【Market Morning】Gold breaks below $1800, Oil rises 3% to one-week high

Yesterday Market Review

Gold breaks below $1800 as dollar, yields firm on rate hike bets

Gold prices fell below the key $1,800 level on Tuesday, as the dollar and bond yields firmed with expectations that U.S. interest rates will rise next year, shored up by the renomination of Federal Reserve Chairman Jerome Powell.

Spot gold fell 0.5% to $1,795.97 per ounce by 1248 GMT, after hitting its lowest since Nov. 5 at $1,792.00.

The dollar index hit a fresh 16-month peak and U.S. Treasury yields firmed after Powell was nominated for a second term, adding to confidence that the U.S. central bank will lift interest rates in 2022. read more

"The gold market had bet on Lael Brainard to be the next Fed chair, as she is considered to be more dovish than Powell in terms of monetary policy or stimulating the economy longer," Julius Baer analyst Carsten Menke said.

"Therefore, the breach of $1,800 level could put further selling pressure on gold" Menke added.

Investors are betting that newly renominated Fed Chairman Jerome Powell will need to step up the pace at which the central bank is normalizing monetary policy to better grapple with surging consumer prices.

While gold is considered a hedge against inflation and other uncertainties, a likely hike in rates would increase the opportunity cost of holding non-yielding bullion.

But it's "too early to write off gold", said Ross Norman, an independent analyst.

"Inflation still has legs to run, and there are COVID-19 restrictions in Europe once again. But the onus is on the bulls to prove their case and garner support, failing which the metal could drift lower again," Norman added. read more

Elsewhere, spot silver fell 1.6% to $23.79 per ounce, platinum dropped 1.6% to $994.99, and palladium shed 0.7% to $1,941.07.

Oil rises 3% to one-week high after U.S. taps emergency reserves

Oil prices rose to a one-week high on Tuesday after a move by the United States and other consumer nations to release tens of millions of barrels of oil from reserves to try to cool the market fell short of some expectations.

The United States said on Tuesday 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+ producers repeatedly ignored calls for more crude. 

But 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. 

Brent futures rose $2.61, or 3.3%, to settle at $82.31, while U.S. West Texas Intermediate (WTI) crude rose $1.75, or 2.3%, to settle at $78.50.

That was the biggest daily percentage gain for Brent since August and its highest close since Nov. 16. It also pushed Brent's premium over WTI to its highest since mid-October.

Talk of a coordinated reserves release, a strong U.S. dollar and a potential hit to energy demand from a fourth wave of COVID-19 cases in Europe has already caused Brent prices to drop over 10% since hitting a three-year high of $86.70 on Oct. 25.

President Joe Biden's administration said it would release 50 million barrels from the U.S. Strategic Petroleum Reserve (SPR), which will start hitting the market in mid to late December. 

"The coordinated SPR release was smaller-than-expected and undoubtedly will be met by less production from OPEC+," said Edward Moya, senior market analysts at OANDA, noting "No one would be surprised if (OPEC+) scaled down their production plans."

The OPEC+ alliance between the Organization of the Petroleum Exporting Countries and allies including Russia has so far rebuffed repeated requests from Washington to pump more oil.

The United Arab Emirates Energy Minister Suhail Al-Mazrouei said on Tuesday the UAE saw "no logic" in increasing its own contributions to global markets at the moment, adding technical data gathered ahead of an upcoming OPEC+ meeting in December pointed to an oil surplus in the first quarter of 2022. 

Analysts said companies that buy oil from the U.S. SPR will have to return it in 2022-2024 when prices are much cheaper than now. Futures were trading around $75 in 2022 , $69 in 2023 and $65 in 2024 .

"We ... expect a flattening of the curve, as parts of the SPR release will need to be replenished again," said Bjornar Tonhaugen, head of oil markets at Rystad Energy.

The oil rally came ahead of U.S. inventory reports from the American Petroleum Institute (API), an industry group, on Tuesday and the U.S. Energy Information Administration on Wednesday.

Analysts expect the latest weekly U.S. oil inventory data to show a 0.5 million barrel draw from crude stocks. ,

The dollar index (.DXY), meanwhile, held near a 16-month high on Tuesday after Federal Reserve Chair Jerome Powell was picked for a second term, reinforcing market expectations that U.S. interest rates will rise in 2022. 

A stronger dollar makes oil more expensive for holders of other currencies, which traders said was weighing on crude prices.

Dow climbs nearly 200 points but Nasdaq falls again as rising rates divide the market

The Nasdaq Composite fell for the second consecutive day as higher interest rates appeared to put pressure on high-flying tech stocks, but shares of banks and industrial names moved higher in a split market on Tuesday.

The tech-heavy index fell 0.50% to 15,775.14, while the S&P 500 ticked up 0.17% to close at 4,690.70. The Dow Jones Industrial Average rose 194.55 points to 35,813.80 on the strength of bank and energy stocks.

The decline in tech and other growth stocks comes as Treasury yields have jumped following President Joe Biden’s decision to select Fed Chair Jerome Powell for a second term on Monday. Higher rates are often seen as a negative for high-growth companies because their future earnings look less attractive as short-term yields rise.

“We have seen a little pressure on tech stocks as long-term government bond yields have rallied for the second day now. That’s weighing on valuations. Zoom earnings didn’t help today, highlighting some of the dynamics in these very high-growth parts of the market that … growth is slowing on the margin,” said Angelo Kourkafas, investment strategist at Edward Jones.

Social media giant Meta, the parent company of Facebook, fell 1.1%, while Roku and biotech stock Moderna dropped more than 2%. Shares of Zoom Video Communications tumbled 14.7% a day after it beat earnings estimates but warned of a slowdown ahead as the Covid pandemic winds down and the demand for remote contact decreases

On the other hand, bank stocks rose along with rates, with shares of JPMorgan adding nearly 2.4%.

Energy stocks climbed even after President Joe Biden announced on Tuesday that he would tap the strategic petroleum reserve in an attempt to lower gas prices at a time when inflation is running at its highest level in three decades. The price of oil had declined in recent days amid rumors that Biden would take this step but reversed higher on Tuesday.

Powell’s renomination was generally welcomed by Wall Street, but the moves in the Treasury market have been sharp. The benchmark 10-year Treasury yield was trading near 1.67% on Tuesday, up from about 1.54% on Friday. Yields move opposite of prices.

“With a Powell-led Fed, we expect the speed of the QE taper to follow the data, likely speeding up if inflation prints continue at the pace of the October print with interest rate hikes to shortly follow the taper (June at current pace). The market believes this action will keep the Fed in control of inflation,” Aptus Capital Advisors portfolio manager John Luke Tyner said in a note to clients.

“While the market is expecting a more hawkish response to current inflation, time will tell if it will be enough, as Powell is well established in the dovish camp of FOMC policy,” he added.

In other earnings news, shares of Best Buy fell 12.3% after the company said comparable sales and gross profit margin might decline in the fourth quarter compared to the year ago period.

On the positive side, chipmaker Western Digital was one of the best performers on Tuesday, rising 6.3% following an upgrade from Mizuho.

Tuesday marked the second straight down day for the Nasdaq, which fell 1.26% on Monday. The index is still positive for the month.