US equity market took a hit after Federal Reserve Chairman Jerome Powell refused to push back the recent spike in Treasury yields

5 March 2021, 03:48

Market Focus

US equity market took a hit after Federal Reserve Chairman Jerome Powell refused to push back the recent spike in Treasury yields. The Nasdaq 100 index extended losses from February high to almost 10%. Meanwhile, S&P 500 index dipped 1.17% on Thursday, with Energy and Utility stocks led the gain, and Financials and Materials stocks lagged.

Here are Bloomberg’s main takeaways from Jerome Powell’s speech:

  • The Fed sees the labor market as being a long way from its goals, which means central bankers are going to be patient as the recovery progresses in the coming months.
  • Emphasized that the increase in inflation rates that we are likely to see this year will probably be transitory.
  • Powell said he took note of the moves recent bond-market turmoil and would be concerned if he observed disorderly markets and a persistent tightening of financial conditions.
  • The rise in longer-term interest rates we’ve been seeing reflect growing optimism and is, therefore, more of a good thing than a bad thing.

Market Wrap

Main Pairs Movement

Eurodollar bleeds badly on Thursday after Fed Chairman Jerome Powell declined to push back on rising bond yield, thus lending strength to the US greenback. He noted that the economic outlook is becoming more positive, and the central bank won’t hike rates until inflation runs above 2% for some time. The US 10-year treasury yield surged another 3.7% after yesterday’s 6.67%, settled the day around 1.541.

Aussie and Kiwi came under pressure during the NA session, dropped 0.62% and 0.76% respectively. The dual pairs may experience relatively large volatility from the China National People’s Congress and US Nonfarm Payroll event on Friday.

Cable dipped 0.46% albeit upbeat PMI figure. UK’s Construction PMI jumped to 53.3, beating the forecast of 51. The encouraging data suggest the recovery is very much on track. Meanwhile, Chancellor Rishi Sunak put off steps to tackle the UK’s record budget deficit, focusing instead on raising more cash for a recovery.

Gold refreshed an eight-month low at $1691 after Powell’s speech and closed the day around $1700. The non-yielding metal 10.7% since January mainly due to fading COVID-19 pandemic, vaccine rollout, and the recent spike in bond yield. Moreover, holdings in large gold ETFs dropped for a 13th straight day on Wednesday, the longest stretch since December 2016.

Crude oil was the ultimate winner of the day, WTI and Brent Crude futures gained 4.4% and 4.5% respectively. Bullish OPEC+ headlines kept the oil price alive. The petroleum organization was on consensus to keep output unchanged in April. Brent has already recovered 30% this year to nearly $68 a barrel. OPEC+ has kept its promise to reduce production throughout the first quarter to drain the glut built up from last year.

Technical Analysis

EURUSD (Daily Chart)

Eurodollar breached below its long-standing ascending trendline and looks to contest horizontal support of 1.193. The blue upward trendline was under pressure recently amid reviving US dollar strength, the breakthrough suggests the long-term bullish run is coming to an end, and bears will be in charge. However, sellers need to take down 1.193 support before any significant selling power kicks in. We cannot completely rule out the possibility of a false breakout. In either case, investors would be prudent to wait for the market to provide clear signals. MACD on the daily chart is in favor of the bears.

Resistance: 1.21, 1.217

Support: 1.193, 1.178, 1.163

GBPJPY (Weekly Chart)

GBPJPY is upon a twelve consecutive week, the price has appreciated 7.85% since last December. More importantly, it overran multiple resistance without any hesitations. The overstretched bullish trend could be facing some roadblocks since RSI is printing 76.1, a rare figure that we could see on the weekly chart, the last time that this level of overheating showed up was dated back to December 2014. That being said, we expect retreats in next week if not the week after it, likely to fall back to near support of 149.43, which coincides with the previous ascending trendline.

Resistance: 152.83, 155.48

Support: 149.43, 145.9, 141.17

XAUUSD (Daily Chart)

Another sad day for Gold buyers, price is falling onto the lower bound of a descending tunnel. The value of this yellow metal is extremely subdued from soaring Bond yield across the globe, investors are somewhat skeptical about the sudden pull-up. That being said, we expect the price to recover toward 50% Fibonacci of $1765 as RSI overextended into the oversold zone, currently printing 27.6. Rejection from this resistance would provide a strong confirmation signal to the bears to resume the south run. On the downside, 61.8% Fibonacci support of $1691 could provide some friction to recent robust selling bias.

Resistance: 1765, 1823

Support: 1691, 1600