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Market News 【Market Evening】Oil extends gain from 7 year high, Gold falls as rising dollar

【Market Evening】Oil extends gain from 7 year high, Gold falls as rising dollar

Asian shares slip in cautious trading, shrug off U.S. rally; Gold falls as rising dollar, bond yields hurt appeal; Oil hits multi-year high on OPEC+ restraint amid global energy crunch.

TOPONE Markets Analyst
2021-10-06
293

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Gold falls as rising dollar, bond yields hurt appeal


Spot gold prices extended losses on Wednesday hurt by a jump in the dollar and U.S. Treasury yields ahead of U.S. non-farm payrolls data.


Spot gold fell 0.68% to $1747.68 per ounce and spot silver fell 1.39% to $22.28 per ounce by 17:30(GMT+8).


The dollar rose towards its 2021 highs, denting gold’s appeal for those holding other currencies, and the benchmark U.S. 10-year Treasury yield hit its highest level since June.


Gold’s price momentum is skewed downward on the basis of monetary policy expectations, IG Market analyst Kyle Rodda said.


“There’s still significant signs of cost pressures in the global economy and that’s going to keep the focus on central banks and tightening policy.”


Gold is often viewed as an inflation hedge, but reduced central bank stimulus and interest rate hikes tend to push government bond yields up, translating into a higher opportunity cost for holding non-interest yielding bullion.


Focus is now on Friday’s U.S. payrolls data, which is expected to show 488,000 jobs were added in September. The National Employment Report by payroll processor ADP, is due at 1215 GMT.


Gold prices will likely consolidate in a $1,745-$1,775 range, Edward Moya, a senior market analyst at brokerage OANDA, said in a note.


“Once tapering is fully priced in, financial markets will grow fixated over the risks to the 2022 outlook and that will be the green light for many investors to return to bullion.”


Chicago Fed President Charles Evans said on Tuesday he continued to believe supply bottlenecks were driving most of the recent increase in inflation and would subside. He also repeated that the central bank was close to begin reducing its monthly asset purchases.


Dollar climbs as energy surge drives inflation worries


The dollar edged higher on Wednesday amid nervousness that surging energy prices could spur inflation and interest rate hikes, and as traders awaited U.S. jobs data for clues on the timing of Federal Reserve policy tightening.


The Reserve Bank of New Zealand lifted its official cash rate for the first time in seven years but its resolutely hawkish tone only seemed to add to expectations that the Fed will follow suit and the kiwi dipped as U.S. yields rose.


The kiwi was last 0.4% weaker at $0.6928 and the Australian dollar fell by the same margin to $0.7265.


The euro was pinned below $1.16 and last bought $1.1589, scarcely higher than the 14-month low of $1.1563 it struck last week.


The yen fell to a one-week low of 111.72 per dollar in tandem with a rise in Treasury yields, which can draw investment flows from Japan. It was within range of the 18-month trough of 112.08 that it visited last Thursday.


The greenback has won support as investors brace for the Fed to begin tapering asset purchases this year and lay the ground for an exit from pandemic-era interest rate settings well before central banks in Europe and Japan.


“Interest rate differentials are starting to have more of an influence on currencies than they have for quite some time,” said Kim Mundy, analyst at the Commonwealth Bank of Australia in Sydney, as an era of suppressed super-low rates starts to end.


“Now that the Fed is starting to look to taper and look to the exit, we think we might see a lift in market pricing for rate hikes which will help to support the USD,” she added.


Longer-dated U.S. yields rose on Wednesday and the U.S. dollar index rose 0.1% to 94.082.


Oil extends gain from 7 year high


Oil hit a multi-year high on Wednesday above $83 a barrel, supported by OPEC+'s refusal to ramp up production more rapidly against a backdrop of concern about tight energy supply globally.


Brent crude oil rose as high as $83.47, the highest since October 2018, and at 17:30(GMT+8) was down 0.17% at $82.52. U.S. crude climbed to $79.78, the highest since November 2014, and was later down 0.24% at $78.83.


The market later unwound those gains due to an American Petroleum Institute (API) report showing rising crude inventories in the United States and, analysts said, technical indicators suggesting oil has rallied too fast.


On Monday, the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, chose to stay with a plan to increase output gradually and not boost it further as the U.S. and other consumer nations have been urging.


"An energy crisis is unfolding with winter in the northern hemisphere still to begin, and sets the stage for even higher oil prices," said Stephen Brennock of oil broker PVM.


The price of Brent has surged more than 50% this year, adding to inflationary pressure that could slow recovery from the COVID-19 pandemic. Natural gas has surged to a record peak in Europe and coal prices from major exporters have also hit all-time highs.


Jeffrey Halley, analyst at brokerage OANDA, said both crude contracts looked overbought based on a widely followed technical indicator, the relative strength index.


"That may signal some daily pullbacks this week but does not change the underlying bullish case for oil," he said.


Some downward pressure came from the API's figures showing signs of slowing fuel demand.


Asian shares slip in cautious trading, shrug off U.S. rally


Asian shares slipped in cautious trading Wednesday, shrugging off a rally on Wall Street led by technology companies and banks that erased most of the losses from the previous day’s selloff.


Nikkei 225 fell 1.05% to 27,528.87.

Hang Seng Index fell 0.57% to 23,966.49.

Taiwan capitalization weighted stock fell 0.41% to 16,393.16.

S&P/ASX 200 fell 0.58% to 7,206.50.

South Korea KOSPI fell 1.82% to 2,908.31.


Worries remain in Asia about ongoing coronavirus infections, although hopes are growing that economic activity will return closer to normal later this year, bouncing back from the deep downturn in 2020.


“On the risks front, China credit problems and contagion risks have certainty not abated with developer concerns still surfacing. As such, caution has not been thrown to the winds,” said Tan Boon Heng of the Asia & Oceania Treasury Department at Mizuho Bank in Singapore.


Troubled real estate developer China Evergrande Group’s risk of defaulting on its more than $300 billion in debt has alarmed investors already worried over the slowdown in China’s growth.


In Japan, markets are reassured that it can expect more of the same in economic policies under the new leadership of the ruling Liberal Democratic Party. Yoshimasa Maruyama and Koya Miyamae, economists at SMBC Nikko Securities, said the comments by Shunichi Suzuki, the new finance minister taking office this week, indicate he is sticking to “orthodox” policies.


But fears remain about the world’s third largest economy. Fitch agency has retained a “negative outlook” on the Japanese economy, citing “downside risks to the macroeconomic and fiscal outlook from the coronavirus shock.”

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