Asian stocks were mixed on Monday, as investors braced for a week of key market events. Treasuries and the dollar were steady before the Federal Reserve’s policy meeting this week, which comes as President Donald Trump prepares to name the central bank’s next chairman. Shares in China sold off as the nation’s bond slump deepened amid mounting deleveraging concerns. Elsewhere, crude oil maintained near 6-month high, while gold lingered near a 2-month low.
- Reports that US President Donald Trumps is favouring Jerome Powell, who is more dovish than rival candidate John Taylor, to head the Fed overshadowed strong 3Q GDP numbers last Friday, taking the steam out of an otherwise impressive dollar rally.
- Nonetheless, the Dollar Index closed above a key resistance – 94.267, for the first time since July, and confirmed its breakout of its downward trend channel which has held firm since the start of the year. The next resistance target of 97.775 may be tested over the course of the medium term. The 94 handle should now provide a region for dollar bulls to buy in, so expect significant support around the level.
- The Dollar Index should continue to hold above the 94 handle amid ongoing optimism about the US tax reform, as well as weakness in the euro following dovish comments from ECB President Mario Draghi last week. The greenback could push further if tax reform moves ahead quickly now that the White House has approved a budget resolution.
- The benchmark 10yr Treasury yield retreated sharply back towards the 2.40% support last Friday after a report said that Jerome Powell is leading the Fed Chair nominations race.
- The 10yr yield managed to close above the key 2.40% though; more upside is expected as long as the yield holds above the significant support. The benchmark had last Friday reached a 7-month high of 2.48%.
- The next 5 trading days will bring a torrent of market-moving information: President Donald Trump is poised to finally announce his nominee to lead the Federal Reserve; US central bankers have an interest-rate decision to make; a House committee is set to release a tax bill; and Treasury will unveil plans to issue more debt to make up for lost funding from the Fed.
- Precious metals continued to face strong headwinds over the past week in the face of a rising US dollar and the prospect of higher yields. Spot gold has declined in 6 out of the past 7 weeks, and is likely to retest its 2-month low of $1,260.67/Oz again soon. That remains a key level, as shown in the chart, because it coincides with spot gold’s 200-day moving average as well, last crossed in July. A break below it could signal more pain for gold bulls, with the next form of support coming in around the $1,200/Oz handle.
- Conversely, if gold manages to hold above the $1,250/Oz – $1,260/Oz region, it could make a renewed push for the $1,300/Oz level again.
- Crude oil closed at a 6-month high Friday, just shy of the $54/bbl mark, after Saudi Arabian Crown Prince Mohammed bin Salman last week backed extending production cuts by OPEC and its allies beyond March. In addition, Qatar Energy Minister Mohammed Al Sada commented that world stockpiles are down to about 160 million barrels above the 5-year average and prices are heading toward “fair” levels.
- However concerns that US oil producers will continue to pump away continue to linger, after a report revealed that American drillers are getting the most output possible with wells that now can run horizontally for miles, as well as putting into service drilled-but-uncompleted wells that need to be fracked.
- The previously-broken resistance around $53/bbl should now act as support. The next resistance in line to be tested lies at $55/bbl.
Upcoming Key Events:
- Trump is poised to announce his nominee for Fed chair by Nov 3, before he departs for Asia.
- In Congress, the House Ways and Means Committee is expected to release on Nov. 1 legislation for tax cuts.
- On the economic front, PCE data, personal income and spending, consumer confidence, ISM manufacturing, PMI and October’s nonfarm jobs report are all due out week. On top of that, the FOMC is expected to leave rates unchanged on Nov 1 and set up a hike in December.
- Canadian GDP is due out on Tuesday. Similar to the US, Canada will release its October jobs report on Friday.
- PMI data from the UK, China and Singapore is due this week as well, while Australia is set to report September retail sales.
Weekly Thematic News:
According to Bloomberg report, gold investors are loading up on the haven asset, sensing the dip in the price of the precious metal from about $1,362/Oz in early September to $1,265/Oz recently is a buying opportunity. Despite the price decline, investors have boosted their holdings of gold through exchange-traded funds to the highest since November 2016, or 2,163.4 tons.
The recent drop in gold has a lot to do with the rebound in the US dollar; since the safe haven asset is priced in the US currency, any gain in the greenback mean’s its more expensive to buy gold. Although gold may be suffering a rough patch, it does have some high-profile backers.
Billionaire Ray Dalio, the founder of Bridgewater Associates, has recommended investors consider placing 5 to 10% of assets in gold as a hedge against political and economic risks. BlackRock advised that in a world where economic or geopolitical perils lurk, investors hould hold bullion in their portfolio to balance equity and credit risks, adding that the prospects for real interest rates staying low are positive for gold.
An alternative to invest in gold would be to buy into the Gold Miners Inverse-Volatility US portfolio on iAdvisor, which comprises of US-listed gold mining companies. In a world where rising debt is a concern, we employ a filtering process to ensure the companies selected satisfy certain credit ratio requirements.