Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
WCU: Gold and oil surge on FOMC and Middle East tensions
Ole Hansen
Head of Commodity Strategy
Summary: The Bloomberg Commodity Index, which tracks the performance of 22 major commodities spread across the three major sectors of energy, metals and agriculture, rose by the most since January during the past trading week.
The 1.8% gain was led by gold and oil which rallied strongly in response to global rate cut expectations and heightened geopolitical tensions in the Middle East while natural gas slumped to a 24-year seasonal low following another inventory surge. The agriculture sector was mixed with the grains sector trading lower on wheat and corn weakness following the recent weather-related surge.
A decisive shift by the US Federal Reserve back to stimulus mode helped drive stocks higher and bond yields lower. The yield on US 10-year Notes briefly moved below 2% a 31-month low, while in Europe the German Bund yield hit an all-time low at minus 0.3% as the European Central contemplated additional stimulus measures. The dollar meanwhile touched a 3-month low against a basket of currencies on signs that US President Trump may be gearing up for a currency war.
These developments were all friendly to gold which shot higher trough multiple layers of resistance before pausing after breaking above $1,400/oz for the first time since 2013. Gold’s biggest challenge in the short term is its ability to confirm to recent buyers that a near six-year high in the price can now turn into being the new low.
A decisive shift by the US Federal Reserve back to stimulus mode helped drive stocks higher and bond yields lower. The yield on US 10-year Notes briefly moved below 2% a 31-month low, while in Europe the German Bund yield hit an all-time low at minus 0.3% as the European Central contemplated additional stimulus measures. The dollar meanwhile touched a 3-month low against a basket of currencies on signs that US President Trump may be gearing up for a currency war.
These developments were all friendly to gold which shot higher trough multiple layers of resistance before pausing after breaking above $1,400/oz for the first time since 2013. Gold’s biggest challenge in the short term is its ability to confirm to recent buyers that a near six-year high in the price can now turn into being the new low.
Crude oil jumped the most in four months in response to the first drop in US crude oil stocks in five weeks and surging gasoline prices following an explosion at PES Philadelphia refinery, the biggest supplier of fuel to the New York Harbor market. In addition, reduced demand fears as central banks shift towards easing, a weaker dollar supporting emerging markets and not least another step up in the geopolitical risks associated with the fraught relation between Iran and the US. The latest escalation occurred after President Trump approved strikes on Iran over the downing of a US drone over the Gulf of Hormuz before abandoning the attack.
We expect these latest developments have at least for now created a floor under oil. Not least considering our belief that the Opec+ group nations at their meeting on July 2 will reaffirm their commitments to keeping oil production capped for the remainder of the year. Adding to this is the improved risk appetite from the expected cut in US interest rates and a weaker dollar.
Brent crude oil reached its first major level of resistance on Friday as the geopolitical risk premium continued to build and short positions were scaled back. The double bottom now established at $59.50/barrel points towards further short-term gains.
We expect these latest developments have at least for now created a floor under oil. Not least considering our belief that the Opec+ group nations at their meeting on July 2 will reaffirm their commitments to keeping oil production capped for the remainder of the year. Adding to this is the improved risk appetite from the expected cut in US interest rates and a weaker dollar.
Brent crude oil reached its first major level of resistance on Friday as the geopolitical risk premium continued to build and short positions were scaled back. The double bottom now established at $59.50/barrel points towards further short-term gains.
While crude oil saw the biggest move on the week it was nevertheless gold that received most of the attention after finally breaking through the wall of resistance which had capped the market since 2014.
The additional demand that led to the breakout was driven by the Federal Open Market Committee confirming it has moved to an easing stance, with the market pricing in a 100% probability of a cut at the July 31 policy meeting. The weaker dollar that followed this development, together with the heightened US-Iran tensions, also played their part in supporting the yellow metal.
However, above all, but still related to the changed outlook for central bank rates has been the slump in bond yields. The US-led slump in bond yields has over in Europe moved an even bigger amount of outstanding bonds into negative yield territory. This past week the amount of global negative-yielding debt jumped to a fresh record of 13 trillion dollars. Why is this important? It is because it removes the opportunity cost of holding a non-coupon or dividend paying asset such as gold.
The additional demand that led to the breakout was driven by the Federal Open Market Committee confirming it has moved to an easing stance, with the market pricing in a 100% probability of a cut at the July 31 policy meeting. The weaker dollar that followed this development, together with the heightened US-Iran tensions, also played their part in supporting the yellow metal.
However, above all, but still related to the changed outlook for central bank rates has been the slump in bond yields. The US-led slump in bond yields has over in Europe moved an even bigger amount of outstanding bonds into negative yield territory. This past week the amount of global negative-yielding debt jumped to a fresh record of 13 trillion dollars. Why is this important? It is because it removes the opportunity cost of holding a non-coupon or dividend paying asset such as gold.
Having finally broken higher the short-term focus turns to its ability to hold onto these gains and reassure recently established longs that they have not bought another high but instead a potential new low.
From a technical perspective resistance is now at $1,433/oz followed by $1,483/oz, which represents a 50% retracement of the 2011 to 2015 sell-off. Support needs to be found at the previous highs at $1,375/oz and $1,366/oz as highlighted in the chart below.
From a technical perspective resistance is now at $1,433/oz followed by $1,483/oz, which represents a 50% retracement of the 2011 to 2015 sell-off. Support needs to be found at the previous highs at $1,375/oz and $1,366/oz as highlighted in the chart below.
The geopolitical part of gold’s renewed strength was seen through its premium over silver which reached a fresh 26-year high above 91 ounces of silver to one ounce of gold. Platinum, meanwhile, also struggled to keep up with its discount to gold reaching a new record of 588 dollars. Relative value players may eventually move towards these relatively undervalued semi-investment metals but probably not until the gold rally either runs out of steam or improved economic signs begin to emerge.
While gold has raced higher silver has yet to break to break the downtrend from 2016 let alone challenge the 2019 high above $16/oz.
While gold has raced higher silver has yet to break to break the downtrend from 2016 let alone challenge the 2019 high above $16/oz.
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