Why does the decline in US bond yields no longer help the stock market? Gold in the spotlight

Source link: Why does the decline in US bond yields no longer help the stock market? Gold in the spotlight at a glance Sharp swing in US Treasury bond yields: The release of higher-than-expected inflation data initially boosted bond yields sharply; But then, a dramatic turnaround caused yields to reach even lower levels than before the release of the inflation data. Tech stocks sound the alarm: Tech stocks' weakness in […]

Sharp turnaround in US Treasury yields: The release of higher-than-expected inflation data initially pushed bond yields sharply higher; But then, a dramatic turnaround caused yields to reach even lower levels than before the release of the inflation data.

Tech stocks are sounding the alarm: The inability of tech stocks to recover prices despite falling bond yields has raised questions about high valuations and the sustainability of stock market growth. However, two days of weakness alone is not enough to confirm the formation of a bearish trend.

Gold is supported despite macroeconomic headwinds: falling real bond yields and continued investment demand have helped gold prices recover from an initial slide following the release of inflation data; However, the technical outlook of this metal is still fragile.

The sharp volatility of the market on Wednesday, after the release of the US inflation report, which was higher than expectations, indicated a potentially important change in investor sentiment; A change that has implications far beyond the bond market. While gold recouped some of its losses after the initial decline, coupled with a sharp drop in Treasury yields, tech stocks failed to benefit from lower borrowing costs. Meanwhile, silver continued to face selling pressure; Because the atmosphere of risk aversion also extended to industrial metals and strengthened the relative superiority of gold.

The US Consumer Price Index (CPI) showed in September that the overall annual inflation rate rose to 3.7 percent from 3.4 percent. Core inflation also increased from 2.4 to 2.6 percent. The initial market reaction was predictable: Investors revised their expectations of the Federal Reserve's monetary policy, sold Treasuries, and yields rose. The 2-year US bond yield jumped 16 basis points and the 10-year bond yield jumped 12 basis points for a while. Meanwhile, gold was immediately under pressure and the stock market, especially tech stocks, underperformed.

But what happened next was much more interesting. As market sentiment worsened and concerns increased, investors once again turned to buying treasury bonds. This created a sharp reversal that wiped out all the initial gains in yields, sending them down to even lower levels than before the release of the inflation report.

The US dollar also lost its momentum. The Bloomberg Dollar Index fell 0.7 percent after hitting a record high in response to the inflation data, providing further support for gold.

Part of this turnaround was likely due to the closing of short positions; That is after a long period of selling treasury bonds, which exposed traders' positions to sudden changes.

✔️ Read more: The price of gold will reach $5,000 in 2027; Is the recent drop a buying opportunity?

However, the simultaneous weakness in tech stocks raises a broader question: Have investors become more skeptical about the sustainability of stock market growth than they are about the short-term outlook for inflation and interest rates?

When falling bond yields no longer support stocks

For a large part of the stock market's recent rally, falling bond yields have supported stocks of growth companies, especially technology companies. The high valuation of these companies is largely dependent on expectations about their profitability in the coming years. A decrease in bond yield lowers the discount rate of future profits, and as a result, the present value of these profits increases; A factor that increases the attractiveness of shares of growth companies.

But the market reaction on Wednesday questioned this relationship. Tech stocks failed to recover despite a sharp drop in Treasury yields. This suggests that investors may be more skeptical than ever about the profitability expectations, high valuations and huge capital commitments companies are making to finance the investment boom in AI.

In such a situation, the difference between companies that generate significant cash flow and those that depend on increasingly expensive sources of finance to finance their ambitious expansion plans can become more important.

Since AI-related investments have played a significant role in recent stock market growth, any revisions in return expectations for these investments could have broader implications for investors' appetite for risk.

However, one sign cannot judge the formation of a definite trend. Tech stocks' two-day weakness, while worrisome, doesn't necessarily signal the start of a deeper correction.

Profit taking, over-positioning by traders and technical adjustments can all cause sharp but temporary drops.

Still, the inability of stocks to benefit from falling bond yields is a red flag to watch.

Importantly, falling bond yields are not always good news for risky assets. If this decline is due to easing inflationary pressures, it could support valuations. But if declining yields reflect concerns about economic growth, corporate profitability, or financial stability, the message will be even more worrisome.

Gold is caught between macroeconomic obstacles and defense demand

The change in the market environment creates both opportunities and challenges for gold. In the initial reaction to the publication of the consumer price index report, this metal was under pressure at the same time as the jump in bond yields and the strengthening of the dollar, and it decreased for a while until near its recent bottom at the level of $4066.

✔️ Read more: Wall Street in ambush for gold; A buying opportunity or the start of a big drop?

However, increased demand for Treasuries and the subsequent fall in their yields helped gold to recoup most of its losses.

This price reversal highlights the opposing forces that are currently shaping the outlook for gold.

Short-term macroeconomic traders remain highly sensitive to changes in Treasury yields, the value of the dollar, and expectations regarding the Federal Reserve's monetary policy. Although the real yield on the 10-year U.S. Treasury note fell to 2.72 percent from less than 3 percent earlier in the week, the rate remains high by historical standards. This, along with the remaining possibility of monetary policy tightening again, suggests that the macroeconomic headwinds facing gold have eased, but not yet disappeared.

On the other hand, long-term investors continue to seek to increase the share of gold in their asset portfolios to protect their capital against the financial uncertainty of governments, geopolitical instabilities and possible turbulence in financial markets.

This difference in investment horizons helps explain why investment demand, particularly through exchange-traded funds (ETFs), has remained resilient despite the recent price correction and high bond yields.

Since gold's most recent peak on August 25, gold bullion-backed ETFs have increased by 2.3 million ounces. Meanwhile, speculators in the futures market sold a net 4.1 million ounces of their positions during the same period.

However, the technical picture of gold remains challenging. The price of this metal has moved in a downward channel since August and is currently below the 21-day, 50-day and 200-day moving averages. This situation indicates the weakening of the upward momentum of the price after the sharp correction from the previous ceilings.

The price crossing the level of $4175 can be a sign of the beginning of the price stabilization phase. However, to improve the sentiment of short-term traders who make decisions based on the momentum of the price movement, price consolidation above the $4,235 level will be necessary; The surface was broken during the late September spill.

On the other hand, a price drop below $4066 could increase the possibility of a deeper decline to the $4000 level; The range where long-term trend line support is forming.

In the current situation, gold is still caught between selling pressure caused by macroeconomic factors and investors' strategic demand. However, if confidence in the stock market weakens further, it is possible that strategic demand will play a stronger role in determining the path of gold prices.

Silver is under pressure when the monetary attractiveness of gold has overcome the market

Meanwhile, silver has not been able to start a strong recovery. Part of this weakness is related to the less favorable performance of industrial metals. Copper is also on the verge of recording its third consecutive daily drop; The trend is partly affected by the reduction of concerns about the disruption of the supply of this metal due to the strike in Chile.

Unlike gold, silver has both monetary properties and is used in various industries. Because of this, the metal is more vulnerable to concerns about economic growth and industrial demand.

This divergence can now be seen in the ratio of gold to silver. This ratio has crossed the important resistance level of 72.60 and now the same level can act as support; A situation that increases the probability of continued underperformance of silver compared to gold.

To return the bullish momentum to the silver market, a decrease in Treasury yields alone will probably not be enough. Stabilizing the stock market, improving the prospects of industries, and reviving physical demand can also be essential factors for the formation of a more stable improvement process.

Is the market's dominant narrative changing?

Trading in the coming days could reveal whether Wednesday's sharp turn was mainly the result of traders repositioning or an early sign of shifting investor priorities.

If bond yields continue to decline, but the stock market remains under pressure, gold is likely to benefit even more from investors' defensive demand; While silver will face difficulties due to its greater dependence on industrial activities.