YIELDS, US DOLLAR, GOLD, INFLATION, ASIA-PACIFIC STOCKS OUTLOOK:
US equity futures edged lower on Wednesday morning after major stock benchmarks closed near record highs overnight. Investors are probably trying to strike a balance between reflation hopes and seemingly overstretched valuations, allowing recent rallies to take a brief pause. The S&P 500 index is trading near 32.3 times price-to-earnings, far above its five-year average of 21.2. Rich multiples may render the index vulnerable to profit-taking should rising yields and a stronger US Dollar trigger a technical pullback.
It is worth noting that the 10-year Treasury yield climbed more than 10bps overnight to 1.321%, the highest level seen in almost a year. Rising yields may exert further downward pressure on precious metal prices because the opportunity cost of holding non-yielding assets becomes higher. For equities, it means that intrinsic value becomes lower when future cash flow streams are discounted back at a higher required rate of return.
Gold prices plunged 1.26% and broke below the US$ 1,800 mark as yield climbed alongside a stronger USD. WTI crude oil prices stayed elevated, however, backed by a cold blast in parts of the US and disruption in crude oil production in Texas.
US 10-Year Treasury Yield vs. Dow Jones
Asia-Pacific equities look set to retreat from Monday’s highs as profit-taking activity kicks in. Futures across Japan, Australia, Hong Kong, Singapore, and India are pointing to a lower start. Mainland Chinese bourses remain shut for the Chinese New Year holiday and will re-open on Thursday. In the currency market, the risk-sensitive Australian and New Zealand Dollars edged lower, suggesting that sentiment is tilted to the bearish side.
Hong Kong’s Hang Seng Index (HSI) advanced 1.9% on Tuesday, breaking through the 30,000 psychological resistance levels with no hesitation. Property and finance sub-sectors were leading, with HSBC (+7.65%) being the single largest contributor to the index’s gain. With the return of mainland investors on Thursday, sectoral rotation may lean towards in favor of technology firms again.
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