【Market Evening】Gold prices dip on rising dollar, Oil roars beyond $80

Gold prices dip on rising dollar, bond yields

Gold prices eased on Tuesday, hurt by a stronger dollar and rising U.S. Treasury yields, while investors awaited more cues from Federal Reserve officials on the central bank’s monetary policy shift.

Spot gold fell 0.45% to $1741.96 per ounce and spot silver fell 1.08% to $22.35 per ounce by 17:30(GMT+8).

Overnight, benchmark 10-year U.S. Treasury yields rose to their highest level in three months.

U.S. Federal Reserve officials on Monday tied reduction in the Fed’s monthly bond purchases to continued job growth, with a September employment report now a potential trigger for the central bank’s bond “taper.”

Fed Chair Jerome Powell is due to testify later in the day before Congress on the central bank’s policy response to the pandemic.

In prepared remarks, Powell said the U.S. central bank would move against unchecked inflation if needed.

While gold is often considered a hedge against higher inflation, a rate hike would increase the opportunity cost of holding gold, which pays no interest.

China’s central bank vowed to protect consumers exposed to the housing market on Monday and injected more cash into the banking system as the Shenzhen government began investigating the wealth management unit of ailing developer Evergrande.

SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell 0.3% to 990.32 on Monday.

Poland’s central bank has more than 230 tons of gold and plans to expand its reserves, the head of Poland’s Central Bank said on Monday.

Yen weakens to 111 per dollar as U.S. Treasury yields soar

The yen traded near an almost three-month low to the dollar and reached a two-week trough versus the euro on Tuesday, as rising bond yields in the U.S. and Europe lured Japanese investors.

The yen was little changed at 110.985 per dollar.

While benchmark 10-year Japanese government bond yields remain pinned near zero by the Bank of Japan’s yield curve control policy, equivalent U.S. Treasury yields have soared to a three-month high, touching 1.516% overnight.

“The main impact of higher Treasury yields on currencies has been to see USD/JPY make further upward progress, now banging against 111,” Ray Attrill, head of FX strategy at National Australia Bank in Sydney, wrote in a note to clients.

“111 will be a tough (nut) to crack, bearing in mind the pair has spent only two days with time above this level so far this year — and with 10-year Treasury yield having been as high as 1.77%.”

U.S. yields have been pulled higher by a hawkish shift at the Federal Reserve, which announced last week it may start tapering stimulus as soon as November and flagged interest rate increases may follow sooner than expected.

That was reinforced by hawkish tones from the Bank of England and Norges Bank, which last week became the first developed-nation central bank to raise interest rates, pulling other global bond yields higher.

But despite an initial pop in the dollar index — which measures the currency against six major rivals - to as high as 93.526 for the first time in more than a month, it has since moved mostly sideways, and was last not far off from Monday at 93.421.

Against the euro, the dollar was little changed at $1.16935, hovering near the more than one-month high of $1.16835 reached on Thursday.

Still, many analysts expect the dollar to rise over time.

“As much as taper in and of itself is not a surprise, an earlier end to its program will reinforce that downside risks to the U.S. dollar have diminished,” Mazen Issa, senior FX strategist at TD Securities, wrote in a research note.

“If the last taper cycle was any indication, about half of the U.S. dollar’s cyclical upswing was observed three months after taper,” he added.

TD expects the Fed to end its quantitative easing program by June 2022.

Elsewhere, the risk-sensitive Australian dollar slipped 0.14% to $0.7276, but held on to most of Monday’s 0.4% rally as concerns about contagion from China Evergrande Group’s debt woes receded and iron ore prices continued to rebound.

New Zealand’s dollar weakened 0.17% to $0.70005, after ending Monday mostly flat.

Oil roars beyond $80, the highest in nearly three years

Oil markets rose on Tuesday, reversing earlier losses and extending their rally into a sixth session, amid continued concerns over tight supply at a time when demand is picking up with the easing of COVID-19 pandemic restrictions.

Brent crude oil price rose 1.09% to $79.45 a barrel while U.S. West Texas Intermediate crude oil price was at $76.15 a barrel, up 1.67% by 17:30(GMT+8).

“The market sentiment remained strong with tighter supply and recovering demand in many parts of the world,” said Toshitaka Tazawa, an analyst at Fujitomi Securities Co Ltd.

The Japanese government will seek advisers’ approval to lift the state of emergency in all regions on Oct. 1 as the number of new coronavirus cases falls and the strain on the medical system eases, Economy Minister Yasutoshi Nishimura said on Tuesday.

Meanwhile, top African oil exporters Nigeria and Angola will struggle to boost output to their OPEC quota levels until at least next year as underinvestment and nagging maintenance problems continue to hobble output, sources at their respective oil firms warn.

Their battle mirrors that of several other members of the OPEC+ group who curbed production in the past year to support prices when COVID-19 hit demand, but are now failing to ramp up output to meet soaring global fuel needs as economies recover.

Boosting investors’ risk appetite, Goldman Sachs raised by $10 its year-end forecast for Brent crude to $90 per barrel. Global supplies have tightened due to the fast recovery of fuel demand from the outbreak of the Delta variant of the coronavirus and Hurricane Ida’s hit to U.S. production.

Analysts say climbing prices of spot liquefied natural gas (LNG) and coal may also bolster oil prices further.

“Oil demand could pick up by an additional 0.5 million barrels per day, or 0.5% of global oil supply, as high gas prices force a switch from gas to oil consumption,” Commonwealth Bank commodities analyst Vivek Dhar said in a note.

“That is set to tighten oil markets further, especially with supply additions from OPEC+ remaining quite conservative,” he said, adding that energy prices could still rally from here if the winter period in the northern hemisphere proved colder than expected.

China is in the grip of a power crunch as a shortage of coal supplies, tougher emissions standards and strong demand from manufacturers and industry have pushed coal prices to record highs and triggered widespread curbs on usage.

China should work to import more coal from Russia, Indonesia and Mongolia in order to resolve supply shortages now crippling large sections of industry, said Han Jun, governor of the northeastern province of Jilin, one of the worst-hit regions.

Asian markets mostly fall on China energy, Evergrande worries

Asian shares mostly fell Tuesday as concerns about China chipped away at investor optimism following a mixed finish on Wall Street.

Nikkei 225 fell 0.19% to 30,183.96.

Hang Seng Index rose 1.20% to 24,500.39.

Taiwan capitalization weighted stock fell 0.76% to 17,181.44.

S&P/ASX 200 fell 1.47% to 7,275.60.

South Korea KOSPI fell 1.14% to 3,097.92.

A power crunch in some parts of China has shut down factories and left some households without electricity under an effort to meet official energy use targets. That could have global repercussions, including on supplies needed for manufacturing throughout Asia, coming right ahead of the year-end shopping season.

The woes come on top of parts and raw material shortages that already ail regional manufacturing because of supply disruptions caused by the coronavirus pandemic.

Analysts say the power shortage in China could become prolonged as the demand for coal and natural gas surges during the winter.

Another lingering market worry resonating from China is the possible collapse of one of China’s biggest real estate developers, Evergrande Group HK:3333, which is struggling to avoid a default on billions of dollars of debt.

“Crucially, contagion risks loom large due to transmission within the property sector due to similar risks to home-buyers and banks via balance sheet exposures,” said Vishnu Varathan of the Asia & Oceania Treasury Department at Mizuho Bank. “Fact is Evergrande is at best a risk that has temporarily abated but is far from abolished.”

The vote for the leader of Japan’s ruling party, set for Wednesday, was also weighing on Tokyo trading, according to analysts, as players took a wait-and-see attitude. Four candidates are in the race to replace Prime Minister Yoshihide Suga, who is stepping down after a year in office. No major economic or foreign policy changes are expected, as the pro-U.S. Liberal Democratic Party has ruled Japan almost continually in recent decades.