During the previous week, the focus of the market shifted from the topic of J. Biden's new stimulus measures to the increased pressure of rising interest rate on the US debt market of government bonds.
It can be recalled that the hopes of implementing the $ 1.9 trillion aid package to support the US economy and its citizens affected by COVID-19 led to the sales growth in the US Treasury government bond market. Thus, investors started worrying that this would lead to a sharp inflation growth, which would ultimately force the Fed to change the monetary rate, despite its dovish view. First, the regulator will have to start reducing the volume of government bond repurchases, then entirely stop it and start a new cycle of interest rate hikes in 2023.
Last Thursday, the 10-year Treasury benchmark yield surged to a pre-pandemic high of 1.614%, but made a downward correction and is currently at 1.410%. Nevertheless, there were important changes in the yield of the 2-and 5-year-old Treasury, which also increased. It should be noted that the yields of these bonds are extremely sensitive to the Fed's prospective changes in the interest rates.
Due to such conditions, it is evident that there is an increased nervousness in the stock markets, which resulted in the growth of volatility. In this context, Friday's local high was reached, when stock indices were either actively declining or rising. Such a reaction of the market is quite justified. At the same time, the promising growth in yields makes it profitable to buy bonds, which are less risky assets than investing in company stocks. Many funds, starting with pension funds, will surge and start investing in these financial instruments, which will weaken interest in the stock market, and increase the profit-taking factor that pushes stock indexes to new declines.
Following the sharp growth of Treasury yields, the US dollar received significant support in the currency market, recovering its previous losses against commodity and raw currencies. The most noticeable was gold's price decline, which reached a local low in mid-June 2020 before the summer period.
Only time will tell how this week's situation will be. However, we believe that with the implementation of Biden's aid program, Treasury yields will continue to rise. This will lead to curbing the growth of stock indices in the US and Europe, but will not hinder the growth of company shares that have become very interesting, amid the gradual decline of the impact of the COVID-19 on business and manufacturing activity.
Forecast of the day:
The EUR/USD pair found the support level of 1.2060. If it breaks through the level of 1.2085, local growth may resume to 1.2165.
Gold's price is actively recovering amid Treasury yields' correction and the US dollar's local weakening. After breaking through the level of 1758.55, the price may further rise to 1815.85.
