【Market Morning】Gold at 3-week low, Dollar jumps on hawkish Fed, Oil steadies

Yesterday Market Review

Gold at 3-week low on strong U.S. data, rate-hike bets

Gold prices slipped to a three-week low on Wednesday as robust U.S. economic data lifted the dollar and Treasury yields, with jitters around a sooner-than-expected interest rate hike from the Federal Reserve adding to the downbeat mood.

Spot gold was down 0.4% at $1,783.18 per ounce, after falling to its lowest since Nov. 4 at $1,777.80 earlier in the session.

Gold slid below the key $1,800 mark earlier this week as the re-nomination of Fed Chair Jerome Powell bolstered bets of faster monetary policy tightening, boosting the dollar and in turn making bullion more expensive for overseas buyers.

The gold market is being pressured by concerns the Fed may begin to ramp up its tapering or bring rate hikes at a more rapid pace than previously anticipated, said David Meger, director of metals trading at High Ridge Futures.

Various Fed policymakers said they would be open to speeding up the elimination of their bond-buying program if high inflation held and move more quickly to raise interest rates, minutes of the U.S. central bank's last policy meeting showed.

Higher interest rates increase the opportunity cost of holding non-yielding bullion.

Gold investors also seem to be discounting for the possibility of moderating inflation, given the recent retreat in energy prices, ED&F Man Capital Markets analyst Edward Meir said.

Piling pressure were U.S. initial jobless claims falling to their lowest since 1969 and a separate report showing economic growth increased at a 2.1% annualized rate.

With inflows into gold-backed ETFs also subdued, short acquisitions by "trend followers" remain the primary contributor to flows, suggesting further downside to prices, TD Securities said in a note.

Spot platinum rose 0.5% to $974.03 per ounce, while palladium dipped 0.7% to $1,854.32 and silver fell 0.9% to $23.42.

Oil steadies as investors question reserve release

Oil prices were largely steady on Wednesday as investors questioned the effectiveness of a U.S.-led release of oil from strategic reserves and turned their focus to how producers will respond.

Brent crude settled down 6 cents, or 0.07%, at $82.25 a barrel, while U.S. West Texas Intermediate (WTI) crude futures were down 11 cents, or 0.14%, at $78.39.

The United States said it would release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan and Britain to try to cool prices after OPEC+ ignored calls to pump more.

Japan will release "a few hundred thousand kilolitres" of oil from its national reserve, but timing has not been decided, its industry minister Koichi Hagiuda said on Wednesday.

Some countries have not taken a helpful position in terms of oil and gas prices, the head of the International Energy Agency said on Wednesday, saying not enough supply was reaching consumers.

Analysts said the effect on prices was likely to be short-lived after years of declining investment and a strong global recovery from the COVID-19 pandemic.

The coordinated release could add about 70 million to 80 million barrels of crude supply, smaller than the more than 100 million barrels the market has been pricing in, analysts at Goldman Sachs said. 

"On our pricing model, such a release would be worth less than $2 a barrel, significantly less than the $8 a barrel sell-off that occurred since late October," the bank said in a note titled "a drop in the ocean".

JPMorgan Global Commodities Research said any impact on oil prices from the release of crude may not be sustained for long. The brokerage also expects global oil demand to surpass 2019 levels by March 2022. read more

While attention has now switched to how the Organization of the Petroleum Exporting Countries and its allies will react to the joint reserve release, sources said the group was not discussing pausing oil output increases for now.

The group is to hold two meetings next week to set policy, sources said.

Jeffrey Halley, senior market analyst at OANDA, said the move to tap storage was "a one-shot wonder and markets responded appropriately".

U.S. crude stockpiles (USOILC=ECI) rose 1 million barrels last week, the Energy Information Administration said, compared with analysts' expectations for a decrease of 481,000 barrels.

U.S. crude stocks in the Strategic Petroleum Reserve fell last week to 604.5 million barrels, their lowest since June 2003.

"While crude oil inventories built by 1 million barrels, crude oil inventories in the Strategic Petroleum Reserve dropped by 1.6 million barrels and along with continued declines in product inventories, I think this is supportive for prices," Andrew Lipow, president of Lipow Oil Associates, said.

The number of active U.S. oil rigs rose by six to 467 this week, the highest since April 2020, as higher crude prices have prompted some drillers to return to the wellpad.

Prices were also tempered by coronavirus infections that broke records in parts of Europe, prompting new curbs on movement. 

Dollar jumps on hawkish Fed, strong consumer spending data

The dollar hit fresh 16-month highs against the euro on Wednesday as investors priced for the prospect that the Federal Reserve will begin hiking rates in mid-2022 while the European Central Bank is expected to remain more dovish as growth in the region lags.

Fed officials have contributed to the more hawkish view on U.S. interest rates as the central bank faces stubbornly high inflation.

San Francisco Fed President Mary Daly said on Wednesday that she could see a case being made to speed up the Fed’s tapering of its bond purchases. Fed Vice Chair Richard Clarida said last week that it may be appropriate to discuss speeding up the pace of its taper at the Fed’s December 14-15 meeting.

The dollar’s strength is “a reflection of the willing dovishness the leadership of the ECB is presenting, versus a little more concern being shown by the Fed for inflation, so therefore maybe a little bit of a divergence on policies,” said Lou Brien, a market strategist at DRW Trading in Chicago.

The dollar index gained 0.38% on the day to 96.864. The euro fell 0.44% to $1.1199.

The single currency was hurt by data showing German business morale deteriorated for the fifth month running in November as supply bottlenecks in manufacturing and a spike in coronavirus infections clouded the growth outlook for Europe’s largest economy.

The dollar hit a fresh four-and-a-half year high of 115.44 against the Japanese yen after data showed that U.S. consumer spending increased more than expected in October, while price pressures also heated up during the month.

The greenback also reached a seven-month high against the Swiss franc.

The number of Americans filing new claims for unemployment benefits fell to the lowest level since 1969 last week, while gross domestic product data confirmed that growth slowed sharply in the third quarter.

Durable goods orders also fell 0.5% last month after declining 0.4% in September, even as orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.6% last month.

The Fed will release minutes from its Nov. 2-3 meeting later on Wednesday, which will be evaluated for any new indications that it may speed up the taper of its bond purchases and hike rates sooner than expected.

The New Zealand dollar fell 1.13% to $0.6870, the lowest since Sept. 30, after the country’s central bank raised rates by a quarter of a percentage point to 0.75%, disappointing some traders that had expected it may raise rates by half a percentage point.

S&P 500, Nasdaq eke out small gains as jump in Treasury yields cools

U.S. stocks pushed modestly higher on Wednesday as the recent jump in bond yields took a breather, allowing tech stocks to recover.

The S&P 500 ticked up 0.23% to close at 4,701.46, while the tech-heavy Nasdaq Composite added 0.44% to finish at 15,845.23. The Dow Jones Industrial Average lost just 9.42 points and settled at 35,804.38.

The recent rise in yields, which started around President Joe Biden’s decision to renominate Jerome Powell as chairman of the Federal Reserve on Monday, cooled slightly on Wednesday. The 10-year Treasury yield has traded above 1.68% this week after ending Friday at 1.55%. However, the benchmark rate had dipped to about 1.64% on Wednesday afternoon.

Shares of Facebook-parent Meta rose 1.1% to bolster the Nasdaq, while Roku and Peloton shook off rough starts to the week to rise more than 2% each. Computer hardware company HP’s shares got a 10.1% lift after reporting earnings that beat on the top and bottom lines and issuing higher first-quarter earnings guidance.

The move in rates earlier this week sent investors fleeing from tech and growth shares, while boosting some bank stocks and energy shares. The divided market has left the Dow in the green for the week so far, the S&P 500 up just incrementally, and the Nasdaq Composite down 1.3%, even with Wednesday’s move.

“It’s certainly a story of more rotation,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “The market is now — with the Powell renomination — thinking this is a reopening story, which sets aside any of the risks or concerns we might have about rising Covid infection rates.”

Earnings reports drove some of the biggest individual moves on Wednesday, as traditional retail stocks took a hit following poor quarterly results. Gap lost 24% and Nordstrom tumbled about 29%. Both companies reported earnings misses for the most recent quarter.

“A strong consumer and pent-up demand was supposed to make this a strong holiday season for retail, but margin and wage pressures are disrupting many retailer outlooks,” Ed Moya, senior market analyst at Oanda, said in a note to clients.

Elsewhere, software stock Autodesk fell 15.4% after the company issued disappointing fourth-quarter guidance.

Rising Covid cases in Europe continued to worry investors. Germany was considering a full Covid lockdown.

U.S. markets are closed Thursday for Thanksgiving and will close early on Friday in a shortened session.