Robust rise in yields
Market report Michael Blumenroth – 19.01.2024
Weekly market report
The trend of rising government bond yields, happening since the beginning of the year, continued this week. Ten-year Treasuries, for example, are currently yielding around 4.15 per cent, the exact same level as in the hours preceding the Fed meeting on 13 December. Following that meeting, yields saw a sharp decline which lasted until the end of December, as the Fed officially conceded for the first time that the cycle of interest rate hikes was likely over and rate cuts were due in 2024.
Fed and ECB: key interest rates unchanged
Since the beginning of the year, the financial markets have come to realise that the money markets’ expectations regarding key interest rate cuts were too high, resulting in backpedalling. A number of Fed officials, among them Governor Waller just this week, repeatedly pointed out the Fed’s intention of making sure the inflation rate is positioned on a sustainable path towards the 2 per cent mark before making its first rate cut.
ECB President Christine Lagarde similarly dampened all interest rate cut speculations on this side of the Atlantic, stating that the ECB was waiting for the data on wage and salary trends in the eurozone before possibly deciding on its first interest rate cut “in the summer”.
Gold under pressure from strong US dollar, yields
The US dollar has risen slightly since the start of the week. Both higher US yields and the US presidential primary elections are playing a role here, bringing some uncertainty to the markets (particularly regarding the question of how US trade policy could possibly change if Trump were to be re-elected as US president). Market uncertainty usually brings a tailwind for the US dollar.
Against the backdrop of rising yields and a stronger US dollar, it is no wonder that gold came under moderate pressure over the course of the week. Last Friday, the precious metal traded at 2,039 US$ per ounce. Following the unexpectedly low data of the US producer price index, the US dollar briefly weakened on Friday afternoon and yields dropped, causing gold to rise to its weekly high of 2,062 US$ per ounce. Things changed from Tuesday after the US returned from its long weekend (due to a bank holiday on Monday). For the reasons mentioned above, prices fell back to 2,002 US$ per ounce on Wednesday evening, and apparently long positions on the futures markets were also liquidated at this point. Gold has since recovered and started the trading day at 2,026.
The Xetra-Gold price initially rose from 59.75 € per gram on Friday last week to 60.40 on Monday. However, it then started to slacken from Wednesday to 59.30 on Thursday. This morning, Xetra-Gold was expected to kick off trading around a noticeably recovered 59.90.
Over the next few days, the development of yields is also likely to determine the direction of the other markets. The ECB will meet on Thursday next week, with no surprises expected. The US and UK monetary authorities will meet the following week.
I wish all our readers a pleasant weekend.