Sentiment is mixed. The S&P 500 eked out small gains after a volatile session. The FOMC minutes, released yesterday, came as a confirmation that the Federal Reserve (Fed) remains fully committed to bringing inflation down, even if it means slower growth.
But, the recession talk, lower energy prices, and the softening Fed hawks despite yesterday’s hawkish minutes weigh on the US 10-year yield, which shortly slipped below the 2.75% yesterday, then rebounded above the 2.90% mark. The 2-year yield, which is more sensitive to short term Fed decisions, hangs around 2.96%, which keeps the 2-10 year portion of the US yield curve inverted, which is read as ‘recession’ is either here, or about to hit the fan.
Gold on freefall
Gold prices are on a freefall mode. Softer US yields and limited risk appetite should normally play in favour of gold, but we see the contrary happening. The strength of the US dollar clearly overshadows gold, and prevents the yellow metal from gaining at a time it could potentially gain.
The price of an ounce dropped to $1732 yesterday. And the breakout below the long-term triangle is a sign that we could see further losses in yellow metal in the medium run.
Silver is also under a decent selling pressure below the $20 mark due to the strong dollar. And silver is relatively cheap compared to gold. The mint ratio, which is the ratio between the two precious metals, is now around 90, whereas you would normally expect it to stay between 50 and 80 by historical averages. This means that, either gold is still too expensive and could fall further, or silver has become relatively cheap and should correct to the upside. Whether the prices should go up and down will depend on the dollar’s performance.
Strong dollar, bad pain
The dollar trades at 20-year highs, and keeps pushing higher. The strong dollar doesn’t only hurt gold, and other currencies, but it also translates into higher inflationary pressures in the rest of the world. It also harms the US companies’ earnings expectations: every item sold in terms of other currencies bring less money to the US when converted back to the US dollars. So it would be a good thing to see the dollar soften a little from the actual levels.
Activity in Fed funds futures price in more than 93% chances for a 75bp hike by the end of this month. But good news is, there is little chance the hawkish pricing goes much worse than that. On the contrary, many people think that the developments since the Fed’s June decision have been so dramatic, that 1. The minutes are no more relevant as things changed too much since the last decision, and 2. The recession chatter and the morose market sentiment could even bring the Fed to hike by 50bp only instead of 75bp this month. Now, I don’t think the Fed will make a U-turn to hike by 50bp at the next meeting, but the market chatter hints that the market pricing has room to get more dovish rather than more hawkish. And that’s good news to slow the dollar rally, stop the selling in the equity markets, and allow for a rebound.
Bulls out, bears in
We now see a clear pivot in sentiment in crude oil. Investors went from rushing in to buy the dips, to rushing in to sell the top.
The barrel of crude recovered above the $100 level, then came the bears and sent the price to $95 a barrel, a touch above the 200-DMA. We could see a further meltdown toward the $85 level – if the G7 members leave Russia alone.
US and allies consider a price cap to Russian oil at around $40 to $60 per barrel, whereas the US crude trades near $100 and the Russian oil at around $80. It’s a no brainer that Russia won’t sell its oil at such a discount, even less so as they have customers that are happy to buy their oil at a discounted price. The latest data suggests that China doubled its spending in Russin oil, gas and coal during the three months that ended in May, and India multiplied its spending on Russian energy by five in the past year.
Therefore, the G7 leaders are barking to an empty space. And get Vladimir Putin angrier. To retaliate, Putin plans to cut the Kazakh supplies to the West; it is around 1.5 million barrels less per day, which could’ve been avoided if Biden and allies could simply keep calm for a while.
As such, the upside risks still exist, and we may see price rebound. But it looks like the overall attention shifts to the demand side, and that should keep the topside limited. A strong resistance will likely come in play near the 50-DMA, which stands a touch above the $110 per barrel level.
