Equity markets kicked off the week on the front foot, fuelled by optimism on the approval of US President Joe Biden's $1.9 trillion aid programme.
US stocks hit all-time highs, with the Dow Jones Industrial Average hitting a shade below 33,000 and putting the index up 6 per cent so far for March. Meanwhile, the S&P500 has 4,000 in its sights after gaining 3.9 per cent so far this month.
Despite the choppy price action in US tech stocks, the Nasdaq Index is treading in positive waters this month by holding above the 13,000 level.
The upward momentum in stocks has been impressive, despite US 10-year Treasury yields holding above 1.6 per cent. However, all eyes will now turn to this week's US Federal Reserve meeting, which begins late Wednesday UAE time.
The theme around rising US bond yields has been a source of concern for financial markets – they have been on an uptick since early February – a period in which yields on the 10-year bonds have risen from 1 per cent to the current 1.6 per cent.
Anaemic demand from international buyers is fuelling this move in bond yields, which has led to multiple poorly subscribed US bond auctions. Such pricing action would suggest that the Fed may have to step in to fill that gap in demand in a bid to flatten the yield curve.
It's worth noting that higher bond yields lead to lower equity markets – rising bond yields equate to higher borrowing costs, and this hurts future earnings of companies that rely on debt for their cash flow, ultimately hurting their stock prices.
The Fed has consistently stood by its aim to support markets and many see this week's meeting as an opportunity for it to step in, similar to what we saw the European Central Bank do last week, when it announced a plan to increase emergency bond purchases to address rising bond yields.
While I don't foresee any major changes to policy, recent data has shown that US inflation remains soft, with the February core consumer price index growing by just 0.1 per cent month-on-month, while year-on-year CPI eased to 1.3 per cent from 1.4 per cent in January.
However, I will be taking note of just how dovish Fed chairman Jerome Powell's comments will be, along with his thoughts on inflation. I will also keenly watch the Fed's upcoming projections on the US economy and continue to keep an eye on the US 10-year Treasury yield in the weeks ahead.
If we continue to see stubbornly higher bond yields, this could lead to choppier stock prices with downward momentum picking up steam as a result through the end of March and into early April.
Rising yields have had a positive impact on the US Dollar Index, which is up 0.98 per cent on the month. The EUR/USD has corrected below 1.20 levels as a result, while GBP/USD has settled below 1.40 levels. In my opinion, both currencies have been on a tear since 2020 and these moves are short term.
I expect EUR/USD to continue to find good support at 1.1820 levels with a 1.22 target on the cards through the middle part of the second quarter. Similarly for GBP/USD, I expect good buying support to come in at 1.3780 levels with the cross stabilising above 1.40 levels.
After a stunning move above $60,000 in March, Bitcoin has retraced some of its recent gains to trade around the $50,000 handle. Expect optimism in markets to fuel Bitcoin's gains higher in the short term, and I expect good buying support to come in the channel between $43,000 and $45,000.
And finally, the Dubai Gold & Commodities Exchange (DGCX) Gold contract picked up some momentum in March after falling below $1,680 levels this month.
Currently trading at $1,734, I still see some anaemic pricing action keeping gold bulls in check in the short to medium term. I would exercise caution for long positions as I feel the depth of this gold sell-off is not fully complete. I see the key support level for gold at $1,673 and this would need to hold to protect against a further downside move to $1,580.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
