Stocks slipped in Europe in early trading as investors took the cue from a chunky pullback on Wall Street after some weaker US data pointed to rising rates impacting economic activity.
The major bourses tripped around 0.6-0.9 per cent lower in the first hour of trade after the S&P 500 had its worst day in a month and the Dow Jones faded by more than 600pts as investors booked profits following a decent run-up in the first two weeks of January. The S&P 500 lost 1.56 per cent to close at 3,929, its lowest since the middle of December, whilst the Dow shed 1.81 per cent to drop below 33,300. The Nasdaq snapped a 7-day win streak.
After a blistering start to the year, it’s not a great surprise that some softer economic data is an excuse to sell. Yields pulled back further, with the US 10yr touching 3.32 per cent, while Japan’s benchmark was around 0.4 per cent, some way below the top of the trading range allowed by the Bank of Japan.
ECB president Christine Lagarde speaks today, whilst US unemployment claims, the Philly Fed manufacturing index and a speech from Fed governor Brainard are the highlights later in the session. Norway’s central bank has kept rates unchanged at 2.75 but expects to raise again in March.
Fed speakers
Several Federal Reserve speakers were on the wires yesterday. Harker pointed to slower but perhaps longer hikes while Logan supports a slower pace of hikes. The ever-hawkish Bullard wants rates to get above 5 per cent "as quickly as we can".
Bullard also talked about China and how reopening could force the Fed to hike for longer as the world’s second largest economy will drive higher commodity prices – a trend already at work. As I argue in our Watchlist 2023…”a full China reopening could help stave off a global recession by boosting output and demand. However, it could reinforce inflationary dynamics and force the Fed to raise rates more than expected”.
Best of the rest
Sterling pares gains
Cable pushed up further after the bullish MACD signal and the golden cross to 1.24350, its highest since the middle of December. But gains have been pared as risk took a knock in the wake of the US produce price inflation and retail sales figures.
I think we can see the dollar further running to the downside along with real and nominal rates and gold picking up some bid as a result. Longer term though I would worry about inflation not coming down that fast, labour remaining very tight and the Fed hiking higher and keeping it there for longer than currently anticipated. This should, later in the year, push up real rates again and the dollar with them, whilst weighing on gold.
Does gold have further to run?
A recession is usually good for gold. Gold has recovered despite the rise in interest rates around the world in 2022. Fears of a recession and stagflation tend to be gold positive, while continued softening in the US dollar would act as a support. The risk lies in the Federal Reserve pushing nominal rates higher and keeping them there for longer, forcing down inflation expectations and driving up real rates and the dollar in the process.
Real yields have torn higher in the last 12 months, with the 10-yr Treasury Inflation Protected Securities (TIPS) from around –1.0 as recently as March 2022 to +1.70 per cent in November. This move pressured gold from a peak of around $2,070 in March ‘22 to a trough of $1,615. The turn in real yields towards 1.33 per cent since Nov has encouraged a more bullish take on gold and seen the price rally north of $1,900.
The dollar (DXY) also peaked last September and has since fallen by more than 10 per cent. In that time gold rallied by around 18 per cent. US real rates clearly have an impact on the USD – the three are intertwined, but it’s clear that a weaker USD as a result of lower real rates in the US has combined to push up gold in the last few months. The question is whether this is a trend – was last autumn’s peak in real rates and the dollar an inflection?
Can the dollar rebound? In the short term, yes. Markets may have got ahead of themselves. Right now the market still thinks the Fed is not going to be tough enough so nominal rates are down and inflation will persist. This is gold positive. The risk to gold prices making fresh highs would be for the Fed to stick to its guns, push rates higher and keep them there longer than the market expects and we see inflation and inflation expectations really start to come down.
Neil Wilson is the Chief Market Analyst at Finalto
