Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
You probably should notice that gold market reaction on the "Week of the Central Banks" stands a bit different, compares to stocks or FX market. While FX was able to show just short-term, emotional inspiration on major currencies, such as EUR or GBP - Gold has shown better upside dynamic. And, although Omicron fears have depressed it a bit on Friday, it has shown much better performance. Our suggestion that secret stands in the bond market and how it treats recent Fed promises...
Market overview
Gold prices stabilized near a two-week low on Wednesday, as investors await the U.S. Federal Reserve's decision on the pace at which the central bank plans to taper its pandemic stimulus measures.
Gold prices recovered from early losses to trade higher on Wednesday, drawing support from a decline in the dollar after the U.S. Federal Reserve said it would end its pandemic-era stimulus measures in March. The U.S. central bank's move signaled its inflation target has been met and paved the way for three quarter-percentage-point interest rate increases by the end of 2022.
In its new economic projections, the Fed forecast inflation would run at 2.6% next year, compared with the 2.2% projected as of September. Fed Chair Jerome Powell also noted the U.S. economy was improving quickly, but warned he sees no near-term end to the COVID-19 pandemic.
ECB officials are set to call time on the central bank's Pandemic Emergency Purchase Programme but investors will look to see how the six-year-old Asset Purchase Programme may pick up the slack, though rate rises are a way away.
Analysts said gold gained despite the possibility of higher U.S. interest rates, which increase the opportunity cost of holding bullion, because rate hike prospects had been priced in before the Fed announcement. Apart from a weaker dollar, "there are multiple supportive elements for gold, including geopolitical issues and pent-up physical demand," StoneX analyst Rhona O'Connell said.
Gold rose above the key $1,800 level on Friday and was set for its first weekly gain in five as worries over the Omicron surge and hot inflation drove investors to safe-haven assets.
But the metal marched higher because rate hike prospects had been priced in before the announcement, analysts said. Gold's gains came despite inflows into the dollar, also considered a safe store of value during geopolitical uncertainties. But its outlook for 2022 "remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields," Saxo Bank analyst Ole Hansen said in a note.
The Fed said it would pave the way for a three quarter-percentage-point interest rate increases by the end of 2022 as a response to full employment and surging inflation. The benchmark 10-year yield has dropped 3.8% this week.
Safe-haven gold also seemed to take some cues from reduced risk appetite due to fears over the Omicron coronavirus variant.
MARKETS DON'T BUY FED HAWKISH VIEW
Global bond funds posted huge outflows in the week ended Dec. 15, as investors anticipated that major central banks would shift the direction of their monetary policy during key policy meetings this week, pressured by soaring inflation levels. Investors offloaded global bond funds of $6.91 billion, marking their biggest weekly net selling since April 8, 2020, Refinitiv Lipper data showed.
U.S. bond funds witnessed net selling of $7.48 billion, although investors purchased European and Asian bond funds of $1.45 billion and $0.19 billion respectively.
Investors sold global equity funds of $13.14 billion, compared with net purchases of $3.43 billion in the previous week. Global money market funds also saw outflows, worth a net $20.46 billion, after eight straight weeks of inflows.
The Federal Reserve's more hawkish turn this week came amid heightened worries about economic recovery and inflation, but it has barely changed the bond market's view that short-term interest rates could top out below the U.S. central bank's estimated peak. Current betting even has rates staying below the inflation level the Fed projected over the next few years.
Since the Federal Open Market Committee released its policy statement Wednesday, markets have priced the terminal rate where policy rates will stop going up, at between 1.4% to 1.7%, according to eurodollar futures' view of U.S. rates in three years. The Fed does not forecast a terminal rate, but the market's expectation of when the current hiking cycle will peak is well below the U.S. central bank's view of 2.5%, and lower still than the revised core inflation estimate of 2.6% next year.
On Wednesday, the Fed flagged three interest rate increases in 2022 and another three in 2023, with the policy rate climbing to 2.1% in 2024.
The Fed typically lifts its benchmark rate higher until the economy is able to run on its own without any monetary policy action, typically hitting or exceeding what is known as the "equilibrium rate". The previous Fed rate hike cycle in 2018 peaked at 2.25%-2.5%.
The U.S. Treasury yield curve typically bear flattens as the Fed shifts toward tightening, with smaller rises in long-term than in short-term yields. But recently, long-term U.S. Treasury yields have dropped from already very low levels, implying the historically low Fed terminal rate.
The decline U.S. long-term yields has baffled market participants given a backdrop of persistent inflation pressure, stronger and tighter labor market, as well the Fed's tapering of its bond buying.
Jonathan Cohen, head of rates trading strategy at Credit Suisse in New York, said the decline in yields could be attributed, in part, to supply-demand factors, which include rapid buying of U.S. Treasuries by banks, the reduction in available supply even after accounting for Fed tapering, and the de-risking of pension funds as they gravitate toward bonds.
Still, some analysts believe the terminal rate is way too low and may well end up higher than what markets expected.
Indeed, as we've shown yesterday in FX research, the Fed rate change could be more aggressive than market thinks right now, at least by Fathom Consulting opinion. Mostly because of the wage inflation - not only in the US but in EU as well. The phenomenon that has not been seen in developed countries for the long time.
Even J. Powell, before the official Fed meeting gave the hint that planned rate change seems to be too slow. Particular this moment bond market confirms by ignoring hawkish Fed steps. Just days before the Fed's November meeting, however, when the plan was to be announced, Powell got his first inkling that the pace might be too slow: The Labor Department reported labor costs in the third quarter had shot up by the most since 2004.
As a result, the employees' sentiment becomes more sensitive to wage growth in relation to inflation and that could force employers' to boost wages more aggressively, leading to another spiral of inflation. This combination could turn to chain reaction and self-fulfilled prophecy, forcing Fed to move rates faster.
The same things we see in EU, after supposed "slightly hawkish" comments from the ECB. Euro zone bond yields slipped back on Friday as markets assessed the reduction of monetary stimulus from the European Central Bank as being roughly in line with expectations. Germany’s 10-year government bond yield, the euro zone's benchmark, was down 2.5 basis points at -0.371%, after rising 1.5 bps on Thursday.
COT Report
Precious metal funds saw net selling of $402 million, posting a second straight week of outflow. CFTC data shows jump in speculative short positions this week, but this was at the eve of Fed meeting, so it could be just the preparation for the statement, as gold has dropped before the meeting as well. Since we've got the rally since then, it would be interesting to take a look how situation will change next week.
As a bottom line:
We intentionally put investors' expectations on Fed statement in the beginning of our report just to show how different they were to real market reaction. Obviously markets have expected some hawkish tones and prepared to corresponding reaction of higher US dollar and rally in the interest rate market. This kind of reaction seems absolutely reasonable. But reality was different. This makes vital meaning to the gold. We get no changes from the Fed until March meeting and currently gold rally is based on weak interest rates reaction. Market doubts that Fed will execute steps that are planned. As Fed was waiting too long to make first steps in holding of inflation, it goes out of control a bit, which suggests more radical Fed reaction in near-term. But investors worry that it could hurt the economy pace, which is still fragile, as well as job market. Besides, fears around Omicron impact, that it could slowdown economy as well also suggest that Fed will not be able to keep promised pace of rate change. That puts the upside limit on the upper border of interest rates, as investors suggest that Fed steam will out of the pot earlier than it needs to change rate and push it to 2.1%.
And now we're coming to the major question - who is right? Fed, that suggests faster rate change and pushing it to 2.1%, Fathom consulting, that suggests even faster price hike or bond market that doesn't believe in this and suggests slower interest rates dynamic. This makes crucial meaning for the gold. Because if bond market appears to be wrong - interest rates jump and makes bearish impact on gold, pushing real interest rates higher. Conversely if bond market is right - gold will keep climbing higher. How it is possible to clarify? Only by monitoring of statistics, such as GDP, Sales, Consumption, production and inflation. The strong performance supports the Fed opinion and negative to the gold. Weak data suggests that bond market is right and Fed will adjust its forecasts later.
The pandemic theme and Omicron also have a big importance as well. Because the turning off the pandemic should eliminate fears and concerns around economy performance and also support rally on interest rates. Now it is unclear the plans of "pandemic masters". From the one side - China just is starting to get first negative fruits on breaking supply chains, that is primary US target. From this point of view, pandemic should last longer, at least for 1-2 years more. And that is what Pfizer told - they suggest that it lasts till 2024. From the other side - Omicron (as I read about it) includes all other major variants and with high degree has been made manually. It leads to lighter disease way and provides immunity to the whole family of the variants. Virologists tell that usually "masters" produce this variant when they want to finish the pandemic. It difficult to say right now who is right. But here we specify the major points, driving factors that we have to keep an eye on in long-term.
In short-term, market stands in information vacuum, until March-22 probably, that should be supportive to the gold. The "doubt" sentiment should hold here until new statistics will be released that either confirm or deny bond traders suspicions. Interest rates probably should fluctuate around current levels and gold, with current momentum has chance to climb higher.
Technicals
Monthly
December still is an inside month and makes no impact on the picture. The major achievement of the last week is reaching of 1758$ major support with following healthy upside bounce.
Once we've mentioned that overall price performance doesn't look truly bearish in long term. Market stands too close to the top, forming tight consolidation and has not reached even 3/8 major support. And potential appearing of pennant pattern just confirms this. This in turn, cares signs of bullish dynamic pressure, as market stands tight while MACD is going down...
In short-term market is flirting with YPP and breaking of 1875 top might become important moment. The support line that makes shape of triangle here seems to be more important at current moment.
Speaking about upside target, we have very thrilling combination. Major COP is completed, but we also have all-time COP, when A point equals to ~ 40$ - fixed gold price to US dollar before the Bretton Wood. In this case all time COP agrees with YPR1 around 2165$. This is next nearest target on gold...
Weekly
Here is again - the tricky moment, especially if you're not watching for CME futures charts. Retail broker chart shows that we have nothing special, but in reality we've got two side-by-side bullish grabbers here, suggesting action above 1870$ area and completion of wide AB-CD OP target around major 5/8 resistance area of 1922$ (Futures price is different from spot one). Second important issue that we have is vital point for short-term context - current week lows.
Daily
Here we do not have any patterns by far. Market has completed grabber's target and hit the level that we've set as approximate target - around overbought and 1815$ resistance. Trend turns bullish.
Intraday
So, on Friday Gold has reached the levels that we've suggested around 1815$, which is local top. Now it stands in minor pullback, but thrust action is nice. As you understand - potentially we could get nice B&B "Buy" setup that could let us to step in on a long side. Besides, we also talked about reverse H&S shape here.
Second - market is flirting with MACD and we could get bullish grabber as well...
On 1H chart we follow to the trading plan that discussed on Friday. As gold is coming to B&B pattern on 4H chart - we have also K-support here:
You probably should notice that gold market reaction on the "Week of the Central Banks" stands a bit different, compares to stocks or FX market. While FX was able to show just short-term, emotional inspiration on major currencies, such as EUR or GBP - Gold has shown better upside dynamic. And, although Omicron fears have depressed it a bit on Friday, it has shown much better performance. Our suggestion that secret stands in the bond market and how it treats recent Fed promises...
Market overview
Gold prices stabilized near a two-week low on Wednesday, as investors await the U.S. Federal Reserve's decision on the pace at which the central bank plans to taper its pandemic stimulus measures.
Gold prices recovered from early losses to trade higher on Wednesday, drawing support from a decline in the dollar after the U.S. Federal Reserve said it would end its pandemic-era stimulus measures in March. The U.S. central bank's move signaled its inflation target has been met and paved the way for three quarter-percentage-point interest rate increases by the end of 2022.
In its new economic projections, the Fed forecast inflation would run at 2.6% next year, compared with the 2.2% projected as of September. Fed Chair Jerome Powell also noted the U.S. economy was improving quickly, but warned he sees no near-term end to the COVID-19 pandemic.
ECB officials are set to call time on the central bank's Pandemic Emergency Purchase Programme but investors will look to see how the six-year-old Asset Purchase Programme may pick up the slack, though rate rises are a way away.
Analysts said gold gained despite the possibility of higher U.S. interest rates, which increase the opportunity cost of holding bullion, because rate hike prospects had been priced in before the Fed announcement. Apart from a weaker dollar, "there are multiple supportive elements for gold, including geopolitical issues and pent-up physical demand," StoneX analyst Rhona O'Connell said.
Gold rose above the key $1,800 level on Friday and was set for its first weekly gain in five as worries over the Omicron surge and hot inflation drove investors to safe-haven assets.
But the metal marched higher because rate hike prospects had been priced in before the announcement, analysts said. Gold's gains came despite inflows into the dollar, also considered a safe store of value during geopolitical uncertainties. But its outlook for 2022 "remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields," Saxo Bank analyst Ole Hansen said in a note.
The Fed said it would pave the way for a three quarter-percentage-point interest rate increases by the end of 2022 as a response to full employment and surging inflation. The benchmark 10-year yield has dropped 3.8% this week.
Safe-haven gold also seemed to take some cues from reduced risk appetite due to fears over the Omicron coronavirus variant.
MARKETS DON'T BUY FED HAWKISH VIEW
Global bond funds posted huge outflows in the week ended Dec. 15, as investors anticipated that major central banks would shift the direction of their monetary policy during key policy meetings this week, pressured by soaring inflation levels. Investors offloaded global bond funds of $6.91 billion, marking their biggest weekly net selling since April 8, 2020, Refinitiv Lipper data showed.
U.S. bond funds witnessed net selling of $7.48 billion, although investors purchased European and Asian bond funds of $1.45 billion and $0.19 billion respectively.
Investors sold global equity funds of $13.14 billion, compared with net purchases of $3.43 billion in the previous week. Global money market funds also saw outflows, worth a net $20.46 billion, after eight straight weeks of inflows.
The Federal Reserve's more hawkish turn this week came amid heightened worries about economic recovery and inflation, but it has barely changed the bond market's view that short-term interest rates could top out below the U.S. central bank's estimated peak. Current betting even has rates staying below the inflation level the Fed projected over the next few years.
Since the Federal Open Market Committee released its policy statement Wednesday, markets have priced the terminal rate where policy rates will stop going up, at between 1.4% to 1.7%, according to eurodollar futures' view of U.S. rates in three years. The Fed does not forecast a terminal rate, but the market's expectation of when the current hiking cycle will peak is well below the U.S. central bank's view of 2.5%, and lower still than the revised core inflation estimate of 2.6% next year.
On Wednesday, the Fed flagged three interest rate increases in 2022 and another three in 2023, with the policy rate climbing to 2.1% in 2024.
The Fed typically lifts its benchmark rate higher until the economy is able to run on its own without any monetary policy action, typically hitting or exceeding what is known as the "equilibrium rate". The previous Fed rate hike cycle in 2018 peaked at 2.25%-2.5%.
The U.S. Treasury yield curve typically bear flattens as the Fed shifts toward tightening, with smaller rises in long-term than in short-term yields. But recently, long-term U.S. Treasury yields have dropped from already very low levels, implying the historically low Fed terminal rate.
The decline U.S. long-term yields has baffled market participants given a backdrop of persistent inflation pressure, stronger and tighter labor market, as well the Fed's tapering of its bond buying.
Jonathan Cohen, head of rates trading strategy at Credit Suisse in New York, said the decline in yields could be attributed, in part, to supply-demand factors, which include rapid buying of U.S. Treasuries by banks, the reduction in available supply even after accounting for Fed tapering, and the de-risking of pension funds as they gravitate toward bonds.
Still, some analysts believe the terminal rate is way too low and may well end up higher than what markets expected.
Indeed, as we've shown yesterday in FX research, the Fed rate change could be more aggressive than market thinks right now, at least by Fathom Consulting opinion. Mostly because of the wage inflation - not only in the US but in EU as well. The phenomenon that has not been seen in developed countries for the long time.
Even J. Powell, before the official Fed meeting gave the hint that planned rate change seems to be too slow. Particular this moment bond market confirms by ignoring hawkish Fed steps. Just days before the Fed's November meeting, however, when the plan was to be announced, Powell got his first inkling that the pace might be too slow: The Labor Department reported labor costs in the third quarter had shot up by the most since 2004.
As a result, the employees' sentiment becomes more sensitive to wage growth in relation to inflation and that could force employers' to boost wages more aggressively, leading to another spiral of inflation. This combination could turn to chain reaction and self-fulfilled prophecy, forcing Fed to move rates faster.
The same things we see in EU, after supposed "slightly hawkish" comments from the ECB. Euro zone bond yields slipped back on Friday as markets assessed the reduction of monetary stimulus from the European Central Bank as being roughly in line with expectations. Germany’s 10-year government bond yield, the euro zone's benchmark, was down 2.5 basis points at -0.371%, after rising 1.5 bps on Thursday.
COT Report
Precious metal funds saw net selling of $402 million, posting a second straight week of outflow. CFTC data shows jump in speculative short positions this week, but this was at the eve of Fed meeting, so it could be just the preparation for the statement, as gold has dropped before the meeting as well. Since we've got the rally since then, it would be interesting to take a look how situation will change next week.
As a bottom line:
We intentionally put investors' expectations on Fed statement in the beginning of our report just to show how different they were to real market reaction. Obviously markets have expected some hawkish tones and prepared to corresponding reaction of higher US dollar and rally in the interest rate market. This kind of reaction seems absolutely reasonable. But reality was different. This makes vital meaning to the gold. We get no changes from the Fed until March meeting and currently gold rally is based on weak interest rates reaction. Market doubts that Fed will execute steps that are planned. As Fed was waiting too long to make first steps in holding of inflation, it goes out of control a bit, which suggests more radical Fed reaction in near-term. But investors worry that it could hurt the economy pace, which is still fragile, as well as job market. Besides, fears around Omicron impact, that it could slowdown economy as well also suggest that Fed will not be able to keep promised pace of rate change. That puts the upside limit on the upper border of interest rates, as investors suggest that Fed steam will out of the pot earlier than it needs to change rate and push it to 2.1%.
And now we're coming to the major question - who is right? Fed, that suggests faster rate change and pushing it to 2.1%, Fathom consulting, that suggests even faster price hike or bond market that doesn't believe in this and suggests slower interest rates dynamic. This makes crucial meaning for the gold. Because if bond market appears to be wrong - interest rates jump and makes bearish impact on gold, pushing real interest rates higher. Conversely if bond market is right - gold will keep climbing higher. How it is possible to clarify? Only by monitoring of statistics, such as GDP, Sales, Consumption, production and inflation. The strong performance supports the Fed opinion and negative to the gold. Weak data suggests that bond market is right and Fed will adjust its forecasts later.
The pandemic theme and Omicron also have a big importance as well. Because the turning off the pandemic should eliminate fears and concerns around economy performance and also support rally on interest rates. Now it is unclear the plans of "pandemic masters". From the one side - China just is starting to get first negative fruits on breaking supply chains, that is primary US target. From this point of view, pandemic should last longer, at least for 1-2 years more. And that is what Pfizer told - they suggest that it lasts till 2024. From the other side - Omicron (as I read about it) includes all other major variants and with high degree has been made manually. It leads to lighter disease way and provides immunity to the whole family of the variants. Virologists tell that usually "masters" produce this variant when they want to finish the pandemic. It difficult to say right now who is right. But here we specify the major points, driving factors that we have to keep an eye on in long-term.
In short-term, market stands in information vacuum, until March-22 probably, that should be supportive to the gold. The "doubt" sentiment should hold here until new statistics will be released that either confirm or deny bond traders suspicions. Interest rates probably should fluctuate around current levels and gold, with current momentum has chance to climb higher.
Technicals
Monthly
December still is an inside month and makes no impact on the picture. The major achievement of the last week is reaching of 1758$ major support with following healthy upside bounce.
Once we've mentioned that overall price performance doesn't look truly bearish in long term. Market stands too close to the top, forming tight consolidation and has not reached even 3/8 major support. And potential appearing of pennant pattern just confirms this. This in turn, cares signs of bullish dynamic pressure, as market stands tight while MACD is going down...
In short-term market is flirting with YPP and breaking of 1875 top might become important moment. The support line that makes shape of triangle here seems to be more important at current moment.
Speaking about upside target, we have very thrilling combination. Major COP is completed, but we also have all-time COP, when A point equals to ~ 40$ - fixed gold price to US dollar before the Bretton Wood. In this case all time COP agrees with YPR1 around 2165$. This is next nearest target on gold...
Weekly
Here is again - the tricky moment, especially if you're not watching for CME futures charts. Retail broker chart shows that we have nothing special, but in reality we've got two side-by-side bullish grabbers here, suggesting action above 1870$ area and completion of wide AB-CD OP target around major 5/8 resistance area of 1922$ (Futures price is different from spot one). Second important issue that we have is vital point for short-term context - current week lows.
Daily
Here we do not have any patterns by far. Market has completed grabber's target and hit the level that we've set as approximate target - around overbought and 1815$ resistance. Trend turns bullish.
Intraday
So, on Friday Gold has reached the levels that we've suggested around 1815$, which is local top. Now it stands in minor pullback, but thrust action is nice. As you understand - potentially we could get nice B&B "Buy" setup that could let us to step in on a long side. Besides, we also talked about reverse H&S shape here.
Second - market is flirting with MACD and we could get bullish grabber as well...
On 1H chart we follow to the trading plan that discussed on Friday. As gold is coming to B&B pattern on 4H chart - we have also K-support here:
