Overnight, North Korea fired a missile that flew over Japan, violating the nation’s airspace. This marked further escalation in the region’s geopolitical tensions, which triggered a classic risk-off market reaction. Safe haven assets such as gold, the Japanese yen, and the Swiss franc rallied on the news, while major equity indices edged lower.
In the short-term, we expect market action to be driven by incoming headlines on the subject. Japanese PM Abe already called for fresh UN sanctions on North Korea, which we view as a "soft" and diplomatic approach. Nonetheless, key US officials (such as the President) have not yet commented on this latest show of force by the North Korean regime. If we were to see another round of hard rhetoric from the US administration, or some form of action, then risk-aversion could continue to drive markets. Specifically, gold and other safe havens could gain further, while riskier assets could remain under pressure. Having said that, unless the situation intensifies to the degree of military intervention, we don’t expect this negative sentiment to remain the main market theme for too long.
Gold surged during the European afternoon Monday, to break above the key psychological barrier of 1300 (S2). The metal gapped further up during the Asian morning Tuesday after North Korea fired a missile over Japan to hit resistance at 1325 (R1). The price structure on the 4-hour chart suggests a short-term uptrend marked by the uptrend line taken from the low of 10th of July. Thus, we would expect a clear break above 1325 (R1) to set the stage for more bullish extensions, perhaps towards our next resistance level of 1340 (R2). The trigger for further advances may be further escalation in geopolitical tensions.
Having said that though, given that the latest rally appears overextended, and also taking account our proximity to the return line drawn from the peak of the 7th of July, we stay careful of a possible retreat before the bulls decide to take charge again. A dip below 1313 (S1) may confirm the case and is possible to open the way for a test near the 1300 (S2) zone as a support this time. Our short-term oscillators enhance our concerns. The RSI shows signs that it could top within its above-70 zone, while the MACD, although above both its zero and trigger lines, shows signs that it could start topping as well.
Zooming out to the daily chart, we see that the 1300 (S2) zone acted as the upper bound of the wide range the yellow metal has been trading within since the 31st of January, between that hurdle and the 1200 territory. As such, its clearing make us confident that the medium-term outlook may have also turned somewhat positive.
