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.