Crude oil, gold: Impact of latest geopolitical headlines didn’t last long

• Crude oil and gold rallied initially on increased geopolitical tensions last Friday before giving up their gains
• Sensitivity to geopolitical tensions in the Middle East rarely lasts long in the absence of fresh headlines

Traders come across as almost desensitised to geopolitical developments in the Middle East nowadays, unable to sustain market moves on increased tensions beyond anything other than the short-term. Just look at gold and crude oil last Friday to news US and UK forces, with the support of allies, had attacked Houthi rebel targets in Yemen in response to continued disruptions caused to shipping activities in and around the Red Sea.

Crude oil, gold reverse hard despite Iranian threat

The initial reaction was exactly what you’d expect; crude oil went bid on the threat posed to supplies coming from the region while gold gained on increased risk aversion. But both moves were reversed as quickly as they occurred, suggesting that in the absence of a further escalation in tensions, interest, and more importantly concern, is unwound rapidly. It’s been the playbook for market moves ever since the latest tensions first escalated in southern Israel last year. Fade the rips, not buy the dips.

No one can say with any certainty what will happen next, but the inability for crude and gold to maintain their gains suggests near-term downside risks may increase without another escalation, be it driven by the Houthis or their backers, Iran.

Crude oil attempting to stabilise

Having broken downtrend resistance on the back of the US ad UK airstrikes, crude oil rose to above $75 per barrel before reversing hard into the North American to close roughly where it was prior to the headlines.

It’s now stabilised on the former downtrend, finding buyers on an attempt to drill the price back below it, resulting in a bullish hammer candle on the four-hourly. While that suggests bulls haven’t completely thrown in the towel, you wonder how long that may remain the case given prior form around pops generated on geopolitical headlines.

On the downside, a break of $72.15 may open the door to further selling, potentially targeting $71.15, $70.55 or even $69.35. On the upside, $74 looms as the most logical initial target for longs.

Gold comfortably above $2000 ahead of key Fed speech

While gold didn’t give up all its gains on Friday, assisted by another led lower for US bond yields after a soft producer price inflation report, it was comprehensively rejected above $2058, sending it back below former downtrend resistance. The reversal mirrored what was seen earlier in the week where a similar advance fizzled. However, recent price action has been more constructive with dips below $2047.3 bought, suggesting it may help determine where gold moves from here. On the downside, support is located at $2040 and again at $2016. $2058 looms as the first upside target for longs.

With US rates markets nearing 170 basis points worth of rate cuts from the Fed this year, the threat posed to gold by a stronger US dollar and higher bond yields comes down to whether any event can pose a threat to the soft landing narrative? While we’ll receive US retail sales and University of Michigan consumer inflation expectations data this week, a speech from Fed Governor Christopher Waller on Tuesday looms as the most likely known threat. The former policy hawk turned dovish in late November, preceding the broader pivot towards rate cuts from the FOMC.

-- Written by David Scutt

Follow David on Twitter @scutty