Headwinds from Geneva

The topic of the week is the agreement to de-escalate the trade conflict reached by the US and China in Geneva last weekend. The outcome of these talks exceeded even the most optimistic expectations – including, I must admit, my own. The two sides agreed that, for an initial period of 90 days, US tariffs on Chinese imports will be reduced from 145 to 30 per cent (10 per cent global tariff + 20 per cent surcharge due to disputes over China’s responsibility for the US opioid crisis). Beijing’s tariffs on imports from the US will be reduced from 125 per cent to 10. In the run-up to the negotiations, a reduction in US import tariffs on Chinese goods to 60 to 80 per cent would probably have been more acceptable to the financial markets. 

Interest rate expectations scaled back 

This was an unexpectedly positive outcome. The market reactions were therefore more than understandable: euphoric reactions on the stock markets, rising yields and a recovery of the US dollar, which had come under heavy pressure in April. This combination of factors provided strong headwinds for gold prices. In addition, expectations of key interest rate cuts by the Fed were noticeably scaled back on the financial markets due to the now supposedly somewhat brighter economic outlook for the US: Just over two weeks ago, the interest rate futures markets were pricing in four key interest rate cuts of 0.25 percentage points each by the end of the year (the rationale being that the Fed would need to support a weakening economy), but currently, only around two key interest rate cuts are forecast, with expectations for interest rate cuts by the ECB and other central banks similarly scaled back.

Optimism up, gold prices down 

Overall, this means that, from the perspective of the financial markets, the need for ‘safe havens’ is currently considered to be lower than in the weeks since the announcement of US tariffs on 2 April. This is due to the de-escalation in the tariff dispute between the US and China, which triggered a wave of selling on the gold markets – presumably primarily by short-term investors who had built up gold holdings since the beginning of April. Last Thursday morning, gold traded at 3,370 US$ per ounce but slipped below the 3,300 mark intraday, after the high-level negotiating officials from the US and China were announced for the meeting in Geneva and it became clear that decisions could be made. After a moderate recovery on Friday, the Geneva agreement triggered another wave of selling. On Monday, the gold price dropped to 3,207 US$ per ounce and even further yesterday, to 3,170. This morning, the sell-out continued, causing gold to drop to around 3,125 US$ per ounce. The precious metal started the European trading day at around 3,130 US dollars per ounce. Note that even at this level, it remains up 19 per cent since the beginning of the year, a rise that very few stock indices can match. 

Xetra-Gold trades around 90 € mark

The Xetra-Gold price also lost ground, somewhat slowed by the weaker euro against the US dollar. It initially fell from 95.75 € per gram last Thursday morning to 91.05 yesterday afternoon. Prices suffered their heaviest daily losses on Monday. If the 7:00 level holds as markets open, Xetra-Gold would kick off the European trading day even lower at around 89.90 € per gram. In the coming days, prices could be further impacted by developments in the trade conflict, some of the US economic data due to be released today, as well as geopolitical developments such as the meeting of officials from the US, Ukraine and Russia in Turkey scheduled for today. It remains to be seen when the selling wave will end. Currently, the markets are once again focusing strongly on rising yields in the US. 

I wish all readers another sunny weekend.