17th July - Gold Falls Below $4,000 As Strikes Continue
Yesterday was a day when markets struggled once again, as markets looked to future inflation concerns despite the positive inflation figures from earlier in the week. In Iran, strikes continued once again as oil stayed at its one-month highs. Today is the OFAC's wind-down deadline for selling Iranian oil, so as of now, oil supply is further restricted and oil prices are subject to even more supply-side pressure. Trump's threat to attack Iranian infrastructure looms over the weekend, meaning the next few days could bring a lot of uncertainty while markets are closed.
Forex
The DXY saw a small bounce yesterday as it recovered past the 100.650 level of resistance. Yesterday saw a healthy data release for unemployment claims (208k against an expected 216k) and a very strong beat on the Philly Fed Manufacturing Index (41.4 against an expected 12.7). Core Retail Sales was -0.2% against an expected 0%, but this was countered by last month's figures being revised up. Overall, the releases painted a picture of an economy still making progress. The data also lifted yields and gave more space for the hawkish rate-hike theory to breathe, as the FOMC is more able to hike rates into an economy and a labor market that are performing well.
The GBP began to pull back after a bumper day on Wednesday, as investors either took some profits off the table or were distracted by other events. The GBP still looks strong and has potential to move higher, meaning if we see any continuation in this pullback, we could be in a strong position to back the GBP and see a strong risk-to-reward ratio. I would caution against trades over the weekend due to the political uncertainty, but if we are in the same position at the start of next week, then GBP could be a strong candidate for a buy.
The AUD and NZD also had somewhat of a pullback after a very strong week. The risk-on appeal following the inflation prints earlier in the week has died off a little and left the currencies vulnerable to the weakening metals markets. Both currencies still have higher interest rates and so have rate differentials in their favor, but for the medium term, I would worry a little that pressure on metal prices and a more risk-off environment around the Middle East could impact their demand next week.
The CHF and JPY held relatively steady on the day as markets looked elsewhere, while the EUR was a little weak against the USD but relatively steady elsewhere. The CAD continues to show strength on the back of rising oil prices, which looks to stay the case for the duration of time we have this uncertainty around Iran.
Indices
Yesterday was yet another very interesting day in indices, especially when it comes to the AI/tech bubble that we have been monitoring for months.
TSMC, the most important chip manufacturer in the world, released their earnings data yesterday, announcing a 77% jump in quarterly profits, a beat in earnings, and an additional $100bn in US investment. After the event, their shares fell by 4%. The market sold due to the company's raised capital expenditure guidance, which rose to $60-64bn. Markets are currently asking whether the enormous amounts being spent on AI will generate a return on the investment, or whether it will be an ever-escalating cost. Each time we see a market release bumper earnings but raised capex expenditure, the concerns become more entrenched, something that is happening more and more and means the biggest names are met with selloffs, not buys, on blowout earnings results.
The result on the day was a fall in all indices, with the Dow down 0.3%, the S&P down 0.6%, and the Nasdaq down 1%. This fall was concentrated, however, in the semiconductor sector (SanDisk -12.6%, Marvell -8.7%, Intel -5.8%, Micron -5.7%, AMD -5.3%, and Nvidia -2.4%), as if we look at the equal-weight S&P, this was actually up 0.6%, meaning other markets actually had a broadly positive day.
This is again another sign of the balloon deflating rather than the bubble bursting, as the momentum runs out for AI/semiconductor stocks, the rest of the market is picking up the demand that AI/semi's are leaving behind. This is by no means set in stone, but if we continue the way we are, we may see a more controlled reallocation of capital across markets, and we may be able to avoid a rerun of the Dot-com bubble from the early 2000s.
Precious Metals
Gold was the market that hit the most consequential number of the day, as it broke and then closed below $4,000 for only the second time since November last year. Gold was down 2.1% to close at $3,980, while Silver was also down 4% to close at $55.50.
As mentioned yesterday, if we have a week where we see inflation prints much lower than expected and where we see an escalation of tensions in the Middle East, in theory, we should see metals soar and have a bumper week. We have instead seen the exact opposite, which is all the evidence that could be asked for that metals are currently completely tied to the US rate cycle. Currently, there is still an over 50% chance of a rate hike in September, and the year-end expectation currently has rates at 3.90%.
At the moment, for the short and medium term at least, metals are very much in a sell-only environment for me. Until we see concrete evidence that rate hikes are due to stop and rate cuts are on the horizon, I struggle to see anything but further downside in metals. If you are a long-term investor, then we could be getting to some excellent levels for long-term buys, but I would also argue if you waited just a little longer, the purchase prices could look even more attractive.
Today's Key Market Drivers
UoM Consumer Sentiment - This is the only data released today, but it is not a significant market mover. It will help shape how we see the markets, but it is unlikely to cause significant moves on its own.
Iran - This is the one that could move markets. We often hear significant updates after the Friday market close, so I would position myself accordingly going into the weekend.
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