Gold Is Gaining on the Stock Market Narrative

Commodity

Summary:

Gold rose to $2,040 per troy ounce on Tuesday morning, a two-week high.

Gold rose to $2,040 per troy ounce on Tuesday morning, a two-week high. The positive momentum is being driven by risk appetite on global platforms. One of the reasons for the increase in demand for the metal could be the strength of the Chinese stock market.

The three main US indices, the S&P500, the Dow Jones Industrial Average and the Nasdaq100, closed at all-time highs on Monday, continuing a run of almost two weeks of gains after a minor correction at the start of the year. The rally was fuelled by reports that the US Treasury had reduced its bond borrowing plans for the coming months. This means that more money that would have been used to buy bonds can be used to buy stocks and commodities.

We are also paying attention to signals from a WSJ journalist who covers Fed policy. He is widely acknowledged to be effective at conveying and interpreting signals that the FOMC can no longer give in the 'week of silence' before the meeting. In a recent article, he noted that the 'sharp drop' in inflation poses a new risk for the Fed. It's a sharp reversal from the inflation threat of the past two years. It is a return to the narrative that prevailed after the 2008 crisis when the world's major central banks worked to raise inflation rather than contain it.

This return of an old theme is reminiscent of gold's rally from $720 to $1,900 an ounce in 2008-2011 when there was a shift to a zero interest rate policy and the start of QEs. Gold Is Gaining on the Stock Market Narrative_1

Gold Is Gaining on the Stock Market Narrative_1

At the same time, the Chinese market continues to lose investor confidence as a result of the Evergrande bankruptcy and the unimpressive measures taken by regulators to support the markets and the economy. Hong Kong and mainland Chinese stock indices have halted the recovery that began last week and are losing ground for the second trading session, trading near multi-year lows. In this environment, and particularly in China, gold is once again enjoying the status of a defensive asset.

On the other hand, gold has been in a downtrend since the beginning of the year, although it usually starts the year strong. In years where we see early weakness in the first few weeks, the pressure soon builds. And we expect this trend to manifest itself as early as this week.

The price of the troy ounce could correct as low as $1,960, approaching the 200-day moving average, where the battle for the trend will likely intensify. If the bullish scenario comes to fruition, a move above $2,050 by the end of this week will significantly increase the chances of gold testing its all-time highs in the coming weeks.

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Economic

Commodity

Sharp drop in Baltic Dry Index points to slowing commodity demand

The Baltic Dry Index, the shipping and trade index produced by the London-based Baltic Exchange, provides a clear picture of the price of moving raw materials by sea and offers valuable insights into global supply and demand.

In recent months, the Baltic dry Index has been significantly impacted by a confluence of factors, including a severe drought disrupting major shipping routes and escalating regional conflicts affecting maritime trade.

A prime example is the Panama Canal, an essential conduit for global shipping, which in November faced drought conditions, forcing the canal to impose temporary restrictions on ship crossings. This bottleneck stymied trade flows and rippled through supply chains worldwide with the index surging by around 140% to its 3,346 early-December peak, an 18-month high.

In Yemen, the Iran-backed Houthi rebel forces have been battling a Saudi-led coalition for years. As the Houthis targeted commercial ships in the Red Sea, the US and Britain retaliated with airstrikes. This regional turmoil has disrupted vital oil shipments and rocked commodities markets.

Meanwhile, the flare-up in violence between Israel and Hamas forces in Gaza has also unsettled the shipping industry. With missiles being fired and airstrikes being launched, underwriters raised war risk insurance premiums for vessels passing through the Red Sea. Consequently, some shipowners avoided the region, causing shipment delays and rate spikes on certain routes.

Interestingly the December high in the Baltic Dry Index was made marginally below the December 2021 and May 2022 peaks at 3,369 to 3,423 before a sharp sell-off took it back to the 200-day simple moving average (SMA) at 1,520, more than halving the index's value within six weeks as freight rates across vessel categories plunged to multi-month lows. Sharp Drop in Baltic Dry Index Highlights Slowing Commodity Demand_1

Sharp Drop in Baltic Dry Index Highlights Slowing Commodity Demand_1

Lack of growth in China and Europe – with two of its main players, Germany and France skirting a recession - coupled with overcapacity in containerships has provoked the recent swift bearish reversal.

The Euro area has seen zero quarter-on-quarter growth in the fourth quarter (Q4) of 2023 and year-on-year only grew by 0.1% whereas China is plagued by its property sector bust and lacklustre demand.

The Baltic Dry Index is now being capped by the 200-day SMA which acts as resistance at 1,520 with it slipping towards its February-to-January support line at 1,350, marginally below which lies the mid-January low at 1,308.

Below it sits significant support between the June and September 2023 lows at 1,063 to 919. Above or within this support area the Baltic Dry Index would then be expected to level out, unless the global economy were to slip into a recession in which case the February 2023 trough at 530 would be back in sight.

Good resistance above the 200-day SMA at 1,520 can be spotted between the March to May 2023 highs at 1,603 to 1,640.

While the next higher October 2023 peak at 2,105 isn't exceeded, the medium-term trend will remain bearish.

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Ukadike Micheal

Economic

UK mortgage approvals surged to a six-month high in December, coinciding with the first decline in average rates since November 2021, signaling a potential stabilization in the property market. Net mortgage approvals for house purchases increased from 49,300 in November to 50,500 in December, reaching the highest figure since June. However, this fell short of the economists' forecast of 52,500, as revealed in a Reuters poll.

In addition to the positive momentum in house purchase approvals, net approvals for remortgaging also saw an uptick, rising from 25,700 in November to 30,800 in December. The Bank of England reported a noteworthy development in the 'effective' interest rate on newly drawn mortgages, which fell by 6 basis points to 5.28% in December. This marked the first decline in interest rates since November 2021, providing a potential boost to the affordability of mortgages and contributing to the overall positive sentiment in the real estate market.

The increase in mortgage approvals and the dip in interest rates reflect a dynamic shift in the housing market, potentially encouraging both homebuyers and individuals seeking to remortgage. As the property market responds to changing economic conditions, these trends may influence consumer confidence and contribute to the ongoing recovery and stability in the UK real estate sector.

Despite the encouraging signs, the December figures for mortgage approvals fell short of economists' expectations, emphasizing the potential challenges and uncertainties that persist in the market. While the six-month high in approvals is a positive indicator, the modest deviation from the forecast suggests that the real estate landscape remains influenced by various factors, including economic conditions, policy changes, and market dynamics.

As the Bank of England continues to monitor and respond to economic developments, the mortgage market's performance will likely be closely watched. The central bank's role in shaping monetary policy and influencing interest rates can have a significant impact on the affordability of mortgages, influencing consumer behavior and overall market activity.

The rise in remortgaging approvals indicates that existing homeowners may be exploring opportunities to optimize their mortgage arrangements, taking advantage of favorable interest rate conditions. This trend aligns with the broader economic landscape, where individuals and businesses alike seek to adapt to changing financial conditions and make strategic decisions to enhance their financial positions.

Looking ahead, the real estate market's trajectory will be influenced by a range of factors, including inflationary pressures, economic growth prospects, and potential shifts in monetary policy. The delicate balance between supply and demand, coupled with evolving consumer preferences and external economic influences, will shape the resilience and sustainability of the property market's recovery.

The recent uptick in UK mortgage approvals, coupled with the decline in average interest rates, provides a positive signal for the property market's potential stabilization. While challenges and uncertainties persist, these developments contribute to an optimistic outlook for the real estate sector. As stakeholders navigate the evolving landscape, the interaction of economic variables and policy decisions will play a crucial role in determining the market's resilience and future trajectory.

Source: Financial Times

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Cohen

Economic

Net mortgage approvals for house purchases rose slightly from 49,300 in November to 50,500 in December, and net approvals for remortgaging increased from 25,700 to 30,800.

This modest increase in mortgage approvals could indicate a stabilising or slightly more optimistic housing market. However, the numbers are still relatively modest, reflecting ongoing caution among both borrowers and lenders due to economic uncertainties like job security.

This cautious approach is illustrated by the fact individuals repaid, on net, £0.8 billion of mortgage debt, compared to net zero in November. This move towards paying off debt rather than accruing more suggests a careful approach, against the backdrop of inflation and higher interest rates. In uncertain times, reducing debt can be a way to decrease monthly expenses and prepare for potential financial strains.

Interestingly, the ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages fell by 6 basis points to 5.28% in December, marking the first drop since November 2021. While this decrease could provide minor relief to new borrowers, the high overall living costs might limit the impact of this reduction on household finances.

In the realm of consumer credit, borrowing fell to £1.2bn in December, down from £2.1bn in November. This decrease suggests that individuals might be more hesitant to take on new debts for personal spending, likely due to higher living costs, uncertainty about future income, or a shift towards more conservative financial behaviour in these uncertain economic times, which is not a bad thing given the precarious nature of finances at the moment.

Finally, households deposited, on net, £5.4bn with banks and building societies in December. The preference for saving over spending, particularly in more liquid forms like sight deposits, indicates a desire for financial security and preparedness in the face of the cost of living crisis. This behaviour might reflect concerns about needing funds readily available in case of economic downturns or personal financial needs. Locking money up for long periods will help people achieve higher interest rates but if you are struggling to make ends meet then having ready access to funds is necessary.

Overall, these figures reflect a cautious and conservative approach by individuals in managing their finances during the cost of living crisis but some life does seem to be being breathed back into the housing market. The focus does now seem to be on reducing debts, saving more, and being careful about taking on new financial obligations.

Source:MFS

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FxPro Group

Stocks

The economy of China is hit by the decision to liquidate the developer Evergrande due to a debt of USD 300 billion. Bloomberg writes that this will have huge consequences for all of China.

While the S&P 500 index rose by more than 3% since the beginning of January, the Hang Seng index fell by more than 8%. JPMorgan and HSBC point to local government debt, non-performing bank loans and negative sentiment in the private sector. Hang Seng Index is Near Important Support_1

Hang Seng Index is Near Important Support_1

The weekly chart of the stock index Hang Seng (HSI) shows that:

→ The price is in a downward trend, which is shown by the black line.→ The price dropped close to the 2022 minimum.→ The RSI indicator is located near the oversold zone.

What is important: the price is near the lower border of the long-term channel (shown by orange lines), from which support can be expected.

Expectations of investors to lower the interest rate from the Fed may increase the appetite for risky assets, which features Chinese stocks.

As Reuters writes, Goldman Sachs noted in its note to clients that hedge funds are actively buying Chinese shares – for the period from January 23 to 25, there was the largest capital inflow in the last 5 years. Perhaps the managers of hedge funds believe that the plans of the Chinese authorities to stimulate the economy for more than $280 billion will become a reality, and the price of the Hang Seng index will make a jump from the lower border of the long-term channel, breaking the black line of the downward trend.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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Zi Cheng

Traders' Opinions

Economic

In January, the rate of inflation for UK shop prices significantly decreased to its lowest level in nearly two years, as retailers implemented substantial discounts amid a period of sluggish sales, according to industry data.

The British Retail Consortium reported on Tuesday that annual shop price inflation dropped to 2.9% in January, a decline from the 4.3% recorded in December. This marks the seventh consecutive monthly decrease and represents the lowest rate since May 2022.

Simultaneously, separate data from research company Kantar, also released on Tuesday, indicated a slower decline in grocery inflation to 6.8% in January, compared to 6.9% in the preceding month.

While the BRC index encompasses all retailers, Kantar focuses on supermarkets. The BRC noted that non-food prices were the primary contributors to the January decline, reporting a food inflation figure of 6.1% for the month, down from 6.7% in December.

Both indices offer early insights into pricing trends before the official data is published on February 14, raising some optimism that underlying inflationary pressures are still diminishing, despite the headline measure ticking up to 4% in December.

The reduction in shop inflation was attributed to retailers heavily discounting goods during January sales to stimulate consumer spending amid subdued demand, according to BRC Chief Executive Helen Dickinson.

Although the inflation rate increased from 3.9% in November, December's figure remained well below the multi-decade high of 11.1% reached in October 2022.

Market expectations suggest that the Bank of England will maintain its benchmark interest rate at the current 15-year high of 5.25% on Thursday. However, forecasts anticipate a rate cut in June as inflation is projected to slow toward the central bank's 2% target.

UK Shop Price Inflation Index Fell To 2.9%_1

Non-food prices experienced a 1.4% month-on-month decline, contributing to an overall annual decrease across all categories, as reported by the BRC. Annual non-food inflation slowed to 1.3% in January, down from 3.1% the previous month, marking the lowest rate since February 2022.

The BRC highlighted a decline in the annual growth rate for both fresh and ambient food prices. The former eased from 5.4% to 4.9%, while the latter, referring to items stored at room temperature, decreased from 8.4% to 7.7%.

Despite the significant decline in price growth, the BRC cautioned about potential risks to the outlook, such as new cost pressures arising from higher business rates, the increase in the national living wage starting April, and unrest in the Red Sea.

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Ukadike Micheal

Economic

Commodity

Energy

Oil prices surged over 6% last week, settling at $83.55 a barrel on Friday, marking their highest level since early November. The upward trajectory was attributed to the impact of winter storms on U.S. oil production and robust economic data indicating the country's resilience, signaling strong fuel demand. Despite the growing threat of the Israel-Hamas conflict escalating, the oil market remained unexpectedly active.

The surge in oil prices commenced earlier in the month when winter storms and extreme temperatures disrupted significant portions of U.S. crude output. The adverse weather conditions, particularly affecting oil fields in North Dakota and Texas, resulted in a reduction of about 1 million barrels per day, equivalent to approximately 7.5% of the typical daily domestic production.

Furthermore, recent economic data revealed a 3.3% annual growth rate for the U.S. economy in the fourth quarter, surpassing economists' expectations of 2%. This positive economic outlook heightened expectations for increased fuel demand.

Despite the geopolitical tensions, especially the Israel-Hamas conflict and attacks by Yemen's Houthi rebels on oil-carrying vessels, the oil market had exhibited a prolonged period of relative stability before the recent surge. The lack of a geopolitical risk premium in petroleum prices, as indicated by J.P. Morgan analysts, suggested that major supply disruptions were not factored into prevailing prices.

The consistent lack of significant supply disruptions contributed to the market's calmness, with attacks and geopolitical events failing to sustainably drive up oil prices in recent years. Oil options prices also reflected this subdued market sentiment, with option-implied volatility, a measure of the cost of insuring against oil price spikes, declining from over 50% to about 36% after the initial turmoil.

Notably, the recent attacks by Houthi rebels appeared more focused on disrupting traffic than causing substantial damage to oil infrastructure. Analysts pointed out that the rebels are unlikely to expand their campaign to the strategically crucial Strait of Hormuz, a critical chokepoint for global oil flows, as such a move would adversely impact their ally, Iran.

While disruptions in Red Sea shipping were estimated to have a small and manageable impact, lengthening voyages and adding a modest $2 per barrel to prices for affected ships, the transitory nature of these disturbances was highlighted. The cold snap in the U.S. and shipping disruptions were expected to have short-term effects on oil prices.

However, challenges persist in the form of a global surplus of crude and the prospect of expanding offshore projects, potentially adding to the glut in 2025. Non-OPEC countries, including the U.S., Brazil, and Guyana, have contributed to the surplus, and growth in oil demand is expected to slow with the increasing adoption of electric vehicles.

Citi Research anticipates a substantial increase in global oil inventories by an average of 1.2 million barrels per day in the coming year. Despite potential supply disruptions or unexpected surges in demand, the substantial idle production capacity of OPEC, nearly five million barrels per day, exceeds pre-pandemic averages, providing a cushion in case of unforeseen challenges.

The recent surge in oil prices, driven by disruptions in U.S. oil production and positive economic data, underscores the complex interplay of factors influencing the oil market. While geopolitical tensions have historically impacted oil prices, the market's resilience and the absence of sustained disruptions highlight the ongoing challenges of predicting and navigating the dynamics of the global energy landscape.