The tension is rising on financial markets, although it was no clear external appearance on Monday.
However, even in this low volatility investors’ disquietude could be spotted. U.S. ten-year Treasuries’ yields are holding above 1.60% nudging the Dollar to strengthen. The broad market S&P 500 index was stumblingly trading around 3940 points. Crude prices were down by almost one percent. Gold prices as a safe haven asset were rising.
Reasons of such concerns are clear. Long-term interest rates are rising, inflation is expected at 2-3% in 2021 while the Federal Reserve Chairman Jerome Powell is demonstrating enduring tranquility. Fascinating courage if not a dummy sham performed by Mr. Powell that investors may expose ahead of Fed meeting this week.
Investors just need to raise 10-year bond yields to 1.65%-1.70%, or thirteen weeks highs and Mr Powell would be forced to comment on this matter on his follow up press briefing. If he reiterates once more that his not concerned with this investors would receive a clear signal for early tightening of Fed’s monetary policy with a following sell-offs in the stock market. If Fed’s Chairman indeed would express his concerns over rising yields that would mean Mr. Powell was toying the market when he brushed off concerns that the move up in yields might spell trouble for the Fed. This could also mean that the Fed is ready to initiate yields curve control to soften monetary policy. The Fed might also revise its macroeconomic outlook after the approval of $1.9 trillion relief bill to update its trajectory for interest rates changes. So, this is another risk factor that may boost yields even further and trigger the correction on the stock market.
So, the choice Fed has to make is indeed serious. The more likely option for the Fed is to avoid any changes in its current policy. However, such choice may signal a steep correction for the U.S. stock market that would prompt the Fed to deliver additional stimulus measures.
The U.S. stock market is likely to take a pause in such equivocal situation or even to decline a little within the range of 3900-3950 points. If the S&P 500 index would sustain above 3900 points after Fed’s meeting we may consider a further rally to 4000 points as most likely.
Oil market is waiting for Fed’s decisions and possible U.S.-Iran talks. If rumours of re-establishing nuclear deal would be confirmed crude prices would suffer as 2 million barrels a day will return to the global market.
Technically the important support level for Brent crude is at $68.60. In case it would be broken, prices may drop to $65 per barrel within this week. If this support level would sustain than the primary scenario would be a recovery to $69.75 or $70.70 per barrel.
Gold prices are following U.S. debt market movements. So, if the Fed would refrain to cap rising yields this week than the pressure on gold prices would strengthen. In this case, price targets at $1400-1450 per troy ounce could be closer than expected.
The Greenback is gaining momentum pressuring other currencies. The EURUSD this week may slid to 1.1500 this week after the pair fell below key support level at 1.19400 was broken.
The same situation is in GBPUSD after the pair lost ground below 1.39150. If the pair fail to recover quickly to this level then the decline to 1.35100 would become a priority.
The USDJPY is close to begin a reversal movement, although it might reach the level of 110.50, but this is totally unnecessary. It the U.S. stock market would turn for a correction the pair may descend to the support level at 106.50.