Gold Price Forecast: Sustainable Bull Markets Need To Breathe Occasionally

Economic

Commodity

Summary:

The inverse relationship between bond yields and US dollar with the gold price has broken down in 2024, meaning technicals and inflation expectations are arguably a more important driver right now.

The inverse relationship between bond yields and US dollar with the gold price has broken down in 2024, meaning technicals and inflation expectations are arguably a more important driver right now in terms of its near-term trajectory. With the price action looking toppy and inflation concerns as elevated as they’ve been since October 2023, upside for bullion may be hard won in the near-term.

Gold is not behaving as you’d expect right now

Rising bond yields and a stronger US dollar are usually a toxic mix for gold, creating headwinds from both a relative return and currency basis. But not this year. Rather, gold has been moving in the same direction as US dollar and benchmark 10-year bond US bond yields often over the past month, hitting record high after record high despite markets paring 2024 US rate cut expectations from seven to less than two in the space of four months.

The unusual positive relationship between gold and US dollar index and 10-year US bond yields is evident in the correlation coefficient analysis below with scores of 0.67 and 0.92 respectively over the past four weeks on a daily timeframe. The positive relationship with the latter is extremely unusual, sitting at levels not seen for well over a decade.

Essentially, even though nominal bond yields are offering increasingly juicy returns for one of the most popular safe haven assets globally, the rally in non-interest-bearing gold is showing no signs of slowing down. Gold Price Forecast: Sustainable Bull Markets Need To Breathe Occasionally_1

Gold Price Forecast: Sustainable Bull Markets Need To Breathe Occasionally_1

Inflation hedge, technical breakout influencing performance

With traditional fundamental drivers breaking down, it suggests traders need to look elsewhere for clues as to what’s driving the gold price right now. One look at the strong, positive relationship gold has had with US five and 10-year inflation breakevens over the past 20 days suggests it’s role as an inflation hedge may be reasserting itself. Inflation breakevens measure the average inflation rate markets expect over a specific timeframe.

And while central bank buying, increased demand from China and Russia and heightened geopolitical tensions have contributed to gold’s upward bias, you shouldn’t discount the important role technical analysis looks to be playing right now.

As explained in a post earlier this month, gold is doing exactly what you’d expect after breaking cleanly though long-running horizontal resistance. While the longer-term trajectory still looks to be higher, in the near-term, the unconvincing price action last week suggests gold may need to move lower before it can extend its run higher. Every sustainable bull market needs to breathe, so a modest pullback should be regarded as a healthy development for bulls, should it occur.

Gold rally looks in need of a pullback

Looking at the daily, the long topside wicks either side of $2400 point to sellers gaining the ascendency, seeing the price break the minor uptrend it had been sitting in since mid-March on Friday. The inverted hammer to end the week adds to the sense of growing downside risks, contributing to RSI breaking its uptrend and MACD crossing over from above. Momentum is building to the downside.

Those considering taking the short trade on could sell around these levels with a trailing stop above, targeting a push towards a series of minor support levels located below. Initial targets include $2360, $2327, $2305 and $2265. Depending on which you target, make sure your stop level is set appropriately to provide acceptable risk-reward. Gold Price Forecast: Sustainable Bull Markets Need To Breathe Occasionally_2

Gold Price Forecast: Sustainable Bull Markets Need To Breathe Occasionally_2

Risks to the short gold trade

Looking ahead, main risks to the trade would be an undeniable escalation in Middle Eastern tensions. On Friday, the Federal Reserve’s preferred underlying inflation measure, the core personal consumption expenditure (PCE) deflator, is the most obvious known risk event this week. While a softer number would likely lead to a weaker US dollar and lower US bond yields, as discussed above, that traditionally bullish outcome may not lead to upside on this occasion. Instead, should the data print hotter-than-expected, the flow-through to inflation expectations may actually help to boost bullion’s appeal.

Source:cityindex

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Devin

Economic

Bond

Stocks

Commodity

Reports of an Israeli attack on Iranian soil that possibly drags the Middle East into a deeper conflict has jolted world markets with geopolitical risks that can swiftly change the direction of anything from oil to bonds and renew inflation risks.

Stocks tumbled on Friday, oil briefly jumped more than $3 a barrel and safe-haven government bonds rallied.

Moves were relatively modest, but the heightened tensions inject fresh uncertainty and fuels concern that high oil prices and potential supply disruptions will keep inflation high.

"Even though these look to be more benign, telegraphed moves between Iran and Israel, and it is not the base case that we get a wider conflict, you probably do need to price in more of a risk premia," said Tim Graf, head of macro strategy for Europe at State Street Global Markets.

Here's a look at the key takeaways for markets.

1. Oh Oil

Oil prices are up roughly 13% so far this year near $90 a barrel and seen staying high.

The International Monetary Fund on Tuesday described an "adverse scenario" in which a Middle East escalation leads to a 15% jump in oil and higher shipping costs that would hike global inflation by about 0.7 percentage point.

Oil supply tightness, and higher prices, have been underpinned by oil producing group OPEC and other big oil producers curbing output.

Morgan Stanley has lifted its third quarter Brent crude oil forecast to $94.

"A geopolitical risk premium appears to have been built in to the oil price, but, clearly, further escalation presents further upside risks," said Thomas McGarrity, head of equities at RBC Wealth Management.

2. Inflation Round Two

Spooked by latest hot U.S. inflation numbers, investors are watching oil. It was an energy price surge two years ago that helped drive inflation and rates higher.

High oil prices threaten the downward move in inflation and could prompt a further reassessment of bets on global rate cuts.

A key market gauge of long-term euro zone inflation expectations, which generally tracks oil, on Tuesday hit its highest since December at 2.39%. It remains above the European Central Bank's 2% inflation target.

The ECB has said it is "very attentive" to the impact of oil, which can hurt economic growth and boost inflation.

3. Go Energy Stocks

Energy stocks are a winner from higher oil prices.

The S&P 500 oil index and European oil and gas stocks hit record highs earlier in April before pulling back.

U.S. oil stocks have jumped almost 12% so far this year, outperforming the broader S&P 500's 5% gain. Escalating Middle East Tensions a Fresh Jolt to World Markets_3

Escalating Middle East Tensions a Fresh Jolt to World Markets_3

Yardeni Research recommends an "overweight" position on energy stocks, seeing a rise in Brent crude to $100 in coming weeks as a possibility.

Oil briefly spiked to around $139 after Russia invaded Ukraine in 2022, its highest since 2008.

"The rise in oil prices complicates central banks' efforts to bring inflation back down to target levels," said RBC's McGarrity. "Having exposure to the energy sector arguably provides the best hedge to both inflation and geopolitical risks in equity portfolios near term."

4. Safe-Haven Rush

Demand for safe-havens such as U.S. or German bonds -- especially before the weekend -- trumps the urge to sell bonds given renewed inflation risks from rising oil for now.

U.S. 10-year Treasury yields fell as much as 15 basis points on Friday and were last down 6.5 bps at 4.58%, down from recent five-month highs.

"That suggests markets are more concerned about the need for safe havens than the immediate inflationary implications of higher energy prices," said Investec chief economist Philip Shaw. Escalating Middle East Tensions a Fresh Jolt to World Markets_4

Escalating Middle East Tensions a Fresh Jolt to World Markets_4

The dollar and Swiss franc have also benefited from safe-haven demand, with geopolitics and high oil prices seen adding to a dollar rally fueled by a scaling back of U.S. rate cut bets.

Dollar strength exacerbates pressure on economies such as Japan grappling with a yen at 34-year lows, with traders nervy over possible central bank intervention.

ING currency analyst Francesco Pesole said a further Middle East escalation could see losses for currencies in New Zealand, Australia, Sweden and Norway as risk sentiment takes a hit; the Swiss franc could rally further. Escalating Middle East Tensions a Fresh Jolt to World Markets_5

Escalating Middle East Tensions a Fresh Jolt to World Markets_5

5. Fresh EM Pain

Rising oil prices and a strong dollar also hurts emerging markets, such as India and Turkey, that are net oil importers.

India's rupee hit record lows this week.

Even for Nigeria and Angola, typically Africa's largest oil exporters, weakening local currencies and rising fuel prices have hit government coffers due to capped gasoline pump prices and a lack of local oil refining.

"A return to $100+ in oil prices may convince the Fed to throw in the towel on hopes of monetary easing for now, and a potentially magnified impact across EM currencies of geopolitical risk would fuel a substantial rotation back to the dollar," said Pesole.

Source: Yahoo

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Thomas

Economic

Forex

The People's Bank of China (PBoC) and Potential Fiscal Stimulus

On Monday, the People's Bank of China (PBoC) will set the one-year and five-year loan prime rates (LPR). Economists expect the PBoC to leave the one-year and five-year LPRs at 3.45% and 3.95%, respectively.

An unexpected cut to an LPR could influence buyer appetite for the Aussie dollar and riskier assets. Looser monetary policy conditions could drive demand. An improving demand environment would boost the Australian economy and the Aussie dollar.

China accounts for one-third of Australian exports, with 20% of the Australian workforce in trade-related jobs. Improving trade terms could influence job creation and wage growth. Upward trends in wage growth may fuel consumer spending and demand-driven inflation. The net effect could be a more hawkish RBA rate path to raise borrowing costs and reduce disposable income.

The Chinese economy is a consideration for the RBA. In the March press conference, RBA Governor Michele Bullock affirmed that the forecasts considered the effects of a weaker Chinese economy.

While economists expect the PBoC to leave the LPRs unchanged, the markets await a fiscal stimulus package from Beijing. A meaningful stimulus package from Beijing could have more impact on buyer demand for the Aussie dollar than further PBoC measures. Therefore, investors should also monitor stimulus chatter from Beijing.

US Economic Calendar: Chicago Fed National Activity Index

The Chicago Fed National Activity Index (CFNAI) will draw investor attention on Monday. The Index has 85 components, reflecting economic activity and inflationary pressures.

Economists forecast the CFNAI to increase from 0.05 to 0.09. Better-than-expected numbers would support expectations the US could avoid a recession. Moreover, an uptrend in the CFNAI may further reduce investor bets on multiple 2024 Fed rate cuts.

Recent US economic indicators, including inflation and retail sales, have sunk bets on a June Fed rate cut. The numbers also reduced expectations of a September Fed rate cut.

According to the CME FedWatch Tool, the probability of the Fed leaving interest rates at 5.5% in September stood at 35.5% (April 19). On April 12, the chances of the Fed holding interest rates at 5.50% was 23.5%.

Short-Term Forecast

Near-term AUD/USD trends will hinge on inflation numbers from Australia (Wed) and the US (Fri). Hotter-than-expected US inflation numbers could further reduce bets on a September Fed rate cut. However, higher-than-expected inflation numbers from Australia could reignite expectations of an RBA rate cut. An RBA rate hike would tilt monetary policy divergence toward the Aussie dollar.

AUD/USD Price Action

Daily Chart

AUD to USD Forecast: PBoC Rates and US Economic Data to Drive Sentiment_1

The AUD/USD hovered well below the 50-day and 200-day EMAs, sending bearish price signals.

An Aussie dollar break above the $0.64582 resistance level would support a move toward the $0.65 handle. A return to the $0.65 handle could give the bulls a run at the 50-day EMA.

The PBoC, Beijing, and the US economic calendar need investor consideration.

Conversely, an AUD/USD fall through the $0.64 handle would bring the $0.62713 support level into view.

Given a 14-period Daily RSI reading of 37.91, the AUD/USD may fall to the $0.63500 handle before entering oversold territory.

Source: FX Empire

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FOREX.com

Economic

Commodity

The inverse relationship between bond yields and US dollar with the gold price has broken down in 2024, meaning technicals and inflation expectations are arguably a more important driver right now in terms of its near-term trajectory. With the price action looking toppy and inflation concerns as elevated as they've been since October 2023, upside for bullion may be hard won in the near-term.

Gold is not behaving as you'd expect right now

Gold Rice Forecast: Sustainable Bull Markpets Need to Breathe Occasionally_1

Inflation hedge, technical breakout influencing performance

With traditional fundamental drivers breaking down, it suggests traders need to look elsewhere for clues as to what's driving the gold price right now. One look at the strong, positive relationship gold has had with US five and 10-year inflation breakevens over the past 20 days suggests it's role as an inflation hedge may be reasserting itself. Inflation breakevens measure the average inflation rate markets expect over a specific timeframe.

And while central bank buying, increased demand from China and Russia and heightened geopolitical tensions have contributed to gold's upward bias, you shouldn't discount the important role technical analysis looks to be playing right now.

As explained in a post earlier this month, gold is doing exactly what you'd expect after breaking cleanly though long-running horizontal resistance. While the longer-term trajectory still looks to be higher, in the near-term, the unconvincing price action last week suggests gold may need to move lower before it can extend its run higher. Every sustainable bull market needs to breathe, so a modest pullback should be regarded as a healthy development for bulls, should it occur.

Gold rally looks in need of a pullback

Gold Rice Forecast: Sustainable Bull Markpets Need to Breathe Occasionally_2

Risks to the short gold trade

Looking ahead, main risks to the trade would be an undeniable escalation in Middle Eastern tensions. On Friday, the Federal Reserve's preferred underlying inflation measure, the core personal consumption expenditure (PCE) deflator, is the most obvious known risk event this week. While a softer number would likely lead to a weaker US dollar and lower US bond yields, as discussed above, that traditionally bullish outcome may not lead to upside on this occasion. Instead, should the data print hotter-than-expected, the flow-through to inflation expectations may actually help to boost bullion's appeal.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Economic

Stocks

Robust earnings from Corporate America will pull the S&P 500 Index out of its latest morass, despite rising concerns about a significant jump in bond yields, according to Bloomberg’s latest Markets Live Pulse survey.

With reporting season kicking into high gear this week featuring results from Big Tech giants such as Microsoft Corp., Meta Platforms Inc. and Alphabet Inc., nearly two-thirds of 409 respondents said they expect earnings to give the US equity benchmark a boost. That’s the highest vote of confidence for corporate profits since the poll began asking the question in October 2022.

S&P 500 Will Get Its Mojo Back From Strong Earnings_1

“I’m fairly optimistic about this earnings season and I don’t expect there to be any horrors,” said Neil Birrell, chief investment officer at Premier Miton Investors. “The key thing is that the fundamentals of a company are what’s getting reflected in the share price rather than macro factors. Up until now, it was rates and inflation that had been driving asset prices.”

Rising geopolitical risk doesn’t seem to be a major fear, despite tensions escalating in the Middle East. One reason could be that historically, stocks have held up following similar stress events. An analysis by multi-asset strategists at HSBC Holdings Plc showed that over the last 25 years US equities have posted gains 70% of the time on average following significant geopolitical events.

Indeed, the S&P 500 has rallied since this conflict started on Oct. 7, so traders and investors seem to have absorbed that uncertainty — at least for now.

“If anything, the aftermath of such events presents a buying opportunity,” strategists led by Max Kettner wrote in a note. “Beyond geopolitics, fundamentals are still supportive, with growth expectations still moving higher.”

Regardless, companies are facing enormous pressure to deliver strong earnings this season. Without that, survey respondents expect US stocks to be trounced by soaring bond yields. Almost half consider yields on 10-year Treasuries climbing above 5% to be a major risk, bigger than rising oil prices or failing to deliver on artificial intelligence promises.

“When we remove the prop of accommodative monetary policy, that puts more of the burden on earnings than we think,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI.

The focus on earnings is well-timed for the S&P 500, which has struggled since setting a record on March 28 as the Federal Reserve signals it’s in no rush to cut interest rates after a series of hotter-than-expected inflation prints. The benchmark is trading at a two-month low and is down 5.5% from its all time high.

“The first quarter earnings season could give a nice support for US equities, especially with this selloff we've seen over the past month," said Nicole Inui, head of US and LatAm Equity Strategy at HSBC.

History indicates that a rally may be in store. Since 1999, the S&P 500 has risen 67% of the time between between the days JPMorgan Chase & Co. and Walmart Inc. report results, the unofficial beginning and end of earnings season, according to data compiled by Bloomberg.

S&P 500 Will Get Its Mojo Back From Strong Earnings_2

However, the size of the rally in any given reporting period depends on how much exposure investors already have to equities, Deutsche Bank AG strategists led by Parag Thatte said in a note to clients. Allocation is already high this time around, after the record-breaking advance in the first quarter. So Thatte’s team doesn’t expect big gains.

Results from US technology behemoths will take center stage this week, bringing the market’s focus to the frenzy surrounding AI.

The attention appears to be shifting away from AI poster child Nvidia Corp. after the stock’s whopping 54% leap this year. Half of the MLIV survey’s respondents said the best way to increase AI exposure is through secondary and tertiary plays, such as power grids that will benefit from AI’s massive energy demands. Meanwhile, less than a fifth of participants saw an opportunity in buying any dip in Nvidia shares. The stock lost 10% of its value on Friday.

The bottom line is the upcoming earnings reports from America’s corporate giants offer the US stock market an opportunity to flip the script after three straight losing weeks by the S&P 500, the longest streak since September. But the results have to warrant changing the recent narrative.

“The earnings season is being widely overlooked as the market focuses on rates and other uncertainties,” said Florian Ielpo, the head of macro research at Lombard Odier Asset Management. “The start to the season has been strong.”

The MLIV Pulse survey was conducted among Bloomberg News readers on the terminal and online April 15-19 by Bloomberg’s Markets Live team, which also runs the MLIV blog.

Source:Bloomberg

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Samantha Luan

Economic

Forex

Asian markets on Monday will be hoping to bounce back from one of the most bruising weeks this year, but that won't be easy given the hawkish tone of recent Fed comments, heightened Middle East tensions and deepening weakness in tech stocks.

Wall Street fell sharply on Friday with the S&P 500 sealing its longest losing streak since October 2022 and tech darling Nvidia's 10% plunge dragging down the Nasdaq, while demand for safe-haven Treasuries, gold and the Swiss franc rose.

While there was no escalation in the Iran-Israel conflagration over the weekend, investors are cautious.

The MSCI Asia ex-Japan equity index fell 3.7% last week to a two-month low. That was the biggest weekly decline since August, with rising U.S. bond yields, a strong dollar and wobbly global stock markets taking their toll. Fragile FX, Tech Swoon Cloud Sentiment_1

Fragile FX, Tech Swoon Cloud Sentiment_1

Investors are still digesting the IMF/World Bank Spring meetings and related conferences and events from last week, from which one of the clearest messages was how concerned officials are becoming with the strength of the dollar.

The United States, Japan and South Korea issued a joint statement on the issue, ECB rate-setter Robert Holzmann said the ECB probably won't cut rates this year as much as planned if the Fed doesn't move, and the IMF urged Asian central banks to focus on domestic inflation rather than following the Fed too closely.

Indonesia's central bank on Friday intervened in the FX market "more boldly to maintain market confidence" as the rupiah weakened, while India's rupee was lifted from a record low on Friday by likely intervention from the central bank.

South Korea's central bank chief, meanwhile, said the bank is ready to take steps to stabilize the exchange rate if needed.

Fragile FX, Tech Swoon Cloud Sentiment_2

Attention remains fixed on Asia's most liquid FX market and whether, with the dollar hovering at 34-year peaks near 155.00 yen, Japanese authorities will back up recent warnings against the yen's depreciation with intervention.

So far, it has been just talk from Tokyo.

Bank of Japan Governor Kazuo Ueda said in Washington on Friday that the central bank will "very likely" be raising interest rates if underlying inflation continued to go up.

The latest positioning data from U.S. futures markets showed hedge funds and speculators increased their aggregate net short yen position in the latest week to a new 17-year high.

Monday's economic calendar sees the release of Indonesian trade figures, while the People's Bank of China is expected to leave its one-year and five-year loan prime rates on hold at 3.45% and 3.95%, respectively.

Chinese markets will get their first chance to react to new measures announced on Friday aimed at promoting overseas investment in its technology sector.

Here are key developments that could provide more direction to markets on Monday:

- China interest rate decision

- Indonesia trade (March)

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Devin

Political

Palestinian-Israeli conflict

Iran and Israel are engaging in a dangerous "game of bluff" as the world braces for Israel's promised response to an Iranian missile and drone attack over the weekend which itself came after an Israeli strike against its Damascus embassy, analysts have told The National.

"We are in game of bluff in which it is in the interest of the two main players, Israel and Iran, to do the opposite of what they say and to say the opposite of what they do," said Bertrand Badie, a leading French analyst on the Middle East.

Both sides have recently attained previously unreached thresholds in their decade-long proxy war.

Israel's April 1 bombing of Iran's embassy in Syria, which killed seven people, was unprecedented because it occurred on embassy soil, viewed in diplomatic terms as the equivalent of sovereign territory.

Iran's retaliation on Saturday night is widely viewed as a face-saving exercise which was both escalatory and gave Tehran the opportunity to say it would not go further.

It was the first-ever attack on Israeli soil but Tehran also gave ample time to Israel and its allies to shoot down the hundreds of drones. The little that fell in Israel caused little physical damage and injured one child.

Israel's military has warned that it "will be met with a response" while its top diplomat Israel Katz has seized on signals of Western support to push ahead with a diplomatic offensive against Iran, calling for further sanctions.

"Iran seeks to demonstrate strength in a spectacular fashion while making sure they cause little damage likely to trigger a strong Israeli response," said Mr Badie, professor emeritus at Sciences Po University in Paris.

"Israel consistently decries Iran's attacks as life-threatening while also projecting invincibility. Meanwhile, the US says that Iran is serious but it would be even worse if the escalation continues."

It's a dangerous game of contradictions that creates uncertainty and allows both parties to interpret the situation in a reassuring manner, said Prof Badie.

"The situation in the West Bank and Gaza will largely dictate how the situation evolves," he said. Sources have also told The National that Iran is gearing up to counter an Israeli retaliation, possibly within its border.

More than to 34,800 people have died in the enclave in Israel's war of retaliation since the Hamas-led October 7 attacks that killed about 1,200 people.

Israel withdrew earlier this month from south Gaza for tactical reasons but has said that it is preparing a ground offensive on the southern city of Rafah, where 1.3 million people have found refuge from the fighting.

In parallel, the situation has steadily worsened in the occupied West Bank, where Israeli settlers protected by the army killed a teenager and injured dozens of Palestinians in a rampage on Sunday after the disappearance of an Israeli boy and the discovery of his body the following day. Israel has also increased targeted killings of Hezbollah and Hamas operatives in neighbouring Lebanon.

Israeli decision-makers may have decided that the response to the October 7 attacks represented a good pretext to dismantle Iran and its regional allies including Hezbollah and Hamas, but that is likely to cause never-ending escalation, warned Prof Badie.

"It is in Israel's interest to play the Iran card, for which there is minimal consensus, as long as it doesn't go too far in its strikes. On Gaza, Israel is officially alone, and we have seen rhetoric condemnation of the war from its US ally," he said.

Prof Badie said "careful interpretation" was needed of continuing geopolitical tensions between Iran and Israel.

US, UK, French and Jordanian assistance, in addition to reports of support from other Arab countries, in destroying Iranian drones on Saturday does not imply, as media reports have claimed, a strategic realignment in the region or a new air-defence alliance, he added.

"It is a defensive reaction," said Prof Badie. "The so-called Global South follows fluid diplomatic options that adapt to circumstances."