Outlook on Gold and Crude Oil Markets Next Week

Commodity

Summary:

Today (Friday, March 29) is Good Friday, a day commemorating the crucifixion of Jesus Christ. Several major investment markets worldwide are closed, resulting in no trading activity for gold, crude oil, and relatively subdued trading for other forex currency pairs. Here, we'll review the market performance for this week and provide an outlook for the next week.

Gold Market

Gold has seen a fourth consecutive week of gains despite facing upward pressure from the US Dollar Index and rising Treasury yields. The simultaneous rise under such circumstances is uncommon but not unprecedented, as witnessed in May 2023. This phenomenon might defy conventional market analysis logic, but it underscores the significance of market sentiment or fund dynamics alongside fundamental factors. Short-term market movements are driven by the ongoing battle between bulls and bears during critical moments, which is not solely dictated by fundamentals. With the bulls firmly in control, any attempt by the bears to enter the market necessitates continued upward pressure for bulls to solidify their gains, especially in the absence of clear resistance levels above due to historical highs. Thus, as long as short-term bearish sentiments persist, market dynamics are likely to continue their current pattern of consolidation and fluctuations.

The bullish outlook for gold this year remains evident for several reasons. Firstly, interest rate cuts are highly probable, and gold typically benefits during such easing cycles. Secondly, geopolitical tensions have reached historic levels this year, with conflicts such as the Russia-Ukraine (NATO) war and the Israel-Palestine (Middle East) conflict serving as major drivers of risk aversion. Lastly, global economic sluggishness prompts continued central bank purchases of gold.

Tonight, there will be a significant release of data, namely the PCE inflation data, which could potentially stir market sentiment once again. Regardless of bullish or bearish sentiments, it may trigger a significant market reaction. So what's the likelihood of the outcome? Personally, I lean towards expecting another uptick in inflation data. Given that all trading days for March have concluded, and energy prices have surged significantly, with crude oil hitting yearly highs (rising over 6% in March), it's highly probable that inflation will rise. Once inflation aligns with expectations and rises, gold prices are likely to undergo a certain degree of adjustment. However, the entire market is currently engulfed in bullish sentiment. Short-term bearish positions should tread cautiously, as the sentiment among buyers to support the market below remains strong. Historical turning points for any asset rarely occur abruptly; they are typically the result of gradual processes. While shorting the market is an option, it should be done cautiously with light positions and proper risk management regarding stop-loss and take-profit to avoid being caught in significant market fluctuations. If considering long positions, it's advisable to wait for the effects of this data to stabilize before participating.

Crude Oil Market

Similar to gold, crude oil prices have defied short-term fundamentals this week, witnessing an upward trend. Despite both the American Petroleum Institute (API) and the Energy Information Administration (EIA) reporting inventory builds exceeding expectations, along with the United Nations Security Council passing a ceasefire agreement for Israel and Palestine, and a significant rebound in the US dollar creating bearish sentiment, oil prices still managed to achieve a 3:1 ratio of gains to losses, resulting in a 2.5% increase for the week. The optimism stems from the belief among bullish investors that expectations of tight supply under the OPEC+ production cuts will continue to drive oil prices higher. This sentiment was further bolstered by positive indicators for the US economy, such as the fourth-quarter GDP and consumer confidence index, which pointed towards economic improvement and subsequently increased demand expectations.

While there are expectations for supply and demand improvements in the oil market, the actual supply-demand situation does not fully support the strong performance of crude oil, especially with weakness in the refined oil market. If the refined oil market fails to keep up with the pace of crude oil, the upward momentum of oil prices may lack a solid foundation, making it difficult to sustain strength. Investors need to manage their positions effectively and be vigilant against significant volatility that may arise from a cooling of sentiment. Next week's inventory data will be crucial, as further accumulation could prompt a reassessment of supply-demand tightening.

Technically, although the trend remains bullish, short-term corrections should not be underestimated. Overall, the long-term outlook is bullish, but short-term fluctuations lean towards bearish, with strong support still evident in the 80-80.5 range and the current focus gradually shifting upwards. Bears should avoid greed, while bulls should patiently wait for market conditions to stabilize before participating.

Risk Warnings and Disclaimers

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Warren Takunda

Central Bank

Economic

The Dollar has firmed after a key member of the U.S. Federal Reserve said recent U.S. inflation data prints have disappointed, further cooling market expectations for imminent interest rate cuts.

"It has been a good night for the dollar. One of the Fed's most influential voices, Christopher Waller, delivered a mildly hawkish speech," says Chris Turner, Head of FX Research at ING Bank.

The Pound to Dollar exchange rate is a quarter of a per cent lower on the day at 1.2610 after Federal Reserve FOMC member Christopher Waller said there was "no rush" to cut interest rates owing to recent disappointing inflation data.

Turner explained that the speech affirmed a market view that the Fed would be arriving late to the rate cut party.

"There is no rush to cut the policy rate" right now, Waller said in a speech at an Economic Club of New York gathering. Recent data "tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%."

He added, "it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data."

"The US dollar has seen slight support, especially after some hawkish Fed comments as markets await tomorrow's U.S. inflation data," says Hann-Ju Ho, an analyst at Lloyds Bank. Pound to Dollar Rate: "It Has Been a Good Night" for USD_1

Pound to Dollar Rate: "It Has Been a Good Night" for USD_1

Above: GBP/USD in March.

Friday sees the release of the Fed's favoured inflation gauge, PCE inflation, which could further bolster Waller's argument that interest rates must remain at current levels for longer.

The Dollar is 2024's best-performing currency owing to a significant reduction in expectations for interest rate cuts this year thanks to ongoing U.S. economic strength.

Waller says he expects inflation will ultimately fall, and it will become appropriate for the Fed "to begin reducing the target range for the federal funds rate this year."

He said it could take a few months of easing inflation data to gain that confidence, but until then, a strong economy gives the Fed space to take stock of how the economy is performing.

Although markets have lowered expectations for a June rate hike at the Fed, Steve Englander, an economist at Standard Chartered, says June is still live, and the first cut could even come in May.

He explains in a recent research note that Fed Chair Jerome Powell may oversee rate cuts even if there are dissenters on the Federal Open Market Committee (FOMC).

"12 June FOMC is the most likely date for a cut, but we see a slim chance that 1 May will be live," says Englander.

Up until now, the Powell-led Federal Reserve has been known for its cautious approach. It prefers unanimity over quick decisions from a divided FOMC.

"We now think Fed Chair Powell will accept dissents in order to push through timely cuts," says Englander.

This suggests that the Fed can proceed with rate cuts even if the likes of Waller and other hawks disagree, particularly if upcoming inflation numbers show a continued grind lower.

If this comes to pass, the pendulum will swing back towards U.S. Dollar weakness.

Source: Poundsterlinglive

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Ukadike Micheal

Economic

Forex

Consumer price growth in Tokyo moderated slightly in March, remaining comfortably above the central bank's inflation target, setting the stage for potential interest rate increases following the recent hike – the first since 2007. Excluding fresh food, prices rose by 2.4% in the capital, matching economists' estimates and indicating a stable inflationary environment.

Tokyo's inflation figures often foreshadow national trends, with attention now turning to the upcoming release of Japan's nationwide consumer inflation data on April 19. Despite the deceleration in consumer price growth, market focus remains on the possibility of further rate hikes by the Bank of Japan (BOJ). A majority of economists surveyed anticipate another rate increase by October, underscoring the ongoing monetary policy deliberations.

Of particular interest is the deeper measure of inflation trends, which strips out volatile elements like fresh food and energy prices. This measure slowed to 2.9%, aligning with market expectations. Additionally, service price gains moderated to 2% from the previous month, a trend closely monitored by BOJ Governor Kazuo Ueda.

Factors influencing the case for additional rate hikes include the weakening yen, which hit a 34-year low against the dollar. A weaker yen contributes to inflationary pressures by increasing import prices, prompting policymakers to consider preemptive measures to support the currency. The BOJ's recent decision to lift the policy rate reflects concerns about the potential need for rapid rate increases if delayed action exacerbates inflationary pressures.

BOJ Board Member Naoki Tamura has signaled a gradual approach to interest rate hikes as the central bank pursues policy normalization. Emphasizing the compatibility of maintaining accommodative policy settings with further rate hikes, Tamura's remarks underscore the nuanced approach to monetary policy adjustments.

Looking ahead, the BOJ's upcoming meeting in April will provide insights into the central bank's updated price outlook. Despite projections for moderate inflation, factors such as energy price fluctuations and policy changes, like the end of fuel subsidies, could influence inflation dynamics in the near term.

In addition to inflation considerations, economic indicators such as retail sales and industrial output offer valuable insights into Japan's economic health. While retail sales registered a solid 4.6% gain in February, industrial output contracted by 0.1%, signaling potential challenges in the manufacturing sector.

Meanwhile, labor market dynamics remain pivotal in shaping consumer sentiment and spending patterns. Although the unemployment rate inched up to 2.6% in February, the job-to-applicants ratio moderated slightly. Nonetheless, shortages of permanent employees persist, underscoring the persistent labor market tightness.

Wage gains, driven by labor shortages, offer a potential catalyst for boosting consumer spending. Japan's largest labor union group, Rengo, announced significant wage increases for the coming fiscal year, surpassing analysts' expectations. However, the extent of this wage momentum hinges on broader participation from small and medium-sized enterprises (SMEs), which employ the majority of Japan's workforce.

Tokyo's moderated inflation, coupled with ongoing wage negotiations and economic indicators, provides a nuanced picture of Japan's economic landscape. While the BOJ remains vigilant in its monetary policy stance, market participants await further developments in inflation, labor market dynamics, and policy adjustments to navigate the evolving economic environment.

Source: Bloomberg

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Kevin Du

Economic

South Korea’s factory activity last month bounced back in three months thanks to a strong recovery in the country’s semiconductor sector but consumption dwindled with people tightening their belts amid stubborn inflation, which could complicate the recovery of Asia’s No. 4 economy.

According to data released on Friday by Statistics Korea, the seasonally adjusted mining and manufacturing output in February rose 3.1% from the prior month, marking the first gain since November last year when it added 1.6%.

It fell 0.4% and 1.5%, respectively, in December and January.

The rebound was driven by a 3.4% increase in manufacturing output, largely propelled by an increase in microchip and machinery production, Korea’s mainstay export items.

In line with that, the country’s facility investment last month jumped 10.3% from the previous month, the biggest gain since November 2014 when it climbed 12.7%.

Thanks to the strong recovery in factory activity and facility investment, Korea’s overall industrial production extended its growth streak for the fourth month in a row in February with a 1.3% on-month gain.

Korea’s Factory Output Rebounds in Feb on Chip Recovery_1

WEAK RETAIL SALES While the country’s factory activity returned to the recovery track, consumption showed signs of cooling on still high inflation. Retail sales, a gauge of private consumption, contracted 3.1% over the same period, the largest drop since July last year when it retreated 3.1%. Sales of non-durable goods like food and groceries, as well as cosmetics, fell 4.8% on-month in February, and those of durable goods like home appliances dropped 3.2%. Sales of semi-durables like clothing added 2.4%.

The country’s headline inflation rebounded in February from a six-month low on higher prices of oil and agricultural products, with a 3.1% rise on-year despite the government’s efforts to combat inflation. “The overall indicator looked healthy but consumption lagged,” said Gong Mi-sook, deputy director general for Short-Term Economic Statistics at Statistics Korea.

With subdued consumption, the country’s economic growth could hit a snag despite the strong global demand for Korea’s semiconductors, the main growth driver of the export-reliant country.

But Gong was more optimistic about the country’s economic recovery, citing a recuperation in the indicators of the country’s current and future economic activities last month.

The cyclical component of the composite coincident index, which measures current economic activity, climbed 0.2 point from the previous month to 99.9 in February, indicating resilience in the economy.

The cyclical component of the composite leading indicator, which predicts the turning point in the business cycle, also added 0.1 point to 100.4, suggesting potential improvement to come.

Source: The Korea Economic Daily

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Ukadike Micheal

Economic

Stocks

Global stock markets have surged to their strongest first-quarter performance in five years, driven by optimism surrounding the US economy's potential soft landing and the excitement surrounding advancements in artificial intelligence (AI). The MSCI index of worldwide stocks has witnessed a remarkable 7.7% gain this year, marking the most significant surge since 2019. Stocks have outperformed bonds by the largest margin in any quarter since 2020, despite traders scaling back their expectations for rapid interest rate cuts.

Contributing significantly to this surge is the remarkable performance of the S&P 500, which achieved a record high closing on 22 occasions throughout the quarter. The AI boom has notably fueled these market gains, with chip designer Nvidia alone adding over $1 trillion in market value during the initial three months of the year. This surge amounts to roughly one-fifth of the total gain observed across global stock markets during the same period.

In the United States, resilient domestic growth indicators have bolstered stocks, despite unexpected inflation spikes in January and February. These inflation surprises prompted investors to revise down their expectations of as many as six interest rate cuts for the year. Currently, the market aligns more closely with the US Federal Reserve's projection of three 0.25 percentage point cuts from the current benchmark rate, which stands at a 23-year high.

What began as a tech-centric rally on Wall Street gradually broadened throughout the quarter, with equities in Europe and Japan starting to outpace those in the US. Major European indices, including the FTSE 100, Germany’s Dax, France’s CAC 40, and Spain’s Ibex 35, outperformed the S&P 500 in March. This shift indicates a broader market rally beyond the tech sector, which initially led the charge.

Leading among major markets is Japan, where growing economic confidence and rising prices for domestic chip-related stocks have propelled a notable 16.2% rally in the Topix index in 2024, bringing it close to its all-time high set in 1989. Despite these gains, investors remain cautious, mindful of the potential risks associated with a prolonged market rally.

Despite these positive developments, investors are cognizant of the risks associated with surging asset prices and a growing appetite for risk. The comparison to the dotcom bubble of 2000 serves as a cautionary tale, prompting market watchers to tread carefully amid the current exuberance. However, historical analysis suggests that the current bull market, which commenced in 2013, may still have room to run until 2029 to 2033, based on previous market rally durations.

Nevertheless, uncertainties linger, particularly regarding the potential impact of a sudden increase in US unemployment or a recession, which could derail the current market rally. The Federal Reserve's delicate balancing act between addressing labor market weaknesses and managing inflation remains a critical factor in shaping market sentiment moving forward.

The remarkable surge in global stock markets, driven by optimism surrounding the US economy and advancements in AI, underscores the resilience of financial markets amid evolving economic dynamics. However, investors must remain vigilant, mindful of potential risks and uncertainties that could pose challenges to the sustainability of the current market rally.

Source: Financial Times

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Ukadike Micheal

Economic

Forex

French inflation dipped below 3% for the first time in 2 1/2 years, indicating a trend that may prompt the European Central Bank to consider interest rate cuts. In March, consumer prices in France rose by 2.4%, falling short of economists' expectations of 2.8%, as reported by the statistics agency Insee. This slowdown, particularly in services inflation which dropped to 3% from 3.2% in February, suggests a broader trend towards easing price pressures.

Meanwhile, upcoming data for the euro area is anticipated to reveal a slight deceleration in inflation to 2.5% from 2.6% in February, with Italy expected to show a rate of 1.5%. With inflation nearing the ECB's 2% target, President Christine Lagarde has hinted at a potential interest-rate cut in June, a sentiment shared by economists and markets alike. Investors are already pricing in a reduction in the deposit rate to 3.75% from 4% at the institution’s June 6 meeting.

However, there remains caution among some policymakers regarding wage increases potentially fueling further price pressures, especially in the services sector. The slowdown in services inflation to 3% in March from 3.2% in February, along with a cooling in price increases for manufactured goods to 0.1% from 0.4%, underscores the nuanced nature of inflationary dynamics in the French economy.

From a fiscal perspective, the recent disinflation poses challenges for the French government. Slower price increases have led to a reduction in tax receipts, contributing to a widening of the budget deficit. Yet, officials are also hopeful that easing cost pressures will stimulate economic activity, potentially steering the economy out of stagnation.

In a separate report, Insee revealed that consumer spending in February remained stagnant, failing to grow from the previous month's decline of 0.6%, contrary to economists' expectations of a 0.2% increase.

From a technical viewpoint, the easing of inflation in France, coupled with stagnant consumer spending, indicates a potential slowdown in economic activity. This may prompt investors to reassess their outlook for the French economy, potentially leading to adjustments in investment strategies and asset allocations. Additionally, the prospect of ECB interest rate cuts could impact currency markets, with the euro potentially facing downward pressure against other major currencies.

The easing of inflation in France signals a notable shift in economic dynamics, with implications for both monetary policy and market sentiment. While the prospect of interest rate cuts may offer some support, challenges remain in navigating the delicate balance between inflation management and stimulating economic growth. As investors await further developments, the coming months are poised to be critical in shaping the trajectory of the French economy and its impact on global markets.

Source: Bloomberg

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Warren Takunda

Central Bank

Economic

Global bond and equity markets are ending the first quarter on a high note, with investors poised for more wild swings ahead after months of the mood lurching between optimism and pessimism about prospective rate cuts from major central banks.

MSCI's global share index (.MIWO00000PUS), opens new tab, which smashed through record highs in March, is up 10% since mid January after traders dropped earlier bets for as many as seven U.S. rate cuts in 2024 but then chose to celebrate the idea of cuts starting in June.

Switzerland last week kicked off an easing cycle among big, developed economies. And while traders almost fully expect the Federal Reserve to lower U.S. borrowing costs from 23-year highs in June and the European Central Bank to cut its deposit rate from 4% then too, caution could follow.

Dennis Jose, head of equity strategy at Exane BNP Paribas, said central banks could lower borrowing costs in the summer but might then pause if economic growth improves -- raising the odds of further labour market tightness, wage growth and inflation.

"I think it may be better to travel than arrive at that first rate cut," he said. Markets in Q1: The Wild Ride Towards Rate Cuts_1

EVERYTHING RALLY

A global government bond index (.MERW0G1), opens new tab posted its first monthly gain of 2024 in March as the quarter's rally became a buy-everything frenzy, sending Japanese stocks past their 1989 bubble-era high and powering stunning gains for emerging market debt.

Wall Street's S&P 500 index (.SPX), opens new tab and Europe's STOXX 600 index (.STOXX), opens new tab are near record levels.

The S&P is up more than 10% so far this year, and the blue-chip Dow has added nearly 6% and is now less than 1% away from breaching the 40,000 level for the first time. While the tech-heavy Nasdaq climbed more than 9% from January through March.

Of major markets, only China was left out of the party as its once-roaring industrial growth engine continued to sputter.

But it was really those high-yielding emerging market international bonds that enjoyed some stellar rises - as idiosyncratic reasons for optimism were magnified by U.S. rate cut hopes.

Argentina's international bonds returned more than 25% in the first quarter, fired up by hopes over the radical reform agenda of chainsaw-wielding new President Javier Milei. Pakistan matched those gains when a new government emerged from delayed, inconclusive elections, now setting out to secure a fresh multi-billion IMF deal. Returns for embattled Ukraine also surpassed 25% while Egyptian debt benefited from capturing billions of dollars from Abu Dhabi and a new IMF deal.

"High-yield EM sovereigns have strongly outperformed since 4Q23, buoyed risk-seeking from Fed pivot, easing of external financing conditions, and IMF and GCC financing support has been on the rise as China’s financing have stabilized," said Citi strategist Johann Chua. Markets in Q1: The Wild Ride Towards Rate Cuts_2

Markets in Q1: The Wild Ride Towards Rate Cuts_2

In commodity markets, a supply shortage has pushed cocoa futures to record highs, and in currencies the paring back of Fed rate cut bets has left the dollar sailing high again.

The dollar index, which measures the greenback's value against other major currencies, ends the quarter up almost 3% . Its strength has created more pain for both major and developing economies, with markets alert to Japanese intervention to bolster a yen trading near 34-year lows .

MIXED SIGNALS

With investors now banking on a so-called "no landing" scenario of rate cuts without recessions, some analysts warned about the fallout from conflicting economic signals.

"This is a weird (economic) cycle where nothing is quite what it seems and you've got all these conflicting signals right now," said Andrew Pease, global head of investment strategy at Russell Investments.

"This is not the sort of environment where you want to sit back and buy in to the prevailing optimism."

So, even as markets bet on rate cuts, purchasing managers' surveys show U.S, opens new tab. and euro zone business activity picking up.

Brent crude oil is up 13% over the quarter, after the International Monetary Fund raised its global growth forecast in January and the International Energy Agency hiked its oil demand outlook in March.

Zurich Insurance Group's chief market strategist Guy Miller said that while markets embraced the idea of better economic growth supporting companies' earnings, recession risks should not be forgotten.

"There is still a risk of recession in the U.S. and that shouldn't be underestimated. And therefore as an investor, you have be clear on what is driving markets and what, if any, risks are being priced in."

A Deutsche Bank survey of 250 investors this month found that almost half expected no U.S. recession and inflation to still be above the Fed's average 2% goal by end-2024.

More than half of those investors surveyed believed the S&P 500, which influences the direction of stocks worldwide, was more likely to fall by 10% than to rise by that amount.

"It would be a very different situation (to now) if inflation surprises to the upside and rate cuts have once again to be pushed further and further out. Financial markets would suffer," Zurich's Miller said.