With Iran-Israel Conflict Not Escalating, Gold Has Retreated After Surging, Is the Rally Over?

Winkelmann

Commodity

Political

Palestinian-Israeli conflict

Economic

Summary:

Iran launched an attack on Israel, and gold took the opportunity to surge and then pulled back, which may trigger more corrections in the short term. However, in a year when the Fed may turn to rate cuts, the support for long-term bullishness for gold remains, so there will be better buying opportunities ahead.

Since March this year, commodities have rallied strongly, especially gold. Under the combined influence of the Fed's rate cut expectations, large-scale central bank buying gold, and geopolitical turmoil, gold prices soared wildly, which refreshed record highs constantly and attracted the attention of countless investors almost every day. On Friday, rumors of an Iranian attack on Israel pushed gold prices up to $2,430. However, gold prices soon plunged and experienced a sharp correction that curbed gold's excessive rally.

Iranian-Israeli conflict has not escalated

On April 14, local time, in retaliation for Israel's attack on the Iranian embassy in Syria, Iran launched a large-scale attack on Israel through missiles and drones, an incident that could lead to the risk of escalation of the conflict in the Middle East. However, as the G7 group, the UN, and other parties called for "restraint to avoid escalation of the conflict", the panic in the market eased quickly.

With Iran-Israel Conflict Not Escalating, Gold Has Retreated After Surging, Is the Rally Over?_1

We can learn that the Israeli side has been put on high alert because the American side disclosed intelligence in advance about a possible Iranian attack on Israel. As a result, Iran's attack did not cause substantial harm to Israel's land and personnel. According to the statements of the Iranian side, Iran's strikes were quick, accurate, and short-lived. The objectives of the operation were to target only the Israeli air force, intelligence agencies, and military bases, and to refrain from attacking Israel's economy and infrastructure. Apparently, Iran has only resorted to a lesser level of retaliation. Subsequently, there was no unanimous agreement within Israel on an immediate retaliatory attack against Iran, suggesting that both sides exercised restraint and did not want to further escalate tensions. Actually, Iran's retaliation is to gain respect. In any case, they will face condemnation and further sanctions from Europe and the US.

Gold prices may not be able to gain more upward momentum until the situation in the Middle East escalates further. On the contrary, the easing of the conflict between Iran and Israel indicates that "the bullish factor has disappeared". Therefore, the bulls in the gold market who made profits in the early stage could pull up the price first and then take profits. This may have been confirmed by the sharp oscillations in gold prices before the market closed on Friday.

As gold retreated after the surge, has the rally ended?

Gold has been surging strongly recently. Even if gold has been overbought on daily, weekly, and monthly charts, there is almost no doubt that gold prices will continue to rise as the bears are defeated again and again. However, the market does not dare to be bearish until there is a real plummet.

Until last Friday, gold staged a thrilling scramble between bulls and bears. After surging to 2431, gold prices plunged by nearly $90. On the daily and weekly charts, a technical bearish signal for gold occurred, which also seems to indicate the possibility of a short-term peak in gold prices. At the very least, the market has reason to believe that gold prices are going to correct.

With Iran-Israel Conflict Not Escalating, Gold Has Retreated After Surging, Is the Rally Over?_2

However, this does not mean that the rally in gold prices is over. It should be noted that gold's rally in this round began with the rise in expectations of a Fed rate cut. However, as US inflation strengthened again and rate cut expectations continued to cool, the dollar and US Treasury yields rose in tandem. At the moment, the rally of the gold has detached itself from fundamentals, and even the logic of traditional analysis has temporarily failed.

Strictly speaking, the logical essence of this round of gold bull market is because of inflation, which is a belated inflationary correction. Over the past decade, the Fed has implemented an unprecedented large-scale monetary easing program, with dollars being printed much faster than gold can be produced. The rise in gold in US dollars is essentially a depreciation of the US dollar relative to gold, and it is a one-time depreciation. According to several analyses, although gold prices continue to hit record highs in nominal terms, they are still some way from the all-time high of US$3,355 per ounce (adjusted for inflation) set in 1980.

The long-term prospect of gold is bullish

In addition to inflation, there are still many factors driving gold's rally, and the long-term outlook for gold has not changed.

First, the next step for the Fed is to cut rates, but the timing and pace remains uncertain. Also, the global economy is facing uncertainty. Germany, one of Europe's leading countries, is already showing signs of recession earlier. A rate cut and a recession are likely to occur at the same time, which is a positive support for gold.

Second, geopolitical tensions have become the norm. The Russia-Ukraine war has been going on for more than 2 years, but there is still no sign of a ceasefire. As European and American aid to Ukraine decreases, the pressure on Ukraine increases. Also, the situation in the Middle East is more complex, and the number of countries involved in it is increasing. Besides, other potential geopolitical conflict risks should not be overlooked, especially the uncertainty of US-China relations during the US election year. The trade war between China and the US broke out in 2018, and the competition has intensified since then. Geopolitics, including the situation in the Taiwan Strait and the South China Sea issue, have become occasions for Sino-US games. Once Trump returns to office, he may put the pursuit of a unilateralist policy in America on priority. The world is already full of strife.

In addition, currency credit risks are becoming more and more severe. With the so-called unlimited financial expansion of the US, the US has used the weapon of the dollar and imposed international sanctions frequently. Currently, the dollar is experiencing an unprecedented credit crisis. In addition to the US dollar, emerging market countries such as Turkey and Argentina are experiencing severe inflation, with many countries' currencies depreciating severely and their domestic economies facing huge difficulties. Therefore, the shrinkage of the value of the currency can be imagined. As a result, gold become a good choice for asset diversification.

With Iran-Israel Conflict Not Escalating, Gold Has Retreated After Surging, Is the Rally Over?_3

Overall, the future trend for gold will remain positive. The correction in gold will not be long, and on the contrary, it will provide investors with a very favorable buying chance.

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

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Samantha Luan

Economic

The world’s second-largest economy started the year on solid footing, as China’s factories revved up. Analysts warn that growth will be tough to maintain without broader improvement.

A deluge of official data due Tuesday will provide a reality check on whether China’s economy has turned a corner, after a protracted post-pandemic slump. Gross domestic product likely rose 4.8% in the first quarter from a year earlier, according to a Bloomberg survey, bolstering confidence the government could hit its annual goal of about 5%.

Recent bright spots in trade and manufacturing have prompted economists at banks including Goldman Sachs Group Inc. to boost their outlook for 2024. But with exports unexpectedly down in March, and overseas demand largely driving new orders, policymakers still badly need to get people spending at home, according to experts.

“It’s premature to call a sustainable recovery,” said Larry Hu, chief China economist at Macquarie Group Ltd.

Here are five key indicators analysts are watching to track whether China’s first quarter bounce can be sustained: Five Things China Economists Are Watching to See If Rebound is Real_1

Five Things China Economists Are Watching to See If Rebound is Real_1

You’d be hard-pressed to find an economist who doesn’t cite this as a central data point. It measures the total value of output from factories, mines and utilities — in other words, a massive swathe of activity. It rose in the first two months of the year at the fastest pace in two years and analysts forecast a 6% bump in March from the prior year.

A complementary indicator is power production, which tends to be correlated with industrial data, since the sector commands the most power usage, according to Hu. “Economists look for other numbers to confirm or re-check government data on economic growth,” he said.

Power production has been rebounding since China reopened from Covid-related restrictions more than a year ago. Slumping coal prices have made plants more willing to produce and power consumption has improved in recent months. Five Things China Economists Are Watching to See If Rebound is Real_2

Five Things China Economists Are Watching to See If Rebound is Real_2

The stabilization of the property market, where Chinese households have put vast stores of wealth, is central to the nation’s economic recovery: Such a move would boost sentiment, encourage consumer spending and unleash more investment.

That milestone appears far off. Housing sales plunged 33% by value in the January-February period from a year ago, the most since May 2022, and will likely contract again in March. New home sales are watched as a leading indicator for sentiment, investment and prices, said Haibin Zhu, chief China economist at JPMorgan Chase & Co.

“New home sales are still very weak, supporting our view of a third consecutive year of housing activity contraction,” he added. Property investment contraction is also seen worsening in March, despite authorities relaxing rules on buying homes to encourage sales. Five Things China Economists Are Watching to See If Rebound is Real_3

Five Things China Economists Are Watching to See If Rebound is Real_3

China’s economy has been in a deflationary funk since last year, with weak wage growth and prices. Last month’s decline in producer prices — a foreshadow of goods yet to hit shelves — indicated more deflationary pressure ahead. Consumer prices are also hovering precariously close to the negative threshold.

That’s why nominal GDP is important, according to Robin Xing, chief China economist at Morgan Stanley. That figure doesn’t adjust for price changes, so it would show the impact of deflation. It also has a higher correlation with corporate profits and revenue growth, he added.

The nominal rate is also used to calculate China’s GDP deflator, the widest measure of prices across the economy. Three quarters of declines last year marked the longest slide since 1999, underscoring the divergence of China’s economy with its biggest rival the US, where hot inflation is proving hard to beat.

Five Things China Economists Are Watching to See If Rebound is Real_4

Even if manufacturing looks solid, there’s a distinct lack of confidence in borrowing. New bank loans rose at the slowest pace on record in March suggesting companies and households aren’t buying into the recovery story just yet. Meanwhile, a broad measure of credit expanded at the slowest pace ever, in data going back to 2017.

“The lackluster credit impulse hints at lingering drags on activity,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “A creditless recovery cycle will be difficult to sustain.” Five Things China Economists Are Watching to See If Rebound is Real_5

Five Things China Economists Are Watching to See If Rebound is Real_5

China has another entrenched problem: A weak labor market. The unemployment rate has ticked up in recent months, and many younger workers are still struggling. There are also recent reports of wage freezes and layoffs in some parts of the country. Wages offered to new employees rose in the first quarter after declining at the end of 2023 by the most on record, offering a glimmer of hope for workers.

Higher wages would signal reflation and that “corporates are hiring and investing and the job market is becoming tighter,” said Morgan Stanley’s Xing. That would be “a good sign that China can break out of its deflation loop.”

Source：Bloomberg

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

Risk Warnings and Disclaimers

Add to Favorites

Cohen

Economic

Central Bank

Data on Tuesday is forecast to show gross domestic product (GDP) grew 4.6% in January-March from a year earlier, slowing from 5.2% in the previous three months and hitting the weakest since the first quarter of 2023, according to a Reuters poll.

The world's second-largest economy has struggled to mount a strong and sustainable a post-COVID bounce, burdened by a protracted property downturn, mounting local government debts and weak private-sector spending.

The government has set a target of around 5% for this year, which has been described by most analysts as ambitious, partly because last year's growth rate of 5.2% was likely flattered by a comparison with a COVID-hit 2022.

The economy was off to a solid start this year, fanning optimism among some analysts for an improved 2024 outcome, but March data on exports, consumer inflation and bank lending showed that momentum could falter again and policymakers may need to launch more stimulus to spur demand.

"I think Q1 GDP growth could be slightly stronger than expected - it may be close to 5%," said Zong Liang, chief of research at state-owned Bank of China.

"The growth target is achievable as we still have more policy space.”

On a quarterly basis, the economy is forecast to expand 1.4% in the first quarter, quickening from 1.0% in October-December, the poll showed.

China's Q1 GDP Growth Likely to Slow, More Stimulus on the Cards_1

GDP data is due on Tuesday at 0200 GMT. Separate data on March activity is expected to show both industrial output and retail sales slowing.

For 2024, the economy is expected to grow at a subdued 4.6% pace year-on-year, the poll showed, falling short of the official target of around 5.0%.

Last week, Fitch cut its outlook on China's sovereign credit rating to negative, citing risks to public finances as Beijing channels more spending towards infrastructure and high-tech manufacturing, amid a shift away from the property sector.

The government is drawing on infrastructure work - a well-used playbook- to help lift the economy as consumers are wary of spending and businesses lack confidence to expand.

China has set the 2024 quota for local government special bond issuance at 3.9 trillion yuan ($538.79 billion), up from 3.8 trillion yuan last year. Beijing also plans to issue 1 trillion yuan in special ultra-long term treasury bonds to support some key sectors.

The People's Bank of China (PBOC) has pledged to step up policy support for the economy this year and promote a rebound in prices.

Analysts polled by Reuters expected the central bank to cut the banks' reserve requirement ratios (RRR) by 25 basis points (bps) in the third quarter, following a 50-basis point cut earlier this year, which was the biggest in two years.

The PBOC might include the buying and selling of treasury bonds in its policy tool reserve in future, Financial News - a publication backed by the central bank - quoted experts as saying last week.

Source: Reuters

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

Risk Warnings and Disclaimers

Add to Favorites

Ukadike Micheal

Economic

Commodity

Global markets demonstrated resilience as oil prices experienced a decline in response to the recent geopolitical tensions involving Iran and Israel. Traders showed confidence that the situation in the Middle East would not escalate further, leading to a positive outlook in European stocks and US equity index futures.

The drop in oil prices was driven by speculation that the conflict would remain contained, especially after Iran signaled that the matter might be considered concluded. Additionally, reports suggesting that the US would not support an Israeli counterattack contributed to the market's optimism. However, despite the positive sentiment in equities, Treasuries witnessed a marginal decline following a decrease in yields in the previous session.

Market analysts underscored the cautious approach adopted by investors amidst the lingering uncertainty surrounding the potential escalation of the conflict in the Middle East. The recent events injected fresh volatility into markets that were already grappling with concerns over inflationary pressures and the prospects of prolonged periods of higher interest rates. Analysts warned of the possibility of oil prices surpassing the $100 mark per barrel if the conflict were to intensify, anticipating a flight to safe-haven assets such as Treasuries, gold, and the dollar, which could lead to further downturns in the stock market.

As market attention returned to Wall Street's earnings season, investors closely monitored corporate reports for insights into the economic ramifications of recent geopolitical developments. The earnings season commenced with underwhelming numbers for major banks and continued with reports from significant financial institutions such as Goldman Sachs, Schwab, and M&T Bank.

Moreover, the week ahead featured a plethora of significant economic data releases, including Chinese growth figures and inflation readings from Japan, the Eurozone, and the UK. Additionally, the International Monetary Fund and World Bank spring meetings, scheduled in Washington, heightened the market's focus on global economic trends and policy decisions.

In summary, while global markets demonstrated stability following recent geopolitical tensions, uncertainty persisted regarding the potential escalation of conflicts in the Middle East. Investors remained cautious, closely monitoring economic data releases, corporate earnings reports, and international meetings for insights into market trends and potential investment opportunities.

Source: Bloomberg

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

Risk Warnings and Disclaimers

Add to Favorites

Ukadike Micheal

Economic

Stocks

Chinese equities outperformed the rest of Asia on Monday despite escalating tensions in the Middle East following the Iranian strike on Israel. The CSI 300 index surged by 1.7%, driven by positive sentiment stemming from a policy document released by China's cabinet. This document outlined plans to bolster the "high-quality development of capital markets" and emphasized measures aimed at increasing dividend yield. Such initiatives are significant as they signal the government's commitment to fostering a conducive environment for investment and economic growth.

The strength exhibited by Chinese equities in the face of regional turmoil underscores the resilience of the country's capital markets. China's proactive approach to regulatory reforms and market development has instilled confidence among investors, contributing to the robust performance of its stock market. Moreover, the government's emphasis on increasing dividend yields reflects a broader strategy to attract both domestic and international investors seeking stable returns amidst global uncertainties.

In contrast, other Asian markets experienced declines, with the Hang Seng index dropping by 0.7% and indices like Topix, Kospi, and Nifty 50 also registering negative movements. This divergence in market performance highlights the varying degrees of sensitivity to geopolitical events across the region. While Chinese equities benefited from positive domestic factors, other markets were influenced more significantly by external geopolitical factors.

The depreciation of the Japanese yen against the dollar to its lowest level in 34 years further accentuates the impact of geopolitical tensions on currency markets. The yen's decline reflects investor risk aversion and the flight to safety amid heightened uncertainty in the Middle East. Investors often seek refuge in currencies like the dollar during periods of geopolitical instability, leading to appreciations in its value against other currencies.

From a technical standpoint, the resilience of Chinese equities underscores the underlying strength of the country's economic fundamentals and regulatory framework. China's continued focus on market reforms, innovation, and sustainable growth strategies positions it favorably amidst global uncertainties. Additionally, the government's proactive measures to support capital markets bode well for investor confidence and long-term economic stability.

Looking ahead, market participants will closely monitor developments in the Middle East and their potential implications for global markets. Any escalation in tensions could trigger heightened volatility across asset classes, impacting investor sentiment and market dynamics. Amidst these uncertainties, investors will need to adopt a cautious and adaptable approach to navigate the evolving geopolitical landscape.

While Chinese equities displayed resilience and outperformed other Asian markets on Monday, the broader regional context characterized by escalating tensions in the Middle East underscores the interconnectedness of global markets. As geopolitical risks persist, investors will continue to monitor developments closely and adjust their strategies accordingly to mitigate potential risks and capitalize on emerging opportunities.

Source: Financial Times

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

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Commodity

The restrictions on key industrial metals — aimed at curbing President Vladimir Putin’s ability to fund his war machine — are unlikely to stop Russian sales but inject significant uncertainty into commodities markets that have already been reshaped in the aftermath of Russia’s invasion of Ukraine.

Aluminum jumped as much as 9.4%, the most since the current form of the contract was launched in 1987, while nickel rose as much as 8.8%, although prices later pared the advance.

The immediate price action was fueled by “worries that the sanctions will reduce Russian flows to Western markets,” said Jia Zheng, head of trading and research at Shanghai Dongwu Jiuying Investment Management Co. “Any stimulation will be amplified amid an existing bullish backdrop.”

Russia is an important metals producer, accounting for 6% of global nickel supply, 5% of aluminum and 4% of copper. The fresh restrictions bar new Russian supplies of all three to the LME — where global benchmark prices are set — as well as to the Chicago Mercantile Exchange. The metals had until now escaped the kind of direct curbs that have shaken up supply chains from natural gas to crude oil and coal.

Metals traders are hardened to wild swings and long weekends after a period marked by a nickel short squeeze that almost destroyed the LME in March 2022, and sanctions on United Co Rusal International PJSC that caused havoc in 2018.

And some traders and executives argued that new restrictions are ultimately unlikely to have as dramatic an impact as those two events.

There are concerns over the prospect of a flood of old Russian metal — which is still permitted — getting dumped onto the LME, and restrictions only directly affect deliveries to the exchange, rather than the much larger quantity of metal that’s bought, sold and shipped without ever entering an LME warehouse.

“The measures are not meaningfully targeting physical trade of units outside the LME warehouse system, which should moderate the scale of the price impact,” Citigroup Inc. analysts wrote in an emailed note.

Russia’s two metal giants, Rusal and MMC Norilsk Nickel PJSC, are also much less entangled in the western financial system than they were before the war, and the industry has spent the past two years preparing for the prospect of sanctions.

The LME considered banning Russian metal in 2022 and decided against it, arguing that it was still being consumed in the physical market and it wasn’t the exchange’s place to act over and above the requirements of sanctions.

The LME on Saturday confirmed that “old” Russian metal can continue to be delivered, though the exchange said it would require evidence that the metal was not in breach of sanctions and would approve deliveries on a case-by-case basis.

The LME’s approach is effectively just enforcing the restrictions imposed by the US and UK on Friday.

But it is likely to reignite a debate over whether Russian metal should be banned altogether to protect the exchange’s role as the home of global benchmark prices — by continuing to allow Russian supplies, the likelihood is that the LME’s prices increasingly become the price of the older Russian metal.

The escalation of hostilities in the Middle East could also stoke volatility across metals, which have advanced this year on expectations for the US Federal Reserve to cut interest rates, and on signs of a recovery in global manufacturing. Aluminum’s surge on Monday carried the metal to its highest since June 2022.

“Price-wise, the natural predilection will be higher,” said Alastair Munro, a broker at Marex Group based in London. “But against that, it will be interesting to see if any funds or traders have to reduce positioning because of the increasing volatility.”

Aluminum was up 4.9% at $2,616.50 a ton by 1:35 p.m. Shanghai time, while nickel was 3.9% higher.

Most observers agree on one likely outcome of the curbs: more Russian material flowing to China. Rusal got almost a quarter of its revenues from the Asian nation last year, up from 8% a year earlier, while sales to the Europe and US declined. Rusal’s shares in Hong Kong fell nearly 6% on Monday.

Russian metal already accounted for 91% of LME aluminum stockpiles at the end of March, 62% of copper and 36% of nickel. Traders are now expecting a wave of deliveries of Russian material that was being held outside the LME system, which could now be dumped onto the exchange as its owners worry about the prospect of future restrictions.

Estimates of the amount of Russian aluminum being held outside of the LME system range from a couple of hundred thousand tons to as much as one million tons.

In its notice on Saturday, the LME acknowledged the possibility that the uncertainty caused by the sanctions means “a relatively large supply” of Russian metal could flood onto the exchange.

Source: Bloomberg

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Economic

Forex

The Japanese Yen (JPY) maintains its heavily offered tone heading into the European session on Monday and is currently placed near a multi-decade low, around the 154.00 mark against its American counterpart. The Bank of Japan's (BoJ) dovish outlook, indicating that it is in no rush in terms of policy normalization, continues to undermine the JPY. Bulls, meanwhile, largely shrugged off the recent warnings by Japanese authorities that they will intervene in the market to prop up the domestic currency.

Furthermore, a weaker risk tone, amid the worsening Middle East crisis, also does little to provide any respite to the safe-haven JPY. The US Dollar (USD), on the other hand, is seen consolidating its recent strong gains to the highest level since November amid expectations that the Federal Reserve (Fed) will delay cutting interest rates. This suggests that the large difference in rates between the US and Japan will stay for some time, which, in turn, provides an additional boost to the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen continues losing ground, fresh multi-decade low and counting

The Bank of Japan's cautious approach, indicating that accommodative financial conditions will be maintained for an extended period, fails to assist the Japanese Yen in registering any meaningful recovery from a multi-decade low.

Japanese government officials continued with their jawboning to defend the domestic currency, which, along with geopolitical developments over the weekend, held back the JPY bears from placing fresh bets and helping limit losses.

Iran launched explosive drones and missiles at Israel in retaliation for a suspected Israeli attack on its consulate in Syria, raising the risk of a broader conflict in the Middle East region and lending support to the safe-haven JPY.

Data released from the US last week did little to ease market concerns about still-sticky inflation and forced investors to push back their expectations for the first interest rate cut by the Federal Reserve to September from June.

Moreover, the current market pricing indicates the possibility of less than two rate cuts in 2024 compared to three projected by the Fed, keeping the US Treasury bond yields elevated and acting as a tailwind for the US Dollar.

The divergent BoJ-Fed policy outlook, meanwhile, suggests that the path of least resistance for the USD/JPY pair remains to the upside and supports prospects for an extension of last week's breakout momentum.

Traders now look to the US economic docket, featuring Retail Sales figures and the Empire State Manufacturing Index, which, along with Fedspeak, should influence the USD demand and provide a fresh impetus to the major.

Technical Analysis: USD/JPY bulls retain control near 154.00 mark, despite overbought conditions on the daily chart

From a technical perspective, last week's sustained breakthrough of a short-term trading range hurdle near the 152.00 mark was seen as a fresh trigger for bulls. The subsequent move-up validates the constructive outlook, though the overbought Relative Strength Index (RSI) on the daily chart makes it prudent to wait for some near-term consolidation before positioning for any further appreciating move. Nevertheless, the USD/JPY pair seems poised to prolong its recent well-established uptrend and aim toward reclaiming the 154.00 round figure.

On the flip side, any meaningful corrective decline below the 153.00 mark is likely to attract fresh buyers and remain limited near Friday's swing low, around the 152.60 region. A convincing break below, however, could prompt some technical selling and drag the USD/JPY pair to the 152.00 mark en route to the 151.40 intermediate support and the 151.00 round figure. The latter should act as a key pivotal point, which, if broken, will suggest that spot prices have topped out in the near term and shift the bias in favor of bearish traders.