Will Gold Retrace Before Heading Towards Previous High?

Zi Cheng

Traders' Opinions

Commodity

Summary:

Bullish momentum propelled gold to surpass its previous high for 2024.

Fundamental Analysis

On Tuesday, the price of gold, XAU/USD, continued its upward trend for the fifth consecutive day, reaching a fresh three-month peak, hovering around the $2,120 mark during the first half of the European trading session. However, further upward movement appears uncertain as traders await clearer signals regarding the Federal Reserve's potential rate-cutting trajectory. Consequently, all eyes are on Federal Reserve Chair Jerome Powell's two-day congressional testimony scheduled to commence on Wednesday.

Additionally, market participants are closely monitoring key US macroeconomic data releases, particularly the highly anticipated Nonfarm Payrolls report due on Friday, which could significantly impact the US Dollar and consequently provide fresh impetus to gold prices.

The prevailing sentiment that the Fed may commence rate cuts in June has subdued the strength of the USD, lending support to the non-yielding gold price. Furthermore, persistent geopolitical tensions and concerns about a slowdown in China have dampened investor appetite for riskier assets, contributing to a generally weaker tone in equity markets. This, in turn, has bolstered demand for safe-haven assets like gold.

Amidst this backdrop, traders are closely monitoring the US ISM Services PMI for potential short-term trading opportunities. However, given the fundamental landscape described above, the prevailing bias suggests that the path of least resistance for gold prices remains to the upside, with any corrective dips likely to be met with buying interest.

Technical Analysis

Gold has been pushing for new prices and forming strong bold bullish candlesticks for the fourth day in a row without any retracements. It is advisable to stay out of the market and not to chase highs as the price is very high currently, and no retracement has happened yet. For those traders who plan to look for sells just because retracements has not happened, it is also not advisable. Reason is because you will be going against the trend which decreases the probability of your trade winning.

Gold's all time high is priced at about 2149, Gold touched it but got rejected very quickly the last time. It seems like we might be able to see new highs this year judging from the current bullish momentum. However, I am not interested for buys now, I am only interested if the price does come down to retrace at least the 50% level as we have support confluence and FVG as confluence as well which acts like a strong key level to support the price from going lower.

Will Gold Retrace Before Heading Towards Previous High?_2

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SAXO

Stocks

This year was supposed to have been the comeback year for green stocks

Ever since commodities rallied post the Covid vaccines and inflation subsequently rose to the highest levels since the 1970s green stocks have been under pressure. This year should have been the rebound year as the market in the beginning of the year was aggressively pricing in multiple rate cuts (seven at its peak). However, with sticky inflation and a robust economy the market has changed its mind pricing only 3-4 rate cuts and this change of narrative has been negative for greens stocks. A galloping fever in crypto, semiconductors and AI, defence, and cyber security has not helped either.

Our three green equity theme baskets green transformation, renewable energy, and energy storage are all down more than 13% year-to-date compared to semiconductors and defence baskets up 16% and 14% in the same period. Tesla shares are down 18% year-to-date. No wonder that Elon Musk is dreaming about AI and robotics as he has come to the conclusion that EVs will become a red ocean. To make things even worse for the green segments in the equity market, the global energy sector (which is dominated by oil and gas companies) has increased 2% year-to-date.

The main driver of this bad performance is high interest rates and lower prices on natural gas. The green transition is one of the most capital intensive sectors of the economy and high interest rates make many green projects less profitable. While the green transition will still get prioritized, the defence agenda, especially in Europe, has taken the lead position in terms of political attention and with strong momentum in defence stocks the market is showing more interest in Rheinmetall (German military manufacturer) than Orsted (offshore wind developer). More Headwinds For Green Stocks As High Interest Rates Continue To Bite_1

More Headwinds For Green Stocks As High Interest Rates Continue To Bite_1

More Headwinds For Green Stocks As High Interest Rates Continue To Bite_2

More Headwinds For Green Stocks As High Interest Rates Continue To Bite_3

EV growth is slowing but still hit 37% YoY in Q4

One of the key industries in the green transition is the electric vehicles (EV) industry. We are closely monitoring 16 carmakers that are publishing in a transparent way their battery electric vehicles sales (sometimes also called all-electric). These 16 EV makers delivered 2mn BEVs in Q4 2023 up 37% YoY taken the cumulative BEV deliveries among these EV makers to 14.6mn since Q1 2020. The largest BEV maker is now BYD that overtook Tesla for the first time ever and Volkswagen is still maintaining its third position with Li Auto and BMW in a close fight for the fourth spot.

These 14.5mn BEVs have reduced oil demand by 0.4 Mb/d (million barrels per day) which would otherwise have been here today. Compared to a global oil demand of around 100 Mb/d it is still small numbers, but we expect this cumulative oil demand reduction to 1 Mb/d by Q4 2025. By Q4 2026 the EV industry will hit an additional annual oil reduction of 0.5 Mb/d. With Wright’s Law at place and also economics of scale production costs will continue to fall for EVs and in a few years from now it will not make sense for consumers in developed countries to buy a gasoline car over BEV unless there are specific needs to consider. Wright’s Law alone estimates that by Q4 2026 the production costs of a new BEV will have fallen by 36%. However, with the lithium-ion battery being a big part of the overall costs and lithium carbonate prices still being volatile the estimated cost reduction including the battery costs come with a high uncertainty.

As with the green transition stocks in energy, the EV industry has experienced a demand slowdown from higher interest rates and the intense competition from Chinese EV makers that have finally made it in the car industry due to less complexity of assembling an EV over a traditional combustion engine car. Fisker, an EV upstart, has recently said that it could run out of money and is pursuing a partnership with Nissan. NIO, a Chinese EV maker, has also warned that it will need more capital to push ahead. The car industry, whether its run on gasoline or batteries, is still the same old capital intensive and low margin business it has always been. More Headwinds For Green Stocks As High Interest Rates Continue To Bite_4

More Headwinds For Green Stocks As High Interest Rates Continue To Bite_4

NIO earnings: Focus on operating losses and lack of new EV models

NIO is expected to deliver Q4 earnings tomorrow before the US market open. Analysts expect revenue of CNY 16.8bn up 5% YoY and adjusted EPS of -2.70 improving from -3.61 a year ago. NIO delivered 50,045 BEVs in Q4 2023 falling behind other Chinese EV makers such as XPeng and Li Auto at 60,158 and 131,805 delivered in Q4 2023 respectively.

NIO kept its price steady in Q4 while many others including Tesla and BYD lowered its prices which was likely contributing to the 10% QoQ reduction in deliveres in Q4. Gross margin is expected to improve as battery costs are coming down and the 10% reduction in its workforce should lead to better operating metrics although the EV maker is still losing money. Analysts covering the stock is also nervous about the lack of new EV models and as such the outlook and the company’s view on its capital position will be scrutinized.

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Zi Cheng

Traders' Opinions

Economic

In February, UK service providers witnessed continued growth in business activity, supported by a stronger influx of new orders and a modest uptick in employment figures. While the overall pace of output expansion slightly softened compared to January's eight-month high, projections for output growth for the upcoming year were the most positive since February 2022.

United Kingdom Services PMI Fail To Meet Expectations_1

However, input price inflation accelerated during February, reaching its highest level in five months, largely due to increased wage pressures and rising shipping costs. This pressure on margins led to service providers implementing the second-fastest rise in prices charged in seven months, surpassed only by the figures seen in December.

The final seasonally adjusted S&P Global UK Services PMI Business Activity Index for February stood at 53.8, slightly down from January's 54.3 and below the initial 'flash' reading. Nevertheless, it remained higher than any point in the second half of 2023, indicating a sustained rebound in business activity following the downturn last autumn.

This increase in business activity was fueled by a significant rise in new order volumes, marking the sharpest growth since May 2023. Service providers attributed this to increased spending by both businesses and consumers, supported by more favorable economic conditions and the anticipation of lower interest rates stimulating customer demand.

Additionally, improved export sales contributed to enhanced total order books in February, with new work from overseas clients expanding for the fifth consecutive month, reaching its strongest level since June 2023. Survey respondents often cited increased demand from the US and Asia, alongside a tentative recovery in European export orders.

Although there was a modest increase in staffing levels across the service sector in February, it was the fastest recorded since July 2023. This additional recruitment was driven by long-term business expansion plans and the need to increase operational capacity. However, some firms reported constraints on hiring due to significant wage pressures. Despite this, the sustained increase in the total workforce helped to reduce backlogs of work for the ninth consecutive month.

Regarding inflation, the most recent data showed the most substantial increase in input costs across the UK private sector since August 2023. Inflationary pressures heightened in both the manufacturing and service sectors in February, with the service sector experiencing a notably quicker overall surge in business expenses. Likewise, there was a significant uptick in prices charged by service providers, contrasting with only a slight increase in factory gate prices within the manufacturing sector.

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

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Zi Cheng

Traders' Opinions

Economic

According to the BRC-KPMG Retail Sales Monitor report released on Tuesday, total retail sales for the four weeks ending on February 24 saw a 1.1% year-on-year increase. This contrasts with the 1.2% growth recorded in the preceding month and the three-month average of 1.4%. In February last year, annual growth stood at 5.2%.

February Sees UK Retail Sales Growth at Its Lowest Since 2022_1

Food sales remained the primary driver of growth, posting a 6.0% year-on-year increase over the three-month period ending in February, compared to an 8.3% growth rate from the previous year. However, nonfood sales experienced a decline of 2.5% year-on-year over the same three-month period, compared to a growth rate of 3.2% from the previous year.

Chief Executive of the British Retail Consortium, Helen Dickinson, attributed the dampened consumer demand to the exceptionally wet February weather. She noted that despite Valentine's Day, traditionally buoyant products like jewelry and watches failed to stimulate sales. On a brighter note, rainy weather boosted sales of toys as parents sought indoor activities for their children.

Looking forward, Linda Ellett, Head of Consumer Markets, Leisure, and Retail at KPMG U.K., anticipates ongoing challenges for retailers in the coming months, despite signs of slowing inflation and anticipated improvements in household finances.

According to the payments company, spending on non-essential items saw a modest year-on-year increase of only 1.7% last month, marking the slowest rate of growth since September 2022.

In contrast, spending on "in-speriences" like takeaways or film rentals showed a stronger annual growth rate of 6.5%, indicating that households opted to stay indoors to evade the effects of record rainfall. The report from Barclays also pointed to a deceleration in sales, particularly for food items, which was attributed to a decrease in inflation.

Amidst the tumultuous landscape of the UK retail sector, attention shifts towards devising recovery plans aimed at reinforcing consumer trust and expenditure. The forthcoming budget announcement is eagerly awaited, with hopes pinned on measures geared towards bolstering both businesses and consumers. With projections of a slowdown in inflation and potential enhancements in household finances, there exists a cautious optimism regarding a resurgence in retail sales. Nonetheless, the sector remains vigilant, acknowledging the myriad uncertainties that lie along the path to recovery.

Reflecting on the recent tribulations encountered by the UK retail sector, it becomes evident that resilience and adaptability will serve as indispensable assets in surmounting the challenges posed by adverse weather conditions and the escalating cost of living crisis.

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

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Cohen

Economic

Forex

Dollar rebounds ahead of key data and events

The US dollar rebounded somewhat against most of its major peers on Monday, although the fact that it lost decent ground against the euro and the pound kept the dollar index (DXY) lower. Today, the greenback is trading higher or unchanged.

Following Friday’s disappointing ISM manufacturing PMI for February, the dollar came under some selling interest as investors slightly brought forward their Fed rate cut bets. However, today, the market’s implied path is back near the levels observed before the ISM release. Market participants are assigning an 80% chance for the Fed to deliver its first 25bps cut in June, while the total number of basis points expected to be cut by the end of the year is at 85, slightly more than the Fed’s own projections of 75.

This suggests that there is still some room for the dollar and Treasury yields to further recover should incoming data and events corroborate the Fed’s ‘higher for longer’ mantra. The highlights for dollar traders this week may be Fed Chair Powell’s testimony before Congress on Wednesday and Thursday, as well as Friday’s nonfarm payrolls.

Nonetheless, that doesn’t mean that today’s ISM non-manufacturing PMI for February will pass unnoticed. On the contrary, following the disappointment in the manufacturing index and given that the services sector accounts for around 70% of US GDP, the non-manufacturing PMI may impact Fed bets even more. Expectations are for the index to have declined somewhat to 53.0 from 53.4, but investors may pay special attention to the prices and employment subindices, to get an updated idea of how the labor market and inflation are faring.

Yen stabilizes after Tokyo CPIs, China sets GDP and budget targets

The yen stabilized somewhat today, keeping dollar/yen below the key resistance zone of 150.80. Perhaps yen sellers covered some of their short positions after the Tokyo CPIs revealed a strong acceleration in inflation during February.

However, with the majority of BoJ policymakers holding the view that even if a hike is delivered just after the spring wage negotiations, the pace of subsequent hikes in Japan will be very gradual, the yen is unlikely to stage a strong comeback anytime soon.

The Australian and New Zealand dollars are the main losers today, perhaps as China’s target for economic growth in 2024 was announced at around 5%, the same as in 2023, but with a budget deficit targeted at 3%, lower than the 3.8% aimed last year. This likely translates as wanting to achieve the same growth with less stimulus, which seems to be a hard task considering that the world’s second largest economy faces a deepening property crisis.

Apart from news coming from China, aussie traders will also have to evaluate Australia’s GDP data for Q4 during the Asian session Wednesday. Expectations are for a mild acceleration, which may allow the RBA to maintain its tightening bias for a while longer.

Wall Street pulls back, gold and bitcoin climb higher

US stock indices closed slightly in the red yesterday, but that was after the S&P 500 hit another record high during the day. Perhaps equity investors adopted a more cautious stance towards the end of the trading session as several key events are on the agenda for the rest of the week.

Despite the dollar’s recovery, gold continued marching north, closing the distance from its record high to less than 1%. This confirms the notion that the precious metal is not only driven by the dollar and Treasury yields, but also by other factors like geopolitics and central bank buying. After all, even when the dollar was staging a strong recovery due to the repricing of expectations surrounding the Fed, gold held relatively steady, suggesting that there were still participants interested in buying it.

In the crypto space, Bitcoin extended its rally to a more than two-year high, surpassing the psychological barrier of $65.000. It seems that the crypto king continues to benefit from flows into the new spot ETFs, but also from speculation ahead of April’s halving event that could slow the supply growth.

Source：Investing

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Samantha Luan

Economic

Bond

Market participants have been so focused on determining when and how much the Federal Reserve will slow its balance-sheet unwind that they haven’t even started to consider another wrinkle: the composition of the US central bank’s assets.

Officials are preparing for an in-depth discussion of the Fed’s asset reduction, a process known as quantitative tightening, or QT, which began in June 2022. Fed Governor Christopher Waller on Friday said he’d like to see a shift in Treasury holdings toward a larger share of short-dated Treasury securities to give the central bank more flexibility the next time it needs to use its balance sheet.

“One of the benefits from such a move would be to allow for future asset purchases without needing to expand the balance sheet,” BMO Capital Markets strategists Ian Lyngen and Ben Jeffery wrote in a note to clients Monday. “Of course, planning for the next operation twist while still actively engaged in QT isn’t necessarily an inspiring development, even if it does resonate in the context of medium-term risks.”

Treasury Bills Presently Account for 3% of Total SOMA Assets

System Open Market Account holds assets obtained via open market operations For Fed Tightening, There's More To Think About Than Just Tapering_1

For the moment, the market is focused on when the Fed will announce it is tapering QT and when it will actually stop, so as to avoid causing ructions in the overnight funding markets like it did in September 2019. Wall Street estimates for the beginning of the QT taper range from April to September 2024, with the expectation that the pace will slow as the overnight reverse repo facility is nearly empty.

The last time the central bank underwent QT, Treasury bills weren’t part of its holdings. The Fed purchased them after rates on overnight repurchase agreements spiked to 10% in September 2019 to shore up reserve balances. Before policymakers announced the recent round of balance sheet reductions, strategists contemplated how officials planned on treating its portfolio of T-bills, at $326 billion.

At the time, Wall Street strategists thought it would have been prudent for the Fed to sell the T-bills because demand for short-term government debt was outstripping supply, spurring eligible counterparties to park trillions of dollars at the RRP facility. Instead, policymakers opted to gradually reduce the pile, redeeming the securities only when payments of coupon-bearing debt were below the Fed’s suggested monthly reinvestment cap for Treasuries, which currently stands at $60 billion.

That means the central bank now has about $210 billion of bills remaining, or about 3% of its securities holdings, compared to about one-third before the financial crisis, according to Fed data. For Fed Tightening, There's More To Think About Than Just Tapering_2

For Fed Tightening, There's More To Think About Than Just Tapering_2

Yet Wrightson ICAP senior economist Lou Crandall sees another advantage to a Fed balance sheet comprised of short maturities. A smaller mismatch between the central bank’s assets and liabilities also would reduce the volatility of its earnings and losses.

“Large reported losses can be a public relations headache,” Crandall wrote in a note to clients on Monday. “Greater rate sensitivity on the asset side might be attractive to the FOMC members heading into the next cycle.”

Ultimately, moving away from the Fed’s holdings of mortgage-backed securities is a long-dated policy goal for officials and one that’s less pressing than the immediate need to slow and eventually stop QT.

It remains to be seen if the monetary authority will achieve that goal. “I don’t think the Fed will ever be able to reach a Treasury-only balance sheet, but that won’t stop them from trying,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities. “I view it as a goal, but fairly low on the priority list all else considered.”

Source：Bloomberg

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Danske Bank

Economic

We expect the euro area and the Nordic countries to gradually move out of their current stagnation or mild recession (in Denmark’s case, stagnation outside pharmaceuticals). The US economy is stronger than expected, while China continues to muddle through. Interest rates can be gradually cut during 2024 and 2025, with central banks likely to move cautiously.

In the US, Super Tuesday kicks off today when 15 states and one US territory are voting on their preferred candidate for the US presidential election in November. Focus will be on the Republican primaries where former president Trump is up against his former UN ambassador Nikki Haley. Trump is expected to win the most delegates, placing him on the doorstep of formally securing the Republican nomination.

Later today we get the ISM non-manufacturing PMI in the US.

In Sweden we get February service PMI numbers. We expect the numbers to show a third consecutive month above the 50-threshold, as well as come out above last month’s reading of 51.8. Deputy governor Bunge from the Riksbank is also due to speak.

Economic and market news

What happened overnight

In China, the growth target for 2024 together with a bunch of other goals were revealed in the Government’s Work Report released at the opening of the annual National People’s Congress. The growth target was set at 5% as widely expected, the same as in 2023. It is a more ambitious target this year, though, as the base effects are less favourable this year. The inflation target was unchanged at 3%, but in practice means little as inflation is currently far below the target at -0.8% y/y. A market focus in the report was the signal on stimulus and here it disappointed a bit as the budget deficit target was unchanged from 2023 at 3%, and the off-balance special bond issuance did not pose any upward surprises. Overall, the report did not provide much new information compared to previous statements from the government whereas the markets had been hoping for more. Offshore stocks are down around 2% this morning while the CNY is broadly unchanged.

The Chinese service sector disappointed and displayed slightly slower growth signals as the Caixin services PMI came in at 52.5 compared to 52.7 last month and a consensus of 52.9. The official non-manufacturing PMI by the National Bureau of Statistics stood at 51.4 in February.

In Japan, Tokyo CPI numbers for February were released. The numbers show that seasonally adjusted CPI excluding fresh food and energy stands at 0.09% m/m down from last month’s 0.19% m/m. We still look out for the first indications from the wage spring negotiations due later this month as these will be key for the Bank of Japan’s monetary policy going forward.

What happened yesterday

In the US, the Supreme Court awarded former president Donald Trump a victory by deciding states cannot bar him from running for federal office citing insurrection regarding the 6 January 2021 attack on the US Capitol. With the unanimous decision Trump will once again be able to appear on the Colorado ballot, where he had otherwise been barred from appearing back in December.

In the euro area, the Sentix Indicator measuring investor confidence rose to -10.5 from -12.9 in line with expectations. The reading marks an 11-month high for the indicator, albeit it remains well below its long-term average.

Equities: Global equities were marginally lower yesterday in an uneventful session. Defensive value outperformed not least due to communication services and consumer discretionary was lower. We would not be surprised to see a couple of wait-and-see days ahead of the ECB meeting on Thursday and Non-Farm Payrolls on Friday. In the US yesterday, Dow -0.3%, S&P 500 -0.1%, Nasdaq -0.4% and Russell 2000 -0.1%. Asian markets are lower this morning with China leading the declines following the speech from Xi Jinping at the annual people’s congress. Futures are lower in both Europe and US this morning.

FI: The first trading session of the week was a muted one in terms of macro or monetary policy news. Long-end EGB yields extended last week’s rally with peripherals such as Italy outperforming the core. Hawkish comments from Atlanta Fed’s Bostic provided renewed headwinds to US Treasuries, reversing some of the decline seen on Friday following the weak ISM figures for February. 10Y Bund yields ended down by 2bp, while 10Y UST yields were up 4bp throughout the day.

FX: EUR/USD is starting this week close to the upper end of the 1.0800-1-0850 range. Meanwhile, USD/JPY is comfortably above the 150-mark for now, whereas EUR/JPY at 163.30 still has its eyes on the 26 February 163.70 high. The small kneejerk drop in EUR/CHF immediately after the Swiss inflation data was soon erased and the cross trades above 0.96 for the first time since late November. Both SEK and NOK are on the defensive, with EUR/SEK at 11.26 back into our preferred range of 11.20-11.40 and where EUR/NOK is closing in on 11.50 again.

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