S&P 500, ASX 200 Weekly Outlook: Rising Treasury Yields Flag Risk Ahead
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S&P 500, ASX 200, ASIA-PACIFIC MARKET OUTLOOK:
- Rising US Treasury yields may exert downward pressure on stocks, EM currencies and metals
- Major US equity indices closed at all-time highs despite a weaker nonfarm payrolls report
- The ASX 200 index opened lower, dragged by falling metal prices
Nonfarm payrolls, Pandemic, Yields, Asia-Pacific Stocks Weekly Outlook:
Asia-Pacific markets kicked off the week with a mixed tone after major US indices finished at record highs last week. The impact of rising US Treasury yields rippled across the financial markets, leading the US Dollar to strengthen. A potential reversal of the Dollar’s downward trajectory may threaten a pullback in stocks, commodities, EM currencies and risk assets in general. Besides, rapidly climbing Covid-19infections and the follow-on strain on the healthcare system raises the risk of further lockdowns ahead before the rollout of vaccines starts to bring material changes to the picture.
US nonfarm payrolls data came in at -140k, far below an already conservatively-adjusted forecast of a 71k increase and marked the first negative print since April 2020. Weaker nonfarm and private payrolls numbers pointed to a deteriorating labor market as pandemic wave hit the service sector hard.
Markets appeared to have taken bad news as ‘good’ again, hoping that worsening job market condition may lead to more stimulus and bar the Federal Reserve from shifting away from the current accommodative stance. However, this couldn’t mask a longer path for recovery as the likelihood of a ‘double dip’ seems to be rising. The US registered a record 300,594daily Covid-19 infections on Friday, at the same time as US equity indices hit fresh record highs. This is a strange situation that may not be sustainable as overstretched valuations diverge further from the reality. Read more on my fundamental report on the S&P 500 index here.
US Nonfarm Payrolls – Dec 2020
Chart by IG
It is worth noting that the US Treasury yields, especially the longer-dated ones, are rising rapidly. This reflects a rising inflation outlook and may lead the US Dollar to strengthen, which will likely weigh on commodity and emerging market currencies before stock markets get what it really means. Rising Treasury yields – perceived risk-free rates of return - allow government bonds to become slightly more attractive to investors and increase the opportunity cost for holding non-yielding assets such as gold and silver.
US Treasury Yield Curve – 1 Week change
Source: Bloomberg, DailyFX
The ASX 200 index opened slightly lower on Monday, dragged by the information technology (-1.17%), materials (-0.53%) and real estate (-0.32%) sectors. Base metals prices including copper, nickel and iron ore are plunging after gold prices plummeted last week, exerting downward pressure on Australia’s metal and material sectors as well as the commodity-linked Australian Dollar.
Looking back to Friday,7 out of 11 S&P 500 sectors ended higher, but only 29.5% of the index’s constituents closed in the green. Utilities (+0.61%), consumer discretionary (+0.56%) and real estate (+0.52%) were among the best performers, whereas cyclical-linked materials (-0.58%), financials (-0.14%) were lagging behind.
S&P 500 Index Sector Performance 8-01-2020
Source: Bloomberg, DailyFX
Looking ahead, traders are facing a relatively quiet week in terms of macroeconomic data. China trade balance figures will be released on Thursday alongside US President-elect Biden’s stimulus package plan. US corporate earnings season will kick off with releases from JP Morgan, Citi and Wells Fargo. Friday’s US retail sales, consumer sentiment and UK GDP data will be closely watched too. Find out more on DailyFX calendar:
S&P 500 Index Technical Analysis:
Technically, the S&P 500 index extended its upward trajectory within an “Ascending Channel” as highlighted in the chart below. The bull trend is well-supported by its 20-Day Simple Moving Average (SMA) line albeit the upper ceiling of the channel may serve as an immediate resistance. Support and resistance levels can be found at 3,804 (76.4% Fibonacci extension) and 3,893 (100% Fibonacci extension) respectively.
S&P 500 Index – Daily Chart
ASX 200 Index Technical Analysis:
The ASX 200 index pulled back slightly from the upper Bollinger Band and may enter a mild technical correction. Immediate support and resistance levels can be found at 6,630 (the 161.8% Fibonacci extension) and 6,810 (the 100% Fibonacci extension) respectively. A more likely outcome is a range-bound trading condition as upward momentum appears to be faltering, suggested by MACD divergence and a relatively narrow Bollinger Band width.
ASX 200 Index – Daily Chart
--- Written by Margaret Yang, Strategist for DailyFX.com
To contact Margaret, use the Comments section below or @margaretyjy on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.