6th August - Gold Explodes
Yesterday, Iran announced that it had reached an agreement with Oman on a proposed shipping route through the Strait of Hormuz, as had been expected. This looks to have been largely priced in already, though, as oil actually rose slightly on the day. However, the rise could also have been caused by reports that the Houthis have claimed a strike on a Saudi oil tanker in the Red Sea. The downside for oil does still seem to be capped at the moment, thanks to threats to supply from both Hormuz and the Bab al-Mandab Strait.
Outside of the Middle East, gold prices were the main news story of the day, and we will delve into it deeper shortly. We saw two news releases from the US yesterday: the ADP Non-Farm Employment figure and the ISM Services PMI. Both were weaker than expected and continued the recent pressure on the USD. The ADP figure was noticeably weak, coming in at 44k against an expected 68k and less than half of last month's figure. This is adding fuel to the fire for those thinking the US labor market is struggling and adds once again to the significance of the NFP report due tomorrow.
One key caveat to note for those looking at weak employment numbers and falling oil prices: yesterday, we saw three Fed officials independently give hawkish commentary on the current markets. Kansas City's Schmid said inflation is too high and further tightening is needed; Kashkari said the Fed should "start slowly moving up" rates; and Governor Lisa Cook warned she's prepared to hike and that the Fed "may not have the luxury of waiting." All of the data releases this week have pointed to a move away from rate hikes, but three separate Fed voices on the same day have all said hikes are needed and have pushed back against the market's dovish repricing. Whether this is lip service to slow the markets a little is yet to be seen, but, maybe by design, it is something we should make sure to consider. A weak NFP print on Friday could force the members to change course, so any further comments next week could prove just as important.
Forex
The forex markets overall were relatively muted, considering the move we will discuss in Gold later on. The DXY fell on the two negative news releases yesterday, but nowhere near the size of drops we saw last week. This may be as markets factored in the Fed members' comments, but this could also be as markets are keeping their powder dry until after the NFP report tomorrow. Either way, the news tomorrow will be crucial. Yesterday, we saw September rate hike odds fall from 67% to 57%; a weak NFP could push this below 50% and mark an important psychological turning point in market sentiment.
The CAD saw support yesterday after oil rose on the day, but interestingly we did not see a meaningful reaction in AUD or NZD to the rise in precious metals prices. We saw a mixed result in NZD for employment figures (employment change was 0.5% against 0.1% expected, which helps the NZD, but the unemployment rate was 5.6% instead of 5.4%, which hurt the NZD), which meant AUD outperformed its neighbour and saw the AUD/NZD pair rise on the day. The likely explanation for the movement in gold but lack of movement in AUD in particular was that the gold increase was caused exclusively by a change in interest rate expectations as opposed to increased demand for the metal or a risk-off appetite. The gold move was based on speculation as opposed to physical demand for the metal, meaning capital did not flow to AUD companies and so no effect was seen in AUD.
The remaining majors, EUR, GBP, CHF, and JPY, were all relatively flat on the day and did not give us much to report on, as capital was focused elsewhere in other markets.
Indices
After the euphoric rise on Tuesday, yesterday was a little bit of a reset day as both the Nasdaq and S&P fell. The Dow did post a green day, but by less than 0.4%. Once again, we seem to have gone back to the story of AI/tech selling off while value stocks perform well, giving us a rising Dow and falling S&P & Nasdaq. It is interesting to note that on a day when rate hike concerns fell, the AI names were sold anyway. This seems to show that despite the optimism yesterday surrounding the progress made in the Middle East, the AI spending concerns have not gone away and the balloon may still have some way left to deflate.
Precious Metals
The big story of the day, and one we have been looking out for, for a long time. Gold moved a huge 4.14% on the day to close at $4,247, while Silver rose 4.19% to close at $62.05. This means the two levels we had been discussing, $4,200 for Gold and $60 for Silver, were both broken and closed above on the same day. The mechanism for this was almost entirely due to rate hike expectations falling on poor labour data and oil prices crashing. We had commented for months that metals are now rate instruments almost exclusively; yesterday's move was further proof of this.
The question now is whether metals will follow through, or whether this is a false dawn. Both metals seem to have shown support at the recent lows (Gold around $4,000 and Silver around $56), which gives us the confirmation that this is not a 'dead cat bounce'. The question now is whether markets have gotten ahead of themselves on rate-cut expectations, or whether this is a healthy re-pricing of oversold markets. The hawkish comments from Fed members, as mentioned earlier, are a cause for concern. Metals will not react well if rate-hike expectations rise again, and comments from the people who decide this will have to be taken into consideration.
I would strongly recommend against blindly jumping into metals at the moment, as we need to see the reaction to the move yesterday first. Will sellers jump back in as they see a good price and still expect rate hikes, or will tomorrow's NFP, for example, be another signal that rate hikes are less likely? I will personally be waiting until the beginning of next week to see the lay of the land before making any medium-term directional calls. Should we see an NFP that supports rate cuts and then see some form of pullback in metals, we could see an excellent opportunity to jump in and ride the metals back up to previous yearly highs.
Today's Key Market Drivers
Iran - As always, developments in the Middle East will have a huge effect on all markets.
US jobless claims, 1:30 pm UK time - After ADP and the ISM employment collapse, the weekly print is the third read on the same question, and a soft number would compound the move.
Friday's NFP Preparation - Investors will be keenly aware of tomorrow's data release and may well position themselves today to mitigate the risk of unexpected numbers.
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