Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Will he or won’t he? Gold thinks he will...
Ole Hansen
Head of Commodity Strategy
Gold is trading back above $1,200/oz ahead of the expected announcement from the White House that China is about to get hit by additional tariffs on goods valued at up to $200 billion. The latest US trade balance for July showed the US in the red by $50.1 billion while the trade deficit with China rose to a fresh record of $36.8 billion.
With his domestic agenda being challenged by the upcoming midterm elections, less-than-flattering comments from White House insiders, and the ongoing Mueller investigation, President Trump is unlikely to step back from his fight with the Chinese.
The prospect of an escalated trade war continues to make matters worse for emerging market bonds, stocks and currencies. The MSCI emerging market stock index is down by almost 20% since January while the MSCI EM currency index has lost 8.5% of its value since April when the focus turned to trade tensions.
While industrial metals have had a rough ride this week from the prospect of global growth and demand being negatively impacted we have seen gold continue to stabiliae. As a result of these developments the Gold-HG copper ratio touched a two-year high at 4.6 while silver at one point touched a two-decade low against gold after the gold-silver ratio reached 85.
The prospect of an escalated trade war continues to make matters worse for emerging market bonds, stocks and currencies. The MSCI emerging market stock index is down by almost 20% since January while the MSCI EM currency index has lost 8.5% of its value since April when the focus turned to trade tensions.
While industrial metals have had a rough ride this week from the prospect of global growth and demand being negatively impacted we have seen gold continue to stabiliae. As a result of these developments the Gold-HG copper ratio touched a two-year high at 4.6 while silver at one point touched a two-decade low against gold after the gold-silver ratio reached 85.
In the week to August 28, funds bought gold for the first time in 11 weeks. The 9,000-lot reduction of what was a record short, however, was still small compared with the 143,000 lots sold since June. We conclude, as mentioned in recent updates, that a bigger move is needed before short sellers start to worry.
Funds are short gold in response to a stronger dollar, rising US interest rates, and the increased need to be invested where strong liquidity can offer a certain amount of protection.
The US stock market and the dollar both tick that box and as long we do not see any contagion into the US market from the market turmoil seen elsewhere gold may struggle to find a bid strong enough to take it higher. However, a break above $1,220/oz as per the chart above is likely to attract some additional buying but whether it will be strong enough the get the short-covering wheel to accelerate remains to be seen.
Funds are short gold in response to a stronger dollar, rising US interest rates, and the increased need to be invested where strong liquidity can offer a certain amount of protection.
The US stock market and the dollar both tick that box and as long we do not see any contagion into the US market from the market turmoil seen elsewhere gold may struggle to find a bid strong enough to take it higher. However, a break above $1,220/oz as per the chart above is likely to attract some additional buying but whether it will be strong enough the get the short-covering wheel to accelerate remains to be seen.
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