed’s conveyed tolerance for an inflation overshoot also bodes well for the precious metal’s upside.

Spot Gold still harbours the potential to reclaim the $2000 handle, especially if the precious metal’s tailwinds can gather pace as 2021 unfolds.

However, as commented by Fed officials last week, there appears to be a risk of a pullback in the Fed’s asset purchasing programme should a US economic outperformance crystalize in the latter part of the year. Another massive yields spike may then trigger the further unwinding of Gold’s recent gains.