Gold Maintains Consolidation Pattern Amidst Market Stability

Chandan Gupta

Traders' Opinions

Economic

Commodity

Summary:

Gold remains bullish, nearing resistance with support at $2075. A breakthrough above $2200 may signal a 'buy-and-hold' approach, eyeing $2500 amidst global uncertainties. Investors cautiously monitor these levels, anticipating potential long-term gains amid market volatility and economic anxieties.

Fundamental Analysis

In Friday's trading session, the gold market experienced back-and-forth movements, lingering just below a significant resistance level. This comes amidst a recent bullish trend, prompting a period of consolidation to alleviate some of the accumulated gains.

Despite the current oscillations, the overall trend remains strongly bullish. It's crucial to assess whether the market offers value, given the ongoing volatility. A pullback seems inevitable following the rapid ascent in gold prices, with the $2075 level serving as a key support level, reinforced by its previous resistance status.

Geopolitical tensions and concerns over central bank policies continue to drive investors towards gold as a safe haven asset. Additionally, the prospect of inflation and PMI announcements in major economies adds to market uncertainty. Most central banks are expected to maintain interest rates this week, with attention focused on clues regarding potential rate cuts later in the year.

The US dollar index (DXY) steadied around 103.5, with investors awaiting the Federal Reserve's policy decision, widely anticipated to keep key US interest rates unchanged. Recent data showing higher-than-expected US producer and consumer prices have raised concerns about prolonged restrictive monetary policy.

Looking ahead, there's about a 55% chance of a US rate cut in June, a significant drop from earlier predictions. This shift reflects evolving economic conditions and expectations regarding future Fed actions.

In summary, while gold markets navigate short-term fluctuations, the broader bullish trend persists, underpinned by geopolitical uncertainties and inflationary pressures. Investors remain vigilant for signals from central banks and economic data releases, which could influence market sentiment and gold's trajectory in the coming days.

Technical Analysis

The gold market has faced some selling pressure recently, but the overall trend remains bullish. Analyzing the daily chart, it appears unlikely for a bearish trend reversal without gold prices dipping towards key support levels at $2080 and $2020 per ounce. The current upward trajectory is supported by several factors, including shifts in global central bank policies towards easing and increased demand for gold bullion led by these institutions. Additionally, growing geopolitical tensions globally contribute to the appeal of gold as a safe haven asset.

Looking ahead, the resistance levels at $2165 and $2180 per ounce are the next targets for gold prices. It may be wise to consider selling gold at these levels, but without taking excessive risks.

The big question on everyone's mind is whether gold prices will decline in the coming days. Since the beginning of 2024, gold prices have increased by $89.55 per ounce, or 4.34%, according to trading data on the Contract for Difference (CFD) tracking the standard market for this commodity.

Looking further into the future, global macroeconomic models and analysts' forecasts suggest that gold is expected to trade at $2067.94 per ounce by the end of this quarter. Looking even further ahead, a forecast of $2134.44 per ounce within the next 12 months indicates continued positive sentiment surrounding gold. Gold Maintains Consolidation Pattern Amidst Market Stability_1

Gold Maintains Consolidation Pattern Amidst Market Stability_1

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Risk Warnings and Disclaimers

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Thomas

Economic

Even as the Bank of Japan prepares for a pivotal change in monetary policy, analysts say much more will need to be done to materially shift the roughly $3 trillion of yen Japanese investors have parked in global bond markets and yen trades.

Japanese investors have invested trillions of yen overseas in their quest to earn anything better than the near-zero returns at home under the BOJ's decades-long effort to end deflation.

The BOJ might change that policy as soon as this week. Rising wages and other business activity suggest stagnation is over, meaning little need for the BOJ to continue to keep short-term rates negative.

Anticipation of better growth has drawn foreign money into Japanese stocks and driven yen bond yields higher.

It has also put the spotlight on the $2.4 trillion of foreign debt Japan's life insurance companies, pension funds, banks and trust firms collectively hold, and how much of those investment flows will return home.

But these holdings earn yen investors upwards of 5%, so investors will barely react if the BOJ raises its rates by 10 or 20 basis points, analysts say.

"I honestly don't think it will have a big impact on flows," says Alex Etra, a senior strategist at analytics firm Exante Data.

Japan's overall foreign portfolio investments were 628.45 trillion yen ($4.2 trillion) at the end of December, Ministry of Finance data shows - more than half in interest rate-sensitive debt assets, and most of it long term.

The BOJ embarked on its quantitative and qualitative easing (QQE) in May 2013. Between then and now, Japanese investment in foreign debt was about 89 trillion yen, nearly 60% of which belonged to pension funds, including the giant Government Pension Investment Fund or GPIF.

Exante's Etra says the country's pension funds routinely do not hedge their overseas bond investments for currency risk and their returns on foreign bonds are attractive, particularly when translated into yen.

Hedging is Painful

"I'm not a huge believer of that repatriation story," said Gareth Berry, currency and rates strategist at Macquarie Bank.

"If you look at the numbers down the last 20 years, in fact there was very, very little repatriation even during the GFC," he said, referring to the Global Financial Crisis of 2008.

In contrast to pension funds, Japan's big banks and life insurance firms tend to hedge their foreign bond holdings, to mitigate any risk to their deposits and other yen liabilities.

Flows data shows this class of investors, which includes Japan Post Bank and cooperative bank the Norinchukin Bank, has gradually trimmed foreign debt holdings since 2022.

Nomura strategist Jin Moteki says investors such as insurance firms will repatriate foreign investments only when there is sufficient yield at home in Japanese government bonds (JGBs).

He estimates serious repatriation will occur only when 20-year JGB yields touch 2%, which implies a roughly 50 basis points rise in longer yields. Nomura expects the BOJ to raise the overnight rate to 0.25% by October.

"In our view, the potential repatriation that might be triggered by the end of YCC is likely to be around 45 trillion yen, at a maximum. We also expect Japanese life insurance companies to become potential main players of the repatriation," Moteki said.

Moreover, if short-term yen rates rise just as the Fed starts cutting its rates, hedging costs would fall, making FX-hedged investments in U.S. Treasuries more appealing.

Japan Post Bank, Norinchukin and GPIF did not immediately reply to Reuters' requests for comments on their investment plans.

Carry and Volatility

The implications of the BOJ exiting negative rates on the murkier world of FX carry trades depend heavily on the signals the BOJ sends on the trajectory for rates, rather than just the first hike.

The yen has for decades been the funding currency of choice for trades in which investors borrow zero-cost yen and swap it for higher-yielding dollars. These short-term trades are hugely profitable, but also highly susceptible to small changes in interest and exchange rates.

A 3-month dollar-yen carry trade earned 7% annualised in December, but now earns only 5%, because both the yen and Japanese yields have risen.

There is no easy way to estimate the amount of such trades either. Japan's overall short-term lending to foreigners is cumulatively around $500 billion, and could be a rough gauge of outstanding carry trades.

The 'carry' in these trades could shrivel quickly if the market started pricing in higher short- and medium-term yields.

James Malcolm, currency strategist at UBS in London, notes that a change of about 10 basis points in the interest rate gap between dollars and yen has roughly led to a 1% move in the dollar-yen rate in the past two to three years.

"Now, when you have a large carry trade built up, the risk is that modest changes cause capitulation and FX moves much further by generating its own dynamic."

($1 = 149.0200 yen)

Source: KFGO

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Saif

Economic

Austin Carstens, the General Manager of the International Settlements Bank, stated in a television interview on Monday that global central banks may undergo major shifts in their monetary policies, including interest rate cuts in the latter half of this year.

Carstens emphasized that global central banks have made significant progress in the battle against inflation. He pointed out the impact of the tightening monetary cycle on economic activity, stating that the global interest rate hike cycle continues to affect the economy.

In this regard, the General Manager of the International Settlements Bank also added that the current uncertainty surrounds the extent of the impact of the interest rate hike cycle on the economy. Carstens recommended central bank governors commit to the path of inflation reduction and persist until the task is fully accomplished.

The American investment bank Goldman Sachs maintained its expectations, suggesting that the Federal Reserve may begin cutting interest rates at its June meeting while adjusting its estimates for the potential size of rate cuts throughout 2024.

Goldman Sachs now anticipates the Federal Reserve to cut interest rates only three times this year, down from their previous forecast of four cuts during the same period.

This adjustment in Goldman Sachs' expectations for Federal Reserve decisions came after recent economic data indicated that inflation in the United States had been moving steadily in recent months. However, by the June meeting, it is likely that inflation will have declined sufficiently.

Nevertheless, economists at the bank noted that the trend of inflation within the United States has become less clear, with inflation expectations for the rest of the year being within a range where minor surprises could have significant consequences.

Based on this, in response to a slight upward trend in inflation, the Federal Reserve is expected to cut interest rates only three times this year, four times next year, and once more in 2026. The Bank for International Settlements' Vision for The Future of Global Monetary Policy_1

The Bank for International Settlements' Vision for The Future of Global Monetary Policy_1

U.S. FOMC Rate Floor (Overnight Reverse Repo Rate)

In conclusion

The evolving monetary policies and interest rate adjustments proposed by global central banks, as highlighted in the article, signify a response to the ever-changing economic landscape. The insights provided by experts like Austin Carstens and institutions like Goldman Sachs underscore the importance of remaining adaptable and vigilant in navigating financial markets. As investors and traders, it's imperative to stay informed about these potential shifts and be prepared to capitalize on emerging opportunities while mitigating risks associated with uncertainty. By maintaining a proactive stance and closely monitoring inflation data and central bank decisions.

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Owen Li

Energy

Palestinian-Israeli conflict

The profit margin for making diesel in Asia is coming under sustained pressure from a glut of supplies as major exporters boost shipments and fewer cargoes head to Europe because of concerns over shipping via the Red Sea.

The crack spread, or profit margin, of making a barrel of gasoil, the building block for middle distillate fuels such as diesel and jet kerosene, at a typical Singapore refinery ended at $20.33 a barrel on March 15.

This was down from the previous close of $20.87 a barrel and just above the eight-month low of $19.89, reached on March 13.

The margin is down 28% from the high so far in 2024 of $28.26 a barrel, hit on Feb. 13.

The weakness comes as several indicators are flashing warning signs for diesel in Asia.

Stockpiles of middle distillates in Singapore, the regional trading hub for refined fuels, surged 8% last week to reach the highest since September 2021 as net exports of diesel dropped by 98%, and those of jet fuel by 26%, according to official data released on March 14.

Total middle distillate inventories in Singapore were 10.97 million barrels last week, up from 9.99 million the prior week, with stockpiles being boosted by an increase in arrivals from South Korea and China.

Despite the weakening crack spread for gasoil, refineries in Asia still have some incentive to export cargoes as a profit margin of around $20 a barrel is still above the 2023 lows of about $11.

But the likelihood of the crack spread dropping to match last year's lows are increasing, especially as more diesel heads into Asia and less towards destinations west of the Suez Canal.

The attacks on shipping using the Red Sea to transit the Suez Canal by Yemen's Iran-aligned Houthi group have led some shippers to divert cargoes to go around the Cape of Good Hope, a longer and costlier voyage.

This has cut the volumes of refined fuels heading to Europe from Asia, a situation compounded by declining European demand as the northern winter ends. Inventory Builds, Red Sea Concerns Pressure Asia Diesel Margins_1

Inventory Builds, Red Sea Concerns Pressure Asia Diesel Margins_1

Window Shut

LSEG Oil Research said in its latest report on Asia's distillate market that the East-West arbitrage window is "firmly shut" with flows at three-year lows.

Just 140,000 metric tons of middle distillates went from East Asia to the West in February, and so far for March just 75,000 tons have been assessed, LSEG said.

India is also usually a major shipper of diesel to Europe, but shipments in the first quarter are likely to average 535,000 tons a month, which LSEG said will be the lowest first-quarter average since 2020, when the COVID-19 pandemic first hit.

India is instead sending more cargoes to Asia, with flows to the region exceeding 700,000 tons for both January and February, the most since August.

Add in rising exports from China and the result is higher inventories in the Singapore hub.

Exports from Singapore to major regional importers such as Indonesia and Australia are also weakening, placing further downward pressure on margins.

Total middle distillate shipments to Asian buyers dropped to 5.07 million tons in February, down from 5.94 million in January, and LSEG vessel-tracking and port data point to a further decline in March.

The factor that may limit the decline in the middle distillate profit margin is the upcoming refining maintenance season in Asia, which will see several units taken offline, mainly in the second quarter.

This may limit exports in the region, but questions remain over whether enough supply will be curtailed to offset lower shipments to Europe from Asian refiners.

Source: Reuters

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Ukadike Micheal

Economic

Stocks

Technology stocks propelled Wall Street higher on Monday as investors anticipated the Federal Reserve's upcoming rate-setting decision, scheduled for Wednesday. The S&P 500 surged 1% shortly after the opening bell, while the Nasdaq Composite climbed 1.4%, with gains across all major technology sectors.

Leading the charge was Alphabet, making the most significant contribution to the S&P 500's ascent with shares soaring 7.3%. This surge followed reports of Apple's discussions to integrate Google's Gemini artificial intelligence engine into the iPhone.

Meanwhile, the major stock market indices, including the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500, all began the trading session on a positive note. Yahoo Finance Live co-host Brad Smith closely monitored the morning's market action, particularly focusing on the status of several Nasdaq 100 tech leaders.

The positive momentum on Wall Street was primarily driven by the strong performance of technology stocks, with investors eagerly anticipating the Federal Reserve's forthcoming decision on interest rates. This anticipation underscored the significance of monetary policy in shaping market sentiment and investor behavior.

As traders awaited the Fed's decision, technology stocks emerged as the primary driver of market gains. The Nasdaq Composite's 1.4% rise reflected the strength of the tech-heavy index, signaling optimism among investors about the future prospects of the technology sector.

The surge in Alphabet's shares, fueled by reports of potential collaboration with Apple, exemplified the market's enthusiasm for innovative technology partnerships. This development highlighted the increasing importance of artificial intelligence and its integration into consumer technology products.

Additionally, the positive market sentiment was evident in the performance of other major indices, including the S&P 500, which experienced a 1% increase shortly after the opening bell. This broad-based rally underscored the widespread optimism among investors as they awaited the Fed's decision.

Overall, the market's bullish start to the week underscored the significance of technology stocks in driving market gains, particularly in anticipation of key events such as the Federal Reserve's rate-setting decision. As investors continued to monitor market developments, the performance of technology stocks remained a key focal point in shaping overall market sentiment and direction.

The surge in technology stocks on Monday highlighted the sector's resilience and importance in driving broader market gains. With the Federal Reserve's decision looming, investors remained cautiously optimistic, with technology stocks leading the charge in propelling Wall Street higher.

Source: Financial Times

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Ukadike Micheal

Economic

Forex

In February 2024, the Industrial Product Price Index (IPPI) in Canada surged by 0.7% compared to the previous month, marking a departure from four consecutive months of decline. This uptick was primarily driven by higher prices in the energy and petroleum products sector. Specifically, energy and petroleum product prices rose by 5.2% in February, following several months of decline. The increase was notably influenced by heightened prices for refined petroleum energy products, including finished motor gasoline and diesel fuel. Additionally, unexpected shutdowns and seasonal maintenance activities at several major North American refineries contributed to the decrease in output, resulting in dwindling stocks of gasoline and distillate fuel oil and consequent price hikes. Canada's February Price Indexes: Energy Lifts IPPI, Mixed Signals in RMPI_1

Canada's February Price Indexes: Energy Lifts IPPI, Mixed Signals in RMPI_1

Chemicals and chemical products also experienced a price increase of 1.6% in February, predominantly due to higher prices for petrochemicals and plastic resins. Strong export demand and disruptions in shipping routes, particularly in the Red Sea, further bolstered prices for plastic resins. Additionally, rising petroleum prices likely exerted upward pressure on chemical prices, given their status as key inputs for petrochemicals and other chemical products.

Canada's February Price Indexes: Energy Lifts IPPI, Mixed Signals in RMPI_2

However, certain product groups witnessed price declines, tempering the overall increase in the IPPI. For instance, prices for meat, fish, and dairy products dropped by 0.9% in February, marking the fourth consecutive monthly decline for this group. Lower prices for fresh and frozen chicken and pork contributed to this decline, although higher prices for beef partially offset the decrease.

Moreover, intermediate food products, such as canola or rapeseed oil and oilseed cake and meal, decreased by 1.3% in February. The global oversupply of canola and other oilseeds, driven by record production levels in the United States and strong output in South America, exerted downward pressure on prices.

In contrast, prices for primary non-ferrous metal products declined by 0.3% in February 2024. Weaker demand from the automotive sector weighed on the prices of platinum group metals, particularly platinum and palladium, which are primarily used in petroleum-powered vehicles. Additionally, zinc prices fell due to increased inventories on the London Metal Exchange.

Year over year, the IPPI fell by 1.7% in February 2024 compared to February 2023, marking the fifth consecutive year-over-year decline. Notable contributors to this decline included unwrought nickel and nickel alloys, which experienced a significant price drop of 38.7%. Other products that recorded notable year-over-year price decreases included jet fuel, diesel fuel, wood pulp, and other unwrought non-ferrous metals and non-ferrous metal alloys.

On the other hand, prices for unwrought gold, silver, and platinum group metals, as well as light-duty trucks, vans, and sport utility vehicles, rose on a yearly basis, partially mitigating the overall decline in the IPPI.

In the Raw Materials Price Index (RMPI), February saw a 2.1% increase on a monthly basis, following a 1.2% rise in January. This increase was primarily driven by higher prices for crude energy products, including conventional and synthetic crude oil. Despite a consecutive increase in US crude inventories, sustained high crude prices were influenced by geopolitical tensions in the Middle East and expectations of production restrictions by OPEC+.

Conversely, crop products continued to decline, falling by 2.8% in February, with canola prices being the primary driver of this decrease. Additionally, metal ores, concentrates, and scrap edged down by 0.1% in February, driven by a decrease in iron ores and concentrates.

Year over year, the RMPI decreased by 4.7% in February 2024, marking the fifth consecutive year-over-year decline. Key contributors to this decline included nickel ores and concentrates, canola, conventional and synthetic crude oil, and iron ores and concentrates.

Despite these declines, cattle and calves and gold, silver, and platinum group metal ores and concentrates recorded notable year-over-year price increases in the RMPI.

The fluctuation in both the Industrial Product Price Index and the Raw Materials Price Index reflects the complex interplay of various factors, including global supply and demand dynamics, geopolitical tensions, and macroeconomic conditions. These indices serve as essential indicators of economic health, guiding policymakers and market participants in navigating the intricacies of the Canadian economy and its interconnectedness with the global marketplace.

Source: Statistics Canada

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Chandan Gupta

Traders' Opinions

Economic

Forex

The pound has recently taken a dip from its March peak against the US dollar, and the situation could worsen if UK inflation figures disappoint and the Federal Reserve adopts a hawkish stance.

Presently, the GBP/USD pair is hovering around 1.2740, showing signs of stabilization amidst the ongoing analysis.

Reflecting on March 8th, the pound-dollar exchange rate reached its apex at 1.2893 before retracing slightly. The Relative Strength Index (RSI) hit 70, signaling overbought conditions and prompting a corrective pullback below 1.1750. This retracement, however, failed to breach critical moving averages—50, 100, and 200-day—hinting at a mere correction within the overarching uptrend.

Technically, a significant trend shift would necessitate a breach of the 50-day moving average at 1.2686, while breaking below the 200-day moving average at 1.2589 would mark a bearish turn for the pair.

Looking ahead, the pound faces several risk factors this week, including Wednesday's inflation data release, Thursday's purchasing managers' index, and the Bank of England's decision. Forecasts indicate a potential decline in the consumer price index inflation rate for February, raising concerns about the pound's performance if expectations fall short.

The Bank of England is anticipated to maintain its interest rates at 5.25%, with any alterations to the accompanying statement and voting composition likely to impact markets. The possibility of a rate cut, signified by shifts in guidance, could exert downward pressure on the pound.

Market sentiment also hinges on the release of March PMI data, which is expected to signal strong growth, affirming the economy's recovery. Similarly, retail sales figures carry weight, with positive readings bolstering confidence in the UK's economic resurgence.

On the US front, all eyes are on the Federal Reserve's monetary policy decision for March, scheduled for Wednesday. While expectations lean towards unchanged interest rates, any indications of a hawkish stance could elevate the US dollar.

Analysts suggest that the US dollar is in a favorable position, particularly if Federal Reserve officials express confidence in economic stability. However, any signs of wavering inflation, resilience in the real economy, or easier financial conditions could dampen the dollar's appeal.

In terms of technical analysis, the GBP/USD pair appears to be undergoing a downward correction, with support levels at 1.2675 and 1.2600 looming as critical thresholds. Conversely, the psychological barrier at 1.3000 remains pivotal for affirming the uptrend, contingent upon stability above 1.2830.

As the week progresses, market reactions to key data and events will likely dictate the pair's trajectory. Until then, expect trading activity to remain subdued within narrow ranges as investors await clarity on future developments. GBP/USD Opens Week with Bearish Tone_1