Calm following turbulent market phase

There’s no sign of a summer slowdown – in fact the past few days have been pretty busy. Three events affected the market, in the following chronological order.

• The first was the interest rate hike by the Japanese central bank last Wednesday, which had not been expected by all market players. The yen appreciated sharply in the wake of Bank of Japan Governor Ueda’s announcement at the press conference following the meeting that there would be more rate hikes in 2024. Prior to this, the Japanese currency had predominantly depreciated for months. 
• Then on Wednesday evening, Federal Reserve Chair Jerome Powell announced that the Fed would be closely observing not only inflation going forward, but also the labour market, and would include both factors in considerations of a looser monetary policy. On Thursday, the highly regarded leading indicator ISM Manufacturing PMI pointed to noticeably subdued demand for labour in US industry. First-time applications for unemployment benefit also increased further than expected.
• The whole thing culminated on Friday. According to the labour market report for July, US unemployment rose from 4.1% in the previous month to 4.3%. This scared many market players, some of whom now see an increased likelihood of recession in the USA.

This resulted in 0.5 percentage points more in rate hikes being priced in on the interbank lending markets between Friday afternoon and Monday morning than before the labour market data was published. The yields on US Treasuries fell uncommonly far, which in turn caused strong appreciation of the Japanese yen, triggering further turbulence on the market. This was because of major investors’ heavy use of the carry trade strategy over the past three years, in which they borrowed yen at very low interest rates and then invested it in higher-yielding investments such as US Treasuries or Mexican government bonds. 

Sales of gold positions to cover losses

The Japanese benchmark stock indices fell by more than 12% on Monday mainly due to the appreciated yen (which means lower export revenue for Japanese exporters), causing other stock markets to decline too. Intuitively speaking, the gold price should actually profit from this type of environment. However, so many sell positions in yen and buy positions in equities came into difficulties that a large number of investors were forced to sell their profitable gold positions too in order to cover their losses on other markets (they are unlikely to have been able to avoid the dreaded margin call).

This meant gold prices were somewhat lower than last Thursday, although all other precious metals and oil prices suffered greater losses. 

Last Thursday morning gold was trading at USD 2,444 per ounce. Following the release of US labour market data, it climbed to just under USD 2,478 per ounce, missing its mid-July record high by just USD 6.00. Then came the aforementioned sale of gold positions to cover losses on other markets, causing the price to drop to USD 2,364.50 per ounce on Monday afternoon. On Tuesday it recovered to USD 2,420 per ounce, but then fell to USD 2,380 per ounce before reaching the USD 2,400 per ounce mark again yesterday. Gold started European trading at around USD 2,394 per ounce at 7 a.m. this morning. 

Xetra-Gold trading lower than last week

Xetra-Gold is also trading lower than last week – not least due to the slightly more stable euro to dollar exchange rate compared with last week. During normal trading hours it rose from EUR 72.60 per gram last Thursday morning to EUR 73.45 per gram on Friday morning. The gold price dip caused a slide to EUR 69.30 per gram on Monday, before it rose back up to above the EUR 71.00 per gram mark. Xetra-Gold is likely to start this morning at around EUR 70.40 per gram. 

Consolidation period continues

The markets entered a consolidation period on Tuesday and continued it yesterday. The stock markets made up for some of their losses of Friday and Monday, while government bonds gave back their gains, causing yields to rise. This caused a little headwind for gold prices. We are curious to find out the US consumer price data on Wednesday. 

I wish all readers a pleasant – and not too hot – weekend, or at least a shady spot and a cool drink.