US Election

Gold was on a roller-coaster last week and has shed over $100 or 5.5% over eight trading days. Silver has lost just over $2 or 9%, and the Friday fall was precipitous. The long Chinese holiday and the implosion of the Shanghai premium were a partial trigger for the late falls last week, but the main influence was a surge in bond yields midweek. Support has developed at the start of this week, but potential professional buyers stood well back last week. Global bond markets finally turn tail and intensify pressure on gold; gold is potentially ripe for a short-covering rally, but with China closed and the bond markets firmly on the defensive now, this may take time to develop. We start the final quarter of the year with gold and silver licking their wounds after a hefty wash-out, and caution looks likely to be the watchword for now.

Inexorably rising bond yields kept pressure on equity markets this morning, with the S&P 500 off 0.6% and, to the contrary, Nasdaq up 0.3%. Ten-year bond yields rose 12 basis points to 4.7%, a significant move. The dollar index rose close to one percent, a significant move. Commodities sold off, notably silver down 4.3% and gold off 1.0% Bottom line: risk-off.

There was some good news last week out of China last week, despite bad news from the struggling property sector, and record low US confidence in doing business in China. The decline in industrial sector profits slowed, a state-owned fund was set up to invest in emerging industries, and the country plans to double power generation from nuclear by 2035.

Equity markets erased early morning gains, notably the Nasdaq being unchanged by lunchtime after a 0.6% rally. Traders cheered better than expected inflation data and less weakness than expected in a consumer sentiment survey. Bond yields fell marginally. The dollar was unchanged. Oil saw continued profit-taking. Bottom-line: risk-off.

Rising bond yields threaten equity market valuations, notably tech stocks, but benefit the US dollar’s attractiveness – themes which continue to play out in markets. Lower bond yields benefited the equity market today, notably the Nasdaq, but for how long? Housing sales data was very weak, unsurprisingly given record high mortgage rates. Bottom-line: risk-on.

Rising bond yields are the main story driving financial markets, with the S&P 500 and Nasdaq continuing to fall. Bond yields saw major yield increases. Durable goods order data was stronger than expected. The dollar continues to rise against most major cross-rates. Gold fell below the key $1,900 level. Oil was up almost 4%, driven by low supply levels and the continued impact of Saudi and Russian production cuts. Bottom-line: risk-off.

Rising bond yields and declining consumer confidence both indicate that the Fed’s ‘higher for longer’ interest rate policies are impacting the real economy. One measure in today’s Consumer Confidence Index data pointed to recession. Nasdaq and the S&P 500 were off sharply. Dollar strength and a rising oil price were the standout performances. Bottom-line: risk-off.

Bullish factors Speeches by Fed members should reinforce the perspective of higher interest rates for a longer period in the United States. PCE can reinforce concern about the new acceleration of American inflation. Bearish factors Minutes of the Copom meeting may signal limitations for more intense cuts in the Selic rate or a slowdown in the expected pace of adjustments for 2024. Revision of the output gap calculation in the Quarterly Inflation Report (RTI in the acronym in Portuguese) may raise inflation expectations and reinforce the Central Bank's cautious tone in conducting monetary policy. If the PMIs for China confirm a trend of stabilization and recovery of economic activity in September, their effect can be bearish for the real/dollar pair.

Nasdaq fell sharply on news that while the Fed will pause rates for now, higher rates are possible. Higher bond yields and the risk of another rate hike this year caused a sell-off in equities and bonds. Oil saw profit-taking. The dollar index rallied on hopes that US rates will rise further. Bottom-line: risk-off.

Nasdaq, the R&P 500 and Russell 2000 equity indices were off marginally as markets braced for tomorrow’s Fed interest rate decision. Bitcoin rose 1.2% to $27,177, continuing a recent rally. Ten year bond yields rose to 4.37%, a rate last seen in June 2008. Oil and the dollar, recently strong markets, were unchanged, as were Gold and Silver. Bottom-line: risk-off.

Bullish factors The Federal Reserve is expected to take a firm stance against inflation and release its projections of interest rates higher than the median of market estimates, reinforcing the perception that interest rates will stay higher for longer in the US and strengthening the dollar. The Monetary Policy Committee should reduce the basic interest rate (Selic) by 0.50 p.p., reducing the country's interest differential to other economies and reducing the inflow of investments into the country, weakening the BRL. Bearish factors The Bank of England is expected to raise interest rates even in the face of economic stagnation in the country, increasing concerns about an economic slowdown in Europe and strengthening the dollar. The Bank of Japan is expected to maintain its ultra-loose monetary policy unchanged, contributing to the strengthening of the dollar by contrast.

Higher oil prices continue to be the headline in financial markets, hitting 2-year highs and briefly surpassing $92 per barrel. Nasdaq and the S&P 500 struggled to find direction ahead of the Federal Open Market Committee September meeting today and tomorrow. No one expects another rate hike. Treasury markets saw yields rising, with 10-year yields close to their highest levels in 16 years at 4.32%. The US dollar index paused after a recent run. Bottom-line: risk-hold.

In the short-term gold remains range-bound, and after finding support in mid-July on its dip below $1,900 (some of which was believed to be institutional and some from the official sector), has traded between $1,900 and $1,950. For the time being we can probably expect it to stay in that range as there is plenty of resistance on the charts above $1,950 and the professional markets, at least, are not prepared to commit themselves until the Fed’s and European Central Bank’s interest rate policies become crystallised.

Global attention is focused on Chinese economic data and financial market conditions after weakness in the first half of the year, with a troubled property sector, and official action to cautiously lower interest rates and increase domestic bank liquidity. Generally, the flow of economic data was more positive than expected last week with signs of economic momentum gathering –better-than-expected retail sales, stronger loan demand and signs that inflation is rising. The Central Bank is still fine-tuning monetary policy to promote that growth and offset property-sector weakness while trying to avoid a sharp sell-off in the Yuan, and last week showed some signs that this is working.

Major indexes extended losses after mid-day, dragged down by tech majors in Nasdaq. Oil and the US dollar built on recent gains, with the former rising to $90.7 per barrel and the latter holding the 105.3 dollar index level. US consumer sentiment is finally eroding, signaling the lagged impact of higher rates. On the other hand, China’s retail data was surprisingly strong, prompting a rally in the yuan. US manufacturing data was surprisingly strong. Bottom-line: risk-off.

The Fed will keep one eye on events and one on economic data. Recent inflation and demand data have been pretty benign despite the rising oil price. Risks of a budget fall-out and government shutdown coupled with a US auto workers strike might tend to make the Fed more dovish and not look to raise rates next week. The ECB hinted that today’s rate rise might be its last. The broad Russell 2000 index led markets higher and the Vix fear index fell to a year-to-date low. The Dolla was strong, and the Euro continued its swoon. Oil passed the $90 mark. Bottom-line: risk-on.

Mixed results in this morning's inflation data fed hopes of a rate hike pause on Wall Street, leading to cautiously firm stocks at midday, led by Nasdaq. Bond yields fell back after sharp increases on a first read of the inflation data. Futures markets put close to zero probability on a rate rise next week. Elsewhere currency and commodity markets were pretty much unchanged. Crude oil moved up to a 10-month high. Bottom-line: risk-on.