【Market Evening】Dollar climbs through 92, Gold fell below $1,770, Oil drops as COVID-19 surges

Gold fell below $1,770

Gold prices edged lower on Tuesday to hover near a one-week low hit in the previous session, weighed down by a firm dollar and concerns that the U.S. Federal Reserve will tighten its monetary policy sooner than expected.

Spot gold fell 0.42% to $1769.89 per ounce, silver fell 0.33% to $25.972 per ounce by 18:00 (GMT+8).

ED&F Man Capital Markets analyst Edward Meir said listless trading was seen in the gold market as some market participants were still confused over the Fed’s policy outlook.

Several Fed policy makers have turned hawkish despite a weaker-than-expected U.S. inflation reading last week.

The Fed has made “substantial further progress” towards its inflation goal in order to begin tapering asset purchases, Fed Bank of Richmond President Thomas Barkin said.

The dollar hovered below a two-month high against its rivals, making gold more expensive for holders of other currencies.

However, Meir said, “the dollar will start to weaken again, because the landscape is clear on the rate (hike) front for at least another 18 months to two years.”

Gold is seen as a hedge against inflation, though a Fed rate hike will increase the opportunity cost of holding bullion and dull its appeal.

“Although having rebounded (from a selloff two weeks ago), gold has continued to trade below its 100-day moving average level,” OCBC said in a note.

“We expect gold to resume its downward trend this week as risk sentiment firms and markets continue to look towards the prospects of tightening monetary conditions from the Fed.”

Dollar climbs through 92

The dollar edged up on Tuesday toward a two-month high versus major counterparts, with traders largely sidelined ahead of a key U.S. jobs report that could alter the timing of an exit from Federal Reserve stimulus.

The US dollar index rose 0.12% to 92.00 by 18:00(GMT+8).

 The Fed commentary since then has put the focus on the data to determine when a tapering of asset purchases and higher rates would be appropriate, with Chair Jerome Powell saying a weak ago that policymakers would not act on just the "fear" of inflation, and will encourage a "broad and inclusive" job market recovery. 

The U.S. Labor Department is expected to report a gain of 690,000 jobs in June, compared with 559,000 in May, and an unemployment rate of 5.7% versus 5.8% in the previous month, according to a Reuters poll of economists.

Investors are also looking at U.S. consumer confidence data on Tuesday and the Institute for Supply Management’s manufacturing index on Thursday for clues as to where interest

rates are headed.

"Is it indeed that the dollar has bottomed and can only get stronger from here, or is it just a short-term positioning adustment? We've been arguing it's more a function of the latter," Paul Mackel, HSBC's global head of foreign-exchange research, said in a conference call with journalists.

With countries reopening from the coronavirus pandemic, the dollar should weaken toward the end of this year, he said.

"That's typically what happens when you have this synchronized global growth backdrop.”

The dollar weakened 0.06% to 110.545 yen, staying below a nearly 13-month high of 111.110 reached last week.

Both the dollar and yen benefited from some safe-haven demand as the more contagious Delta COVID-19 strain spread in Asia and elsewhere, stoking fears of further lockdowns.

The euro declined 0.07% to $1.19145, edging back toward the 2-1/2-month low of $1.8470 touched on June 18.

"The market had been positioned long of the single currency on optimism regarding the vaccine catch-up trade in the region (but) forecasts that the Delta variant of COVID could spread through Europe (in) the summer months could now be undermining confidence in this trade," Rabobank strategist Jane Foley wrote in a report, cutting a one-month euro forecast to $1.19 from $1.20.

"Assuming the U.S. data remains broadly supportive, we expect the USD to grind moderately higher vs. the EUR though the course of the year.” 

Elsewhere, sterling slipped back toward a two-month low, weakening 0.06% to $1.38695.  

The Australian dollar, seen as a liquid proxy for risk appetite, fell 0.09% to $0.75580 after sliding 0.31% at the start of the week amid concerns over renewed COVID-19 lockdowns across parts of the country.

Oil drops as COVID-19 surges

Oil prices dropped for a second day on Tuesday on worries about slower fuel demand growth as outbreaks of the highly contagious COVID-19 variant Delta sparked new mobility restrictions around the world.

WTI oil was at  $72.222 a barrel, fell 0.33%, Brent was at $73.827 a barrel, fell 0.16% by 18:00(GMT+8).

The flare-up in cases of the Delta variant comes as the Organization of the Petroleum Exporting Countries (OPEC), Russia and allies, together known as OPEC+, are set to meet on July 1 to discuss easing their supply curbs.

OPEC’s demand forecasts show that in the fourth quarter global oil supply will fall short of demand by 2.2 million barrels per day (bpd), giving the producers some room to agree to add output.

“We expect the cartel to release 250 (thousand barrels per day) of supply curbs from August onwards. Failure to turn on the taps further may see Brent top $80 (a barrel) by next month,” said Howie Lee, economist at OCBC Treasury Research in Singapore.

Spain and Portugal, favorite summer holiday destinations for Europeans, imposed new restrictions on unvaccinated Britons on Monday, while 80% of Australians faced tighter curbs due to flare-ups of the virus across the country.

Talks on a travel corridor between the United States and Britain also slowed, partly on concerns about a rise in cases of the Delta variant in Britain, the Financial Times reported, citing officials.

Analysts expect OPEC+ to step up supply by about 500,000 bpd in August, as the market has tightened on strong growth in fuel demand in the United States and China, the world’s two biggest oil consumers.

Investors will be looking to the latest U.S. inventory data to reinforce that view, with analysts expecting crude stocks to extend their fall for a sixth straight week, while gasoline stocks also declined, a preliminary Reuters poll showed.

Seven analysts estimated, on average, that U.S. crude stocks fell by about 4.5 million barrels in the week to June 25, in a poll conducted ahead of reports from the American Petroleum Institute, an industry group, on Tuesday and the Energy Information Administration (EIA), on Wednesday.

Asian markets dip for second day in a row

European stock markets opened higher Tuesday while Asia declined as investors looked ahead to U.S. jobs data for signs of inflation pressure.

Nikkei 225 fell 235.41 points or0.81%, close at 28,812.61.

S&P/ASX 200 fell 6.10 points or 0.083% to close at 7,301.20.

Hang Seng Index fell 274.20 points or 0.94% to 28,994.10.

South Korea's Kospi fell 15.21 points or 0.46% to 3,286.68.

Taiwan capitalization weighted stock index rose 7.22 points or 0.041% to 17,598.19.

The European stock opened higher on Tuesday, At press time: 

FTSE 100 Index rose 12.45 points or 0.18% at 7,085.42.

Germany DAX 30 rose 88.36 points or 0.57% at 15,642.54.

France CAC 40 rose 17.58 points or0.27% at 6,575.60.

Stocks are pushing higher and crypto is surging, as the slow days of summer trading continue to keep the sun shining on financial markets.

It may not last for long.

Our call of the day, from strategists Barry B. Bannister and Thomas R. Carroll at the equity trading desk of investment bank Stifel, is that the S&P 500 is heading for an 11% pullback while bitcoin could fall to $12,000.

The “recovery trade” that has defined the recent bull market is headed for a further correction in the second half of 2021, the strategists said. Cyclical stocks—industrials, energy, materials, financials, tech, and discretionary—will fall relative to defensive stocks like staples, healthcare, utilities, and real estate, Bannister and Carroll said.

This will weigh down the S&P 500 SPX, +0.23%, and Stifel’s strategists say that the blue-chip index is heading for an 11% drop to 3,800 points.

The likely catalysts for this major shift, according to the team at the investment bank, are the U.S. PMI Manufacturing Index fading faster than expected in the second half of the year, and the dollar strengthening.

Bannister and Carroll said the primary causes are a slowing global money supply in U.S. dollar terms—as central banks ease pandemic-era supports—as well as distortions from quantitative easing, and the lagged effect of China’s policy tightening.

A sea change of this magnitude will create distinctive winners and losers, the strategists said. Investors can prepare by buying shares in companies focused on defensive industries: pharma and biotech; food and staples retailing; commercial and professional services; food, beverage, and tobacco; utilities; healthcare equipment and services; household products; consumer services; and telecommunications.

But avoid the stocks set to be losers, identified by the team at Stifel as: banks; insurance; software and services; real estate; energy; diversified financials; semiconductors; technology hardware; materials; capital goods; and autos and components.

Other casualties that Bannister and Carroll expect to see are bitcoin BTCUSD, 1.54% and copper HG00, -1.58%, which are both sensitive to slowing global liquidity and the stronger dollar. The strategists at Stifel see bitcoin falling from around $34,000 to $12,000 if global M2—a measure of the money supply—drops to low-single digits year-over-year, as they expect.

Focus Tonight

21:00(GMT+8): United States Fed Barkins Speech;

22:00(GMT+8): United States CB Consumer Confidence (JUN), Forecast: 119, Previous: 117.2;