Equity bulls stumble as COVID-19 fears grip investors

The mood across European markets darkened on Tuesday as surging Covid-19 cases on the continent dented risk sentiment.

Austria reintroduced a national lockdown on Monday to curb new infections spreading across Europe. However, fears continue to mount over larger countries in Europe following Austria’s lead, with Germany at the top of the list.

Across the Atlantic, US futures are pointing to a negative open as investors evaluate Jay Powell’s nomination for a second term as Federal Reserve Chair. When considering how his renomination boosted rate hike expectations and propelled Treasury yields higher, US equity bulls could face some obstacles down the road.

Dollar boosted by rate hike bets

Dollar bulls trampled on the currency markets yesterday after President Joe Biden nominated Jerome Powell for a second four-year term as Fed Chair. Lael Brainard, the other candidate, was seen as more dovish than Powell, although she will become Vice-Chair, the White House announced.

Powell’s renomination injected dollar bulls with renewed confidence, as this means there will be policy continuity at a crucial time when US inflation is at a 30-year high. Markets are now expecting the Fed to raise interest rates from near zero in June 2022. This could fuel the dollar’s upside momentum if we hear more Fed chatter around a faster tapering of bond-buying, with the Dollar Index already hitting a fresh 16-month high today.

On the data front, all eyes will be on the flash PMI for November which will provide insight into the health of the US economy. The dollar could extend gains if this data meets or exceeds market expectations.

Commodity spotlight – Gold

The likely re-election of Jerome Powell sent gold prices tumbling yesterday with bearish momentum rolling over into Tuesday’s session.

Gold stood little chance against an appreciating dollar and rising US Treasury yields, as markets continued to price in higher interest rates next year and beyond. Given how gold is a zero-yielding asset, it tends to perform poorly in a high-interest rate environment. With prices down almost 3% since the start of the week, bears are clearly in the driving seat and may remain there for the rest of November, especially if bond yields advance higher.

Looking at the technical picture, it is certainly a painful sight to behold with gold falling from five-month highs into the 50, 100, and 200-day Simple Moving Averages. If bears break through this key support region and secure a solid weekly close below $1777, this could signal further downside in the short to medium term. Alternatively, a move back above $1800 could encourage gold bugs to push towards $1813 and $1832.