【Market Morning】Gold fell below $1800, Dow drops 260 points, Oil slides

Yesterday Market Review

Gold hastens retreat as dollar gains upper hand

Gold retreated over 1% on Tuesday and is on course for its biggest intraday drop in a month, as a buoyant dollar and higher yields took the shine off the metal.

Spot gold price dropped 1.4% to $1,797.49 and spot silver slid 1.6% to $24.42 per ounce.

The dollar jumped 0.5% against its rivals, making gold more expensive for holders of other currencies.

“The spot gold market is seeing some retracement,” with the dollar likely to advance further and pressure the metals, said Daniel Pavilonis, senior market strategist at RJO Futures.

Gold scaled a 2-1/2 month peak on Friday after a surprisingly soft U.S. payrolls report boosted speculation that the U.S. Federal Reserve might push back the tapering of its bond purchases.

But “the reality is they (Fed) want to start to taper it off, so the (gold) market is going to look to position itself ahead of it actually happening,” Pavilonis added.

The Federal Open Market Committee is scheduled to next meet on September 21-22.

Gold is considered a hedge against inflation and currency debasement, which is caused by massive stimulus measures.

Further denting bullion’s appeal, benchmark 10-year yields also rose to their highest since mid-July, increasing the opportunity cost of holding non-interest bearing bullion.

“In addition, the market is also starting to get a bit nervous because of another failed attempt to break above this key area of resistance around the $1,835 level,” said Saxo Bank analyst Ole Hansen. Investors are also looking at the European Central Bank’s meeting on Thursday, where it is likely to debate winding back stimulus measures as the euro zone economy roars back to life.

Dollar gains as U.S. yields rise before ECB meeting

The dollar rose on Tuesday, moving further off a near-one-month low hit last week, as rising U.S. Treasury yields prompted investors to cut short dollar positions against the euro before a European Central Bank meeting this week.

On Friday, the greenback tumbled to its lowest levels since early August after a surprisingly soft U.S. payrolls report prompted analysts to raise bets the Federal Reserve will not unwind its stimulus plans in coming months.

The US dollar index rose 0.6% to 92.42.

“It does appear that after the sell-off the dollar has maybe established a short-term base at least,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

“The Federal Reserve we think is still likely to move toward tapering by the end of this year, the U.S. economy is likely to perform relatively strongly, so our view is minor dollar dips, minor dollar weakness is probably a buying opportunity,” he said.

The dollar also benefited from rising U.S. Treasury yields with the U.S. government selling new debt this week, including $58 billion in three-year notes, $38 billion in 10-year notes and $24 billion in 30-year bonds.

The yield increase “has helped the dollar index to recoup its post-NFP (non-farm payrolls) losses and then some,” Brown Brothers Harriman strategists said in a note.

U.S. 10-year yields, which were around 1.299% before Friday’s data release, stand now at 1.371%.

The euro was last at $1.1838, below Friday’s one-month peak of $1.1909.

The ECB is seen debating a cut in stimulus at its meeting on Thursday, with analysts expecting purchases under the ECB’s Pandemic Emergency Purchase Programme (PEPP) falling possibly as low as 60 billion euros a month from the current 80 billion.

The Australian dollar weakened after the Reserve Bank of Australia stuck with plans to taper its bond buying but said it would extend the timeline as the economy struggles with coronavirus lockdowns.

The pound also dropped after the British government set out a plan to raise taxes.

Oil slides on demand concerns, strong dollar

Crude oil price ended lower on Tuesday, with Brent building on weakness seen the previous session after Saudi Arabia slashed crude prices for Asia.

West Texas Intermediate crude oil price fell 94 cents, or 1.4%, to settle at $68.35 a barrel and Brent crude oil price lost 53 cents, or 0.7%, at $71.69 a barrel on ICE Futures Europe.

The weaker tone came as strength in the U.S. dollar helped crude erase an earlier bounce that followed unexpectedly strong Chinese trade data.

The drop in prices is a bit puzzling, said Michael Lynch, president at Strategic Energy & Economic Research, given that Chinese trade data were strong for August and a lot of U.S. production remains offline following Hurricane Ida, which “should be pretty bullish.”

There are “fears that delta will cause more economic disruption, but that doesn’t look like it’s going to happen,” Lynch told MarketWatch, speculating that the price decline may be due to profit-taking, “triggered by reports that the Saudis cut prices for oil to Asia.”

Oil was lifted early Tuesday after China data showed the country imported 44.5 million tons of crude oil in August, noted Carsten Fritsch, analyst at Commerzbank, in a report. That works out to daily imports of 10.5 million barrels, an 8% rise from July and the first time above the 10-million-barrel-a-day threshold in five months. The rise comes as China set a somewhat more generous import quota.

August imports were still down 6% year over year, he noted, with China importing 5.7% less crude over the first eight months of the year than in the same stretch in 2020.

“The question for the market is whether this trend in China’s crude oil imports will continue upwards in the ensuing months. That is a complicated matter which the market is trying to get right, as it also depends on government policies on quotas and use of strategic reserves,” said Bjørnar Tonhaugen, head of oil markets at Rystad Energy, in a note.

“For now, the Asian market is in a ‘semi-bullish mode’ while awaiting new clues on the recovery of U.S. production and refinery activity after the hit of Hurricane Ida,” he wrote.

Weekly data on U.S. crude oil supplies will be released by the Energy Information Administration on Thursday, a day later than usual due to Monday’s Labor Day holiday.

Dow drops 260 points

The Dow Jones Industrial Average fell on Tuesday amid lingering concerns about the delta variant’s impact on the economic reopening.

The Dow dropped 269.09 points to 35,100.00, dragged down by a 1.8% loss in Boeing’s stock. The S&P 500 fell 0.3% to 4,520.03. The Nasdaq Composite rose less than 0.1% to 15,374.33, notching a record close. The NYSE was closed on Monday for Labor Day.

Goldman Sachs downgraded its economic outlook over the weekend, citing the delta variant and fading fiscal stimulus. Goldman now sees 5.7% annual growth in 2021, below the 6.2% consensus. The firm cut its fourth-quarter GDP outlook to 5.5%, down from 6.5%.

“The hurdle for strong consumption growth going forward appears much higher: the delta variant is already weighing on Q3 growth, and fading fiscal stimulus and a slower service sector recovery will both be headwinds in the medium term,” stated the Goldman note.

Morgan Stanley downgraded U.S. equities to underweight on Tuesday.

“We see a bumpy September-October as the final stages of a mid-cycle transition play out,” wrote the strategists led by Andrew Sheets. “We continue to think this is a ‘normal’ cycle, just hotter and faster, and our cycle model remains in ‘expansion’. But the next two months carry an outsized risk to growth, policy and the legislative agenda.”

Boeing shares were lower after the Wall Street Journal reported deliveries for the 787 Dreamliner would likely be further delayed. PPG Industries, a paint maker, warned that sales may fall short this quarter because of logistics issues and higher commodity costs. Shares of PPG Industries ticked nearly 3.4% lower.

Drug stocks including Johnson & Johnson, Merck and Amgen all closed lower after Morgan Stanley downgraded the three stocks.

The S&P 500 is down 0.06% for the month of September, a month that historically has challenged markets. The month averages a 0.6% decline, the worst of any month, with a positive rate of just 45%, according to CFRA.

In regular trading Friday, the Dow and S&P 500 fell after the August jobs report came in short of expectations, highlighting continued concern about the spread of Covid and its delta variant. Nonfarm payrolls increased by 235,000 in August, the Labor Department reported, but economists surveyed by Dow Jones expected 720,000 jobs.

Year-to-date, the Dow is up about 14.7%. Meanwhile, the S&P has gained 20.3% and the Nasdaq Composite rose 19.3%. Investors and analysts are still on the lookout for a major correction in September.

“Admittedly, passive investors have yet to feel pain,” Bank of America said in a note Friday, adding that “2021 represents yet another year during which the [S&P 500] has crushed it, but some signs indicate that it may be time to start getting ‘pickier’ when it comes to stocks.”