Gold, bitcoin and stocks suffered from rising bond yields in the US last week. Rising real yields are a sign of improving sentiment on the economic recovery. Why then should the investors sell stocks in such an environment? As investors believe that the economy recovers more quickly than they anticipated earlier the calculations in models that estimate the values of future cash flows for the companies in their investment portfolios need to be adjusted. If investors believe that the interest rates will rise in the future they assume that the current value of those cash flows goes down and investors sell the stocks. By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.

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The US 10-year bond yields spiked last week, which prompted investors to sell stocks in most of the market sectors. Declines in the cyclical sectors (energy, industrials and banks) that historically have a positive correlation with rising yields saw smaller declines or no weekly decline at all. Gold and bitcoin being assets without a yield traded lower last week. As the US 10-year treasury yields retraced from their overbought levels on Thursday and Friday Gold and bitcoin have reacted higher.

President Biden’s $1.9 trillion stimulus bill was approved by the democrat controlled House over the weekend. Over the next two weeks, the bill will be debated in the Senate hearings. Positive commentary on the bill should support the equity prices but traders and asset managers will be following closely what happens with the bond yields.

China’s factory activity is still on a positive path but the rate of growth is dwindling. The official Manufacturing PMI was lower than analysts had expected (50.6 vs. 51.1) and the lowest since June last year. The number, however, is still above the threshold of 50 indicating that manufacturing in China is expanding.

Apart from the US employment data on Friday, the RBA rate decision on Tuesday will be one of this week’s highlights for risk event traders. The bank is signalling that it will double its bond-buying in long-dated Australian government bonds to four billion AUD. For other details on other economic releases, see our economic calendar here.

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It was our view a week ago that a break above the resistance levels at 1.2168 and 1.2189 is likely. EURUSD rallied above these levels but the move was rejected as the US bond yields spiked. EURUSD then sold off bringing the pair below the 20-day SMA. Now the nearest support level is at 1.2023 and a break below it could bring the rising trendline at 1.1966 into play. Together with the 23.6% retracement level at 1.1946 and 1.1952 support level the trendline creates a technical confluence area (a crucial support zone) at 1.1946 – 1.1966. The lack of momentum in all most of the major USD counterparts (EUR, GBP, JPY, AUD, NZD and CHF) last week raises questions on whether the anti USD trend can continue in the medium term. Price action relative to the news on the major themes impacting the world economy will help us to understand what drives the markets. Traders will be focusing on three fundamental factors over the coming week: discussions on Biden’s stimulus package in the US Senate, US treasury yields and the NFP numbers on Friday. We will have some indication developments in the employment front on Wednesday when the ADP Non-Farm Employment Change is released. The recent risk-off sentiment relates to rising yields. This far the Fed Chair Powell has signalled that the central bank is not worried about the rising yields. Should there be change to this signalling the risk sentiment would likely turn positive again. Open a VIP Black account with us. There are no per trade execution or monthly fees on our VIP Black accounts.

After losing momentum last week GBPUSD has retraced to 50% Fibonacci level (at 1.3900 even). The level coincides roughly with the 20-SMA (currently at 1.3880). This confluence area could create a bounce after the sell-off but the risk is that it could be short-lived as the price has violated the trendline that supported it during the extension of the rally. If USD continues strong the next support area at 1.3820 – 1.3830 (a reactionary low and 61.8% retracement level) would be likely to come into play. The other key support and resistance levels are 1.3564, 1.3758, 1.4237.

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In the last week’s Weekly Market Review we highlighted the risk the rising yields create to gold and also pointed TIOmarkets traders to the very resistance area (1810 – 1821) that thwarted the last week’s rally and sent the price of gold lower. On Friday the price of gold dropped through the 1974 support level and well below the bearish channel as US stock indices steadied and started to attract buyers. Now gold is trading below this key support level at 1974 and is losing momentum after rallying to 1759.80. This looks like a typical retracement move and the rejection of the level is likely to send the price of gold lower. A rally above 1974 would negate this indication but at the moment it doesn’t look like a probable move given the weakness just below the 1974 key resistance. The other key support and resistance levels are 1696 (channel low), 1671 (historical low), 1690 (61.8% retracement level) and 1816 (the most recent reactionary high).

S&P 500 retraced back to the support zone we highlighted last week in the Bullish & Bearish Markets video (watch here). Buyers stepped in on Friday at our support zone and the index has rallied to a resistance (at 3861, Friday’s high) in today’s trading. A penetration could take the index to the next resistance zone at 3897 – 3937. A failure to rally higher would be likely to create either some short term ranging action above Friday’s low or possibly push S&P 500 below the medium-term rising trendline and Friday’s low. The trendline is currently at 3801. Should this level break the significant support zone can be found at 3664   3685. Even if there was a rally the risk for the market breaking the support has risen now that the index has created a lower reactionary high at 3937.45. In order to negate the bearish indications by this, the index needs to either break above the level on a closing basis or start creating higher lows above the rising trendline. The latter would make it more likely that the index could break above the recent swing highs (3937.45 and 3963.75).

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Janne Muta
Chief Market Analyst

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