Gold outlook remains bearish despite a positive weekly close
Spot gold closed with a gain of 0.57% at $2036 Friday. The metal was up nearly 1% on the week. As per the macroeconomic data released Friday, China’s new home prices – 70 City Index (January) slid for the eighth consecutive month in January. Germany’s GDP contracted 0.30% in the 4Q as per the final reading, which matched the forecast. ECB’s one-year and three-year CPI expectations stood at 3.30% and 2.50% respectively, almost in line with the exception.
Bond Index rebalancing
Friday’s gains in gold were driven mainly by a dip in the US yields, especially long-term yields, which in turn were driven by month-end rebalancing of treasuries as investors focused on next week’s supply and demand dynamics. Long-dated treasuries are likely to benefit as debt issued during the month is included in the bond Index, while debt with a maturity of less than a year drops out. Index change occurs at the last trading day of the month.
The ten-year US yields fell 1.93% Friday to settle at 4.247%, which amounts to a dip of nearly 1% on the week. In contrast, the two-year US yields, which are more sensitive to the monetary policy, fell only 0.57% to close at 4.68%, and were up by around 1% on the week.
Dollar Index – weighed down by risk-on sentiments
The US Dollar Index is being held back by a healthy risk appetite on corporate earnings. The Index was down around 0.30% on the week as it closed at 103.96.
Volatility in the currency market slid to a two-year low on risk appetite as traders wait for further clarity on interest rates trajectories, especially the Fed fund rate.
US imposes sanctions on Russia
The US unveiled its sanction package it imposed on Russia over the death of dissident Alexey Navalny on Prison Grounds. More than 500 new sanctions were imposed; however, metals and energy escaped the sanctions.Russia’s Mir payment system, a military drone manufacturer and its top staff, and three people linked to Navalny’s death were among the people and the entities targeted in the fresh round of sanctions.
Investing demand remains lackluster
The world’s largest gold-backed exchange-traded fund — SPDR Gold Shares — saw the biggest one-day sell off since October as bullion held by the ETF fell 0.8% on Wednesday to the lowest level since August 2019.
Fedspeak: More data needed before cutting rates
The central thrust of the speeches of the Fed officials in the week ending February 23 was on highlighting the need to wait further to ensure sustainability of inflation trending lower towards the Fed’s target of 2% before easing could begin.
Fed’s Jefferson warned against easing too much by relying on inflation data and the present trend. Philadelphia Fed President Harker said that a May rate cut is possible, though it is not the forecast as recent inflation data have been uneven. Lisa Cook, a member of the Federal Reserve’s Board of Governors, said that policy rates will change when disinflation looks more sustainable. Federal Reserve Governor Waller said that the start of easing and extent of cuts will depend on incoming data. Fed’s Barkin (voter) said that although recent PPI and CPI data have been less good, that should not put too much weight on the month’s data because of the seasonality factor. Fed’s Bowman (voter) said the time for lower rates is “certainly not now”.
US data mostly encouraging
US data were mostly better than expected as weekly jobless claims fell to the lowest level in a month, whereas existing home sales and S&P Global US manufacturing PMI data topped their respective estimates. S&P Global US services PMI at 50.50 trailed the forecast of 51.50,
Focus on US ISM manufacturing and PCE deflator inflation data
Next week’s US data include new home sales (January), durable goods orders (January preliminary), S&P CoreLogic CS 20-city m-o-m (December), Conference Board Consumer confidence (February), GDP 4Q (second estimate), Personal income and spending (January), PCE deflator (January), weekly jobless claims (February 24), pending home sales (January), construction spending (January), U. Of Michigan sentiment and inflation expectations (February final) and ISM manufacturing (February). Out of Europe, focus will be mainly on Germany’s retail sales (January), CPI inflation (January), unemployment change ( February), manufacturing PMI (February final); Euro-zone’s CPI inflation (February preliminary); and UK’s manufacturing PMI (February final). Out of Asia, Japan’s national CPI inflation (January) and manufacturing PMI and China’s manufacturing and non-manufacturing PMIs will be of particular interest to investors.
Weekly outlook
US PCE deflator inflation and ISM manufacturing will be the most important data to be released in the week ending March 1. Going by hotter than expected US CPI, PPI, import price and export price indices, PCE deflator data may not be benign. In that case, the yellow metal will be prone to a downward correction. Apart from the US data, China’s data and developments will also be influential in affecting gold prices. Concerns about the Chinese economy will be positive for the metal. Overall, a test of support at $1965 is still possible on hawkish Fed as the US economy is resilient despite steep rate hikes.
Support is at $2030/$2010/$2000/$1984. Resistance is at $2050 followed by $2065.
(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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