The Dow Jones Industrial Average is set to extend its gains from its record levels that it recorded yesterday. The dominant concern among investors and traders throughout this week has been the possibility of an early increase in interest rates as the coronavirus situation begins to improve due to the vaccination process.
Investors were worried that any increase in the interest rate might choke off the economic recovery in the U.S. However, for the last two days, Jerome Powell, the Fed Chairman, confirmed and reassured investors (in his two day testimony) that the Fed is far from thinking of such action.
He reminded the market that the Fed always prepares the market well in advance for such an action, and it gives plenty of time for market players to readjust their expectations which are reflected in their portfolios. Therefore, the fact that the Federal Reserve downplayed the threat of inflation is pushing the Treasury yields lower as well, and investors are back in risk-on mode.
The risk-on mode among traders triggered a serious rally on Wall Street last night, and European traders are set to pick up this momentum today.
To put things in perspective, the Dow Jones advanced 425 points to close at a new record high last night. It was a volatile session because the index at one point was down by over 110 points. The S&P 500 surged 1.1%, while the Nasdaq Composite jumped higher by 1%. Just like the Dow Jones, the Nasdaq, the tech-heavy index, was also down 1.3% before it erased all those losses yesterday.
Sector rotation still continues to remain the major theme among investors. The focus is to take the profit off their tech stocks and move that capital into other sectors that are still relatively undervalued. This is the reason that we are seeing a stellar rally in the tourism sector.
Stocks such as United Airlines, Delta, American Airlines rallied yesterday, and they are likely to see more gains today. Similarly, all hotel groups such as Marriot and IHG saw their share prices surge massively yesterday, and their share prices may score further gains today.
In addition to this, investors are shifting their capital into the banking sector because of enormous optimism about fewer bad loans. Most of the investors are optimistic that they are not likely to see the same amount of bad loans as previously anticipated. This has made banks’ balance sheets stronger, and their stock price looks much cheaper now. Hence we are likely to see much stronger share prices for bank stocks.
Energy stocks have also been on the move; investors have pushed the stocks such as Chevron, Exxon Mobil, B.P., and Shell higher. The major reason for the rise in these oil companies’ stocks is the massive rally that is taking place in oil prices. Brent oil made another yearly high yesterday and crossed the critical level of $65, surging all the way to $67. The momentum in oil prices indicates that there is nothing that will stop the Brent oil price from reaching the price level of $70.
In the commodity trading markets, we are seeing gold prices failing to cling to their critical psychological price level of $1,800. The gold price is clearly not benefiting from the Fed narrative, which is that loose monetary policy is here to stay for some time.
Investors believe that this is risk-on time, and they really do not see any reason why they need to hedge their risk if the Fed is holding their back, which has weakened the gold price’s strength.
Another reason for gold prices to continue to move lower is also that an independent study has confirmed that Pfizer/BioNTech vaccine is highly effective in controlling Covid-19. One important piece of economic data that could move the gold price today is the U.S. Weekly Jobless Claims number.