Equities Decline Amidst Surge in Oil Prices Heightening Concerns Over Inflation

Commodity

Economic

Summary:

On Friday, European equities mirrored Wall Street's decline due to escalating tensions in the Middle East, causing Brent crude to surpass $90 per barrel. The surge in oil prices heightened concerns about persistent inflation.

Global stock markets experienced a decline on Friday amidst escalating tensions in the Middle East, which led to a surge in oil prices, sparking concerns about persistent inflation and its potential impact on central banks' interest rate decisions. The Stoxx Europe 600, mirroring Wall Street's late sell-off, dropped by 1.1 percent, with energy emerging as the only sector to gain as oil prices breached $91 per barrel. Major European indices, including France’s Cac 40, Germany’s Dax, and London’s FTSE 100, all experienced declines, reflecting the apprehension among traders regarding the evolving situation in the Middle East.

The market sentiment was influenced by speculation about the possibility of a widening conflict in the region and potential retaliatory actions by Iran following a suspected Israeli attack on its consulate in Damascus. Analysts pointed out that the surge in energy prices could lead central banks like the Federal Reserve and the European Central Bank to adopt a more cautious approach towards interest rate adjustments this year, as higher oil prices revive concerns about stagflation.

Meanwhile, Asian stocks also faced downward pressure, with Japan’s Topix, South Korea’s Kospi, and Hong Kong’s Hang Seng all registering declines. The recent surge in oil prices can be attributed to forecasts indicating a stronger-than-expected economic recovery in major economies such as the US, Europe, and China, coupled with concerns about supply constraints. Brent crude, the international benchmark, reached its highest level since last October, hitting $91.26 per barrel.

However, Francisco Blanch, head of global commodities at Bank of America, reassured that current oil price levels are manageable. Nevertheless, there are apprehensions that if prices surpass the $100 mark, it could pose significant challenges for the Federal Reserve. Traders are closely monitoring key economic indicators, such as non-farm payrolls and unemployment data from the US, for insights into the trajectory of interest rates in the world's largest economy.

The market turbulence fueled by escalating tensions in the Middle East and the consequent surge in oil prices underscores the interconnectedness of geopolitical events and financial markets. The implications of these developments extend beyond immediate concerns about inflation and interest rates, affecting investor sentiment and global economic outlook. As uncertainties persist, market participants must remain vigilant and adapt to evolving dynamics to navigate the ever-changing landscape of global finance.

Source: Financial Times

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SAXO

Commodity

In our end of March update, we wrote about how gold's recent behaviour, where the yellow metal had been rising without clear reasons to explain the move, deserved a great deal of respect as it pointed to sustained strong underlying demand. Since then, the rally which started back in early October when Hamas attacks on Israel raised the geopolitical temperature, has gone from strength to strength, resulting in last month's 8.3% gain to a record high.

Today, gold reached the USD 2,300 target we set out in our Q1 24 outlook titled “Year of the metals”, where we expressed our bullish views on gold, silver, copper, and eventually also platinum. It is however interesting to note the target was achieved without three important drivers, namely rate cuts, where expectations have fallen from above seven at the start of the year to less than three currently. With rate cuts on the horizon, we envisaged a weaker dollar, and lower real yields would lead to a pickup in demand for ETFs from real money managers. Neither of these have yet materialised, and instead gold has been driven higher by hedge funds, or speculators enjoying the strong momentum that has been set in motion by strong demand from investors around the world responding to heightened geopolitical tensions and debt-financed growth. What’s Next As Gold Reaches USD 2,300?_1

What’s Next As Gold Reaches USD 2,300?_1

In our Q2 24 outlook released earlier this week, we highlighted the reasons why we believe the year-long consolidation phase across the commodity sector is over, not least due to expectations for industrial and precious metals to perform well, together with energy and a heavily shorted grains sector.

In the short term, both gold and silver will likely consolidate, but with rate cuts leading to dollar and yield tailwinds still awaiting on the horizon, we see gold potentially make an extension towards USD 2,500 and silver towards USD 30, the February 2021 high. The biggest threats to prices being the unlikely lowering of the geopolitical temperature, central banks pausing their aggressive gold buying spree while adapting to higher prices, and hedge funds pairing back part of the near 300 tons of gold they accumulated through the futures market last month. What’s Next As Gold Reaches USD 2,300?_2

What’s Next As Gold Reaches USD 2,300?_2

The strong momentum rally that followed last month's breakout above USD 2,075 has so far not been challenged, with a mid-March consolidation only triggering a 50-dollar correction. The lack of notable corrections, potentially challenging recently established longs held by hedge funds and CTAs, has been key to gold's continued rally. Using Fibonacci as a guide, a correction at this stage to USD 2,245 or even USD 2,225 may not be enough to challenge the mentioned long positions. Following a period of consolidation, the prospect for rate cuts and a resumption of central bank buying could potentially see the price reach for USD 2,500 later in the year, while the big line in the sand below remains USD 2,075 What’s Next As Gold Reaches USD 2,300?_3

What’s Next As Gold Reaches USD 2,300?_3

Silver, meanwhile, has for a while been struggling relative to gold, not least because the white metal has not enjoyed support from central bank buying. During the past month, however, the semi-precious metal which derives around half of its demand from industrial applications has received a boost from a recovering industrial metal sector, not least copper which has jumped to a 14-month high in response to tightening mined supply outlook and Chinese smelters discussing production curbs at a time where hopes for a global recovery in demand gather momentum.

During the past week, the gold-silver ratio has slumped from above 90 ounces of silver to one ounce of gold to the current 84.7, a move that highlights silver's ability to rally hard when it receives dual support from both gold and copper. From a technical perspective, the break above resistance-turned-support around USD 26 was relatively quickly followed by a break above USD 27, the March 2022 high, with the next major level to watch being the USD 28 area, our initial target for the year, ahead of the decade high at USD 30. What’s Next As Gold Reaches USD 2,300?_4

What’s Next As Gold Reaches USD 2,300?_4

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Ukadike Micheal

Forex

Economic

The UK economy exhibited signs of accelerating rebound from recession in March, as a crucial industry survey highlighted growth across all three primary sectors, marking the first simultaneous expansion since June 2022. S&P Global's construction purchasing managers’ index (PMI) rose to 50.2, surpassing expectations and signaling growth after six months of declining output. This positive momentum suggests a potential resurgence from last year's economic downturn, positioning the UK for a promising end to the first quarter.

Moreover, recent upgrades to the manufacturing PMI, nudging the sector into expansion territory, along with sustained growth in services the UK's largest sector underscore the broad-based recovery trend. Notably, while construction and manufacturing firms show marginal expansion, indicating a shift from stagnation, a robust recovery remains pivotal for Prime Minister Rishi Sunak, especially as elections loom later this year.

Tim Moore, economics director at S&P Global Market Intelligence, attributed the favorable outlook in construction to improved order books, buoyed by easing borrowing costs and early signs of economic recovery in the UK. Specifically, housebuilding experienced its strongest performance since November 2022, with civil engineering emerging as a stalwart within the sector. This stabilization in construction, particularly in response to challenges in the property market, bolsters the broader economic narrative of resilience and potential growth.

From a technical standpoint, the resurgence in key sectors holds implications for market dynamics. The synchronized expansion across services, manufacturing, and construction suggests a more balanced and resilient economic landscape, potentially mitigating the impacts of sector-specific fluctuations. However, the modest nature of growth in construction and manufacturing warrants cautious optimism, as it indicates a trajectory towards stabilization rather than an outright boom.

Looking ahead, the trajectory of the UK economy will likely hinge on sustained momentum in key sectors, supported by conducive macroeconomic conditions and policy measures. As the recovery gains traction, market participants will closely monitor indicators such as consumer spending, business investment, and employment trends to gauge the durability of the rebound. Additionally, geopolitical factors and global economic dynamics will continue to influence sentiment and shape the trajectory of recovery in the UK.

The recent survey data depicting growth across major sectors signals a promising trajectory for the UK economy, marking a significant milestone in its recovery journey. While challenges persist, the emergence of expansionary trends underscores resilience and adaptability, offering a ray of hope for policymakers and market participants alike. As the UK navigates the post-pandemic landscape, sustained efforts to foster growth and address structural challenges will be critical in unlocking the full potential of its economy.

Source: Bloomberg

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FastBull Featured

Remarks of Officials

Minneapolis Fed President Neel Kashkari said on April 4 as follows.

Inflation data was somewhat worrisome at the start of this year. The Fed still needs to closely watch inflation data to ensure that it can successfully decline to the 2% target. Before gaining enough confidence to start the rate-cutting cycle, the Fed needs to see more progress on inflation.

If the economy develops as expected, two rate cuts are expected this year. The Fed will make monetary policy decisions based on economic data.

But if the disinflation process continues to stagnate, I would question whether a rate cut is needed. In addition, if the economy, employment growth, and consumer spending continue to be strong, the need for a rate cut will be further ruled out.

There is still uncertainty about the current economic situation, and the Fed still needs to see how the labor market and inflation will evolve. If the inflation progress stagnates, the Fed will maintain the restrictive monetary policy for longer. If it is still not enough to bring inflation down to the 2% target within a certain period, the Fed will consider raising interest rates.

On the same day, Chicago Fed President Goolsbee said the biggest threat to the current inflation is the consistently rising housing prices. If housing inflation does not fall, it will be difficult to restore headline inflation to 2%.

Currently, the risk of inflation and full employment has come into better balance. If the Fed maintains restrictive monetary policy for too long, it will hurt the labor market. Recent data will not cause inflation to deviate from its path and demand is not overheating across the board. Inflation is still on a downward trend. Moreover, wage growth does not mean that inflation will follow suit.

The two officials seem to have different views on the current monetary policy stance. Kashkari even indicated that he may rule out the possibility of rate cuts this year. Goolsbee believes inflation will keep falling, and maintaining high-interest rates for too long will hurt the labor market.

But they both agreed on the premise of a rate cut: More evidence needs to be seen to boost confidence that inflation can decline sustainably.

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Samantha Luan

Economic

Forex

The Australian Dollar (AUD) snaps its three-day winning streak following the release of unchanged Final Retail Sales and downbeat Trade Balance data from Australia on Friday. However, the US Dollar (USD) faced downward pressure due to softer labor market data from the United States (US) on Thursday, supporting the AUD/USD pair.

Australia’s Trade Surplus (Month-over-Month) narrowed to 7,280 million in March, falling short of the expected 10,400 million and February’s reading of 10,058 million, according to data published by the Australian Bureau of Statistics. Australia's Exports decreased by 2.2% month-over-month, contrasting with the previous increase of 1.6%. Meanwhile, the nation’s Imports grew by 4.8%, compared to 1.3% prior.

The US Dollar Index (DXY) consolidates with a negative sentiment, reflecting the drop in US Treasury yields, possibly influenced by neutral comments from several Federal Reserve officials. However, the US Dollar might have attracted investors amid market caution due to escalating geopolitical tensions following Israel’s attack on Iran's embassy in Syria. Traders await US labor market data including Average Hourly Earnings and Nonfarm Payrolls scheduled to be released on Friday.

Daily Digest Market Movers: Australian Dollar depreciates on mixed economic figures

Australia's Final Retail Sales were unchanged at 0.3% in February, which is in line with expectations.

Australian Judo Bank Services PMI improved to 54.4 in March from 53.5 in February. Judo Bank Composite PMI increased to 53.3 from the previous reading of 52.4.

Australia’s Building Permits (MoM) fell by 1.9% in February against the expected increase of 3.3% and the previous decline of 2.5%. In comparison, there is an increase of 5.2% YoY, compared to the previous increase of 4.8%.

RBA March minutes showed that the board did not contemplate the option of raising interest rates. They unanimously agreed that it was challenging to definitively predict future changes in the cash rate. While the economic outlook remained uncertain, the risks appeared to be generally balanced. The board acknowledged that it would require "some time" before they could express confidence in inflation returning to the target level.

Federal Reserve (Fed) Bank of Richmond President Thomas Barkin remarked that disinflation is expected to persist, although the pace of this trend remains uncertain. He stated, "I am open to rate cuts once it is clear that progress on inflation will be sustained and apply more broadly in the economy."

Loretta Mester, President of the Federal Reserve Bank of Cleveland, suggested on Thursday that she would be open to reducing the pace of securities runoff from the Fed’s balance sheet soon. She also anticipated to be in a position to lower the fed funds rate later this year.”

Fed Chair Jerome Powell reaffirmed the US central bank's preparedness to implement rate cuts, emphasizing a data-dependent approach. Atlanta Fed President Raphael Bostic's remarks advocating for a rate cut in the final quarter of 2024.

Adriana Kugler, a member of the Fed Board of Governors, highlighted that the ongoing disinflationary trend would necessitate rate reductions, with expectations of at least three cuts by the last quarter of 2024.

US Initial Jobless Claims for the week ended March 29 rose by 9,000 to 221,000 from the previous week’s reading of 212,000, below the market consensus of 214,000.

US Challenger Job Cuts posted 90.309K for March against the previous reading of 84.638K.

US ADP Employment Change rose by 184K in March, compared to the 155K increase in February, above the market consensus of 148K.

US ISM Services PMI eased to 51.4 in March from 52.6 in February, weaker than the expectation of 52.7. US ISM Manufacturing PMI climbed to 50.3 in March from February's 47.8, surpassing expectations of 48.4.

Technical Analysis: Australian Dollar maintains position below the psychological mark of 0.6600

The Australian Dollar trades around 0.6570 on Friday. The immediate resistance region is observed around the 61.8% Fibonacci retracement level of 0.6596, coinciding with the psychological level of 0.6600. A breakthrough above this level could potentially propel the AUD/USD pair to explore the area around the major level of 0.6650 and March’s high of 0.6667. On the downside, key support is identified around the nine-day Exponential Moving Average (EMA) of 0.6552 and the major support level of 0.6550. A breach below the latter could exert downward pressure on the AUD/USD pair, potentially leading it toward the psychological level of 0.6500.

AUD/USD: Daily Chart

Source:Bloomberg

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Alex

Economic

Bond

As implied U.S. interest rates revisit their cycle highs from last year and bond yields break out to fresh 2024 peaks, stocks may be at risk of getting vertigo.

Yet the safety net, if required, could also come from the fixed income world - bond market volatility.

Or more precisely, the lack of it.

A calm bond market is critical to the well-being of all markets, as all borrowing costs, from consumer credit cards to corporate debt, are referenced against Treasury yields. Higher volatility generally forces investors to demand a higher risk premium, which lifts the discount rate on all financial assets.

The ICE BofA MOVE index of implied U.S. Treasury market volatility last week fell to its lowest in two years. It has picked up a bit this week as bond selling has accelerated, but remains well below where it was last October when the 10-year yield was shooting up to a 16-year high of 5.00%. Bond Volatility Key to Scale of Equity Pullbacks_1

Bond Volatility Key to Scale of Equity Pullbacks_1

This relative calm may quickly evaporate if inflation fears intensify, in which case a drawdown in stocks would almost certainly follow. And Wall Street is primed for a cooling-off period - the S&P 500 and Nasdaq are at all-time highs, having surged as much as 30% from their October lows.

But if yields are being lifted by stronger growth more than bubbling price pressures, equity investors can feel reasonably confident that pullbacks will be shallow and short-lived.

"If uncertainty about the Fed evaporates, confidence creeps back in. The 'soft landing' views align, bond volatility falls and investor sentiment rises," says Jeroen Blokland, head of research at investment research platform True Insights.

Strategists at Bank of America note that on average since 1929 the S&P 500 has had 5% daily pullbacks three times a year and 10% corrections once a year. The index has not had a 2% pullback in over 100 trading days, so a meaningful drop is probably due soon.

But that would only provide more attractive levels to add exposure. The longer-term view - solid economic growth, promising earnings, disinflation and rate cuts on the horizon - remains the same.

"Not to forget, the settle down in bond volatility that kept us on our toes last year," they wrote in a note last week. Bond Volatility Key to Scale of Equity Pullbacks_2

Bond Volatility Key to Scale of Equity Pullbacks_2

Placebo Effect

Rates volatility has been on a downward path this year, despite nearly 100 basis points of implied rate cuts being wiped off the 2024 U.S. rate futures curve and the 10-year Treasury yield rising around 50 bps.

The upward repricing of Fed expectations and bond yields has failed to stop the equity juggernaut, with the S&P 500 and Nasdaq both advancing around 10% in the first quarter.

Contrast this with market dynamics last year. In October the 10-year yield had reached 5% and stocks were down 10% from their July peak, yet although the economy was still humming along nicely, bond market volatility was elevated.

Bond Volatility Key to Scale of Equity Pullbacks_3

Fast forward five months and stocks are up 30% from the October lows, GDP growth is still running above potential, yields are rising but bond volatility remains reasonably well anchored.

This suggests growth expectations are driving yields.

"The danger is when stocks fall in line with bonds, a sign that inflation and interest rate uncertainty is rising." warns Bob Elliott, CEO at Unlimited Funds and former executive at Bridgewater.

For the equity market to really weigh down on the economy, the 10-year yield might need to rise another 100 basis points, Elliott reckons. That would smash through October's 5.00% peak and obliterate current Fed rate cut expectations.

There is a view that nominal bond yields and implied Fed rates don't hold much sway over stock markets beyond the short term. The same can perhaps be said of bond volatility too.

Since the Fed first raised rates in March 2022, the MOVE index has been structurally and consistently higher than the preceding two years. Yet the S&P 500 is up 25%, and bear in mind stocks slumped 20% in calendar year 2022.

Even the Fed's policy rate may not influence Wall Street as much as people believe. If it did, Wall Street wouldn't currently be hovering near its highest levels on record.

"Unless hikes are back on the table or they're cutting to try to stave off a recession, it basically doesn't matter beyond the placebo effect," hedge fund trader and Behavioral Macro blog author Mark Dow this week posted on X, the platform formerly known as Twitter.

Source: The Globe and Mail

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Thomas

Commodity

Market Overview

Gold prices dipped in Asian trade, pulling back from recent highs as investors await U.S. labor and inflation data, impacting interest rate outlooks. Despite earlier gains from Middle East tensions, gold’s buying momentum waned, and profit-taking emerged.

Copper’s rally to 15-month highs cooled, with a slight fallback in prices due to profit-taking, although it remains near its peak, influenced by China’s economic prospects and supply considerations.

Gold Prices Forecast

Gold, Silver, Copper Daily Forecast: Bearish or Bullish Shift Ahead?_1

Gold price stands at $2,277.42, marking a 0.53% decline. The asset wrestles with a bearish sentiment below the pivot point of $2,302.64, yet a breach above this threshold could pivot to a bullish outlook.

Key resistance levels are spotted at $2,320.10, $2,337.38, and $2,352.87, with support forming at $2,268.26, followed by $2,238.23 and $2,218.07. Technical indicators show the 50-day EMA at $2,244.51 and the 200-day EMA at $2,159.88, underlining a cautious market demeanor.

The immediate trajectory hinges on breaking the pivotal $2,302.64, which would signal a shift in market dynamics.

Silver Prices Forecast

Gold, Silver, Copper Daily Forecast: Bearish or Bullish Shift Ahead?_2

Silver’s is currently priced at $26.67, reflecting a 1.03% decrease. The metal’s performance is teetering on a pivot point at $26.75, with potential resistance levels at $27.37, $27.67, and $28.05. Support is established at $26.35, with further cushions at $26.06 and $25.76.

The 50-day EMA at $25.79 and the 200-day EMA at $24.56 suggest a mounting bullish trend, contingent on maintaining above $26.35. However, falling below this support could precipitate a sharp decline.

The current sentiment leans towards bullish, yet the market is on a knife-edge, closely watching these crucial support and resistance thresholds.

Copper Prices Forecast

Gold, Silver, Copper Daily Forecast: Bearish or Bullish Shift Ahead?_3

Copper trades at $4.22, down by 0.68%. The metal’s pivotal price is $4.22, with immediate resistance seen at $4.28, $4.35, and $4.40. Support levels are marked at $4.17, $4.10, and $4.05.

Technical indicators reveal the 50-day EMA at $4.12 and the 200-day EMA at $4.00, suggesting a bullish undertone above $4.22. A dip below this pivot could trigger a sharp sell-off.

With copper hovering around its pivot point, the market’s direction appears bullish, yet sensitive to shifts below the identified threshold, indicating a delicate balance in its trading sentiment.