Mixed sentiment – Gold rally cools down

US stocks kicked off the week on a positive note, even though the sentiment in European markets remained fragile. The GOP’s 1 trillion-dollar new fiscal stimulus plan helped boosting sentiment in the New York trading session. The Federal Reserve (Fed) doves also tilt the balance to the positive side, as US policymakers are expected to maintain an ultra-dovish policy stance at this week’s meeting amid the persistent rise in new Covid-19 cases over the past weeks. And of course, the significant depreciation in the US dollar is likely fueling demand in cheapened US stocks. 

Technology stocks led gains on Monday before earnings announcements due to follow from big names such as Apple, Alphabet and Facebook this week. It is worth noting that downside risks prevail as the tech earnings could have been hit by a sharp drop in advertisement revenues in the second quarter.

Stay on top of the markets with Swissquote’s News & Analysis

Elsewhere, the company earnings remain completely decoupled with the actual market pricing. Australian companies, for example, are heading into the worst earnings season in history, as businesses have been heavily impacted by the Covid shutdown, and the second wave has already forced 5 million people to an additional 6-week lockdown. The Australian dollar however extended gains past the 0.7140 mark on the back of a broadly weaker US dollar. Solid recovery in iron ore prices, on the other hand, is certainly a positive push for the Aussie despite the critical Covid situation. Hence, for Aussie traders, the trend and momentum indicators point at a further advance towards the 200-week moving average that presently stands at 0.7256.   

Asian markets traded flat to positive on Tuesday, as activity on European futures hint at a positive start after the major indices ended the Monday session in the red.  

It is hard to predict the short-term market direction in such choppy conditions. Hope for more monetary and fiscal stimulus keep investors on track for buying equities, however, the company fundamentals and the economic situation don’t improve at the desired speed. This means that the country and company debts are exploding without a concrete positive impact on businesses and economies. And as we move forward, the margin for more stimulus tightens. When and how this would impact the market sentiment is yet to be seen.  

For now, the skyrocketing US debt and escalating US-China tensions sent the US dollar to a 22-month low.  

The EURUSD extended gains to 1.1781 and the GBPUSD traded past the 1.29 mark for the first time in almost five months. The surge in both pairs is mostly driven by a broadly weaker US dollar. But the overbought market conditions hint that a downside correction is healthy at the current levels. 

Gold advanced to $1980 per oz on Monday. The soft US dollar, low-to-negative US real yields, rising inflationary pressures, possibility of a global stagflation and the slippery market conditions remain supportive of a strong gold in the medium, long run. However, the rapid surge in gold prices also increases the risk of swift profit taking and a sharp downside correction. Gold rallied more than $500 per oz, 34%, since March. There is room for a decent retracement. 

Gold miners, on the other hand, continue rising parallel to gold prices. Fresnillo’s share price has almost tripled since March, as Anglo American’s almost doubled. Any significant correction in the precious metal should also trigger a decent retrace in these stocks. 

Oil remains steady near the $41 per barrel. Prospects of a slower recovery in oil demand amid heavily interrupted supply chains and persistent rise in new Covid cases, combined with a perhaps premature waning of the OPEC production cuts will likely limit the appetite near the actual levels. Strong resistance is eyed into $43.50 per barrel, the 200-day moving average.