Sat, Oct 16, 2021 @ 11:48 GMT

Gold Dives

Asian stock markets kicked off the week on a positive note, although the US indices had nothing more exciting than mixed performance after the announcement of strong jobs data on Friday.

The US nonfarm payrolls printed a strong 943’000 nonfarm job additions in the US during the month of July, strong than 870’000 expected by analysts and 850’000 printed a month earlier. The latest data helped cement the thinking that the Federal Reserve (Fed) is moving towards the ‘substantial’ progress that it is looking for to start easing the bond purchases.

As a result, the US 10-year yield jumped above the 1.30% mark after the data release and is now set to recover towards the 2% threshold to the end of the year.

The US jobs data gave a small boost to the Dow and the S&P500 which closed Friday’s session 0.41% and 0.17% higher respectively. Yet Nasdaq slid 0.40% to the weekly closing bell, to my surprise, as I would expect the strong jobs data to boost the tech stocks to a certain extent as well, because even though the strong economic data and prospects of a tighter US policy are better for value stocks, the rising Covid cases should keep the tech stocks in demand, regardless of a tighter Fed policy. But apparently, and curiously, investors are not too concerned with the delta crisis just yet. They are, to some extent, as we see the stock markets somewhat moody time to time, but the S&P500 chart doesn’t necessarily hint that there is any kind of stress in the US big caps. Why is that?

It sure has something to do with the vaccination. There is the general belief that the vaccination and the introduction of the Covid certificate will prevent businesses from going through strict lockdown measures yet again. The ‘certificate’ setup will allow them to stay opened instead and continue functioning with those who can present a valid Covid certificate. The idea is obviously to get as many as people vaccinated and get out of the crisis as soon as doable. But the delta variant is now taking lives and represents a higher risk for stocks that are sensitive to the economic recovery. In this sense, the risk of a sharp drawback in cyclical stocks increases, meanwhile the Fed safety net weakens.

In commodities, the prospect of higher yields is becoming a serious headache for gold. Gold is not doing well, and Friday’s strong US jobs figures has come as a slap on gold’s face. Moving forward, higher US yields will continue increasing the opportunity cost of holding the non-interest-bearing gold, which didn’t even fully benefit from the overshooting inflation and the ultra-low US yields recently. So, there were clear signs that the more likely scenario was a further selloff, and the latest death cross formation on the daily chart, where the 50-day moving average slipped below the 200-day moving average, is a solid sign that there is more downside for gold in horizon. The speed at which investors dumped their gold holdings after the NFP print was rather impressive, but we should see a short-term support forming near the $1680/1700 area, with those investors who would still benefit from the latest slump to enter a long position in gold as a hedge for inflation and an eventual retreat in stock prices.

About inflation. The latest update on the US consumer price inflation is due on Wednesday, and the expectation is a certain steadying in the US consumer prices near last month’s 5.4% print. China released softer-than-expected consumer prices this Monday, while producer prices advanced to 9%, as an indication that the pressure on factory-gate prices remains strong.

We shall see a similar print on US inflation figures this week. But the inflation numbers tend to surprise to the upside rather than to the downside these days. And, what would a stronger-than-expected number do? Combined with the strong jobs figures, it should further revive the Fed hawks, push the US yields higher and apply a certain pressure on the US stock prices.


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