Gains in equities reversed on Thursday, but industrial metals traded south, and crude oil cheapened despite a tense geopolitical environment, as the worries that such a spike in energy and commodity prices would certainly curb the economic growth and slow the global demand took over the worries of a tighter supply.
As a result, the price action in US crude gave us an important insight this week: the levels above the $130pb mark may be unsustainable for a further rally.
The upside risks remain of course, and the tight supply conditions, the war and the OPEC countries’ malicious pleasure seeing the prices trend higher should throw a floor under the downside correction near the $100pb. But the speculations and the likelihood of an advance to the $200 mark will likely, and hopefully ease from here.
The reverse ‘whatever it takes’
The central banks are increasingly concerned about inflation, and the major ones start giving out signals that they won’t let inflation run too hot, even if it means a slower growth. That’s the case of the European Central Bank (ECB).
Christine Lagarde announced on Thursday that the ECB is ready to take ‘whatever action is needed to pursue price stability and to safeguard financial stability’ in Europe.
The bank will end the pandemic emergency purchases in March as planned and reduce the APP purchases to 40 billion euro in March, to 30 billion euro in April and to 20 billion euro in June. And if inflation continues going higher – which probably will happen, as buying less bonds still means growing the balance sheet – the ECB will stop purchases by the third quarter, altogether.
The German 10-year yield advanced after the decision, but the EURUSD fell, as the hawkish shift in ECB expectations was already priced in and ‘buying the rumour’ prior to the meeting resulted in some profit taking. I still believe that the upside potential in the EURUSD has grown with the ECB clarifying the price stability as its top priority.
Inflation in US will exceed 8%
Inflation in the US advanced to 7.9% in February as expected. It is now a mathematical certainty that the next read will surpass the 8% mark given that inflation increased at the rate of 8.4% over the past three months, and that doesn’t even take into account the latest surge in energy and commodity prices due to the Ukrainian war.
Gold rush
The upside potential in gold is more than just a safe haven hedge, as the rising geopolitical tensions and the latest sanctions imposed on the Russian central bank will bring the central banks around the world to reconsider their FX holdings, and start shifting towards a nationless gold.
This could particularly be the case of China, which appears to be backing Russia in the Ukrainian war, and which doesn’t necessarily have positive diplomatic relations with the US, and which is also pointed with the tragedy going on in its Xinjiang region, and the pressure it’s imposing to other Asian nations in the South China Sea.
Goldman says that they expect the gold demand from the central banks to reach its historical high, as central banks globally have ‘strong diversification and geopolitical reasons to shift reserves into gold’. And with inflation expectations building stronger, gold certainly has potential to extend its latest rally to fresh all-time-high levels and beyond.
The price of an ounce eased below the $2000 mark, yet the price pullbacks could be seen as interesting buying opportunities for those who bet that it’s time for gold to shine again.
