【Market Morning】 Oil prices drop 1%, Gold prices drift lower amid rising dollar

Yesterday Market Review

Gold prices drift lower amid rising dollar

Gold was down on Monday morning in Asia, but remained below a two-and-a-half-month high. A disappointing U.S. jobs report indicated that the U.S. Federal Reserve could delay its asset tapering timeline, giving the yellow metal a boost.

Spot gold settled at $1,823.09 an ounce and spot silver settled at $24.69 per ounce.

The US Dollar Index, which moves inversely to gold, also fell after the report. Dollar rose on Monday.

As part of their respective policy decisions, the Reserve Bank of Australia and the European Central Bank will make announcements on Tuesday and Thursday, respectively.

As spot gold prices bounced back in the previous week, physical gold demand was comparatively muted in Asian hubs. There are, however, tentative hopes that Indian festivals will boost demand this year.

Data provided by the U.S. Commodity Futures Trading Commission showed that COMEX gold and silver net long positions were increased by speculators in the week ended Aug. 31.

Dollar stands tall as global growth momentum fades

The dollar erased all losses sustained after last week’s poor U.S. jobs report and extended gains versus its rivals on Monday as concerns about slowing global growth boosted its safe-haven appeal in a big week for central banks.

The dollar index, which measures the currency against six rivals, edged 0.2% higher to 92.31. It had dipped to 91.941 for the first time since Aug. 4 on Friday, when a closely watched U.S. labour report showed the world’s largest economy created the fewest jobs in seven months in August.

While the weak jobs report doused expectations the Fed might strike a hawkish note at a meeting later this month, analysts said the data is yet another reminder of global growth losing steam after a bounce earlier this year, a significant headwind for cyclical currencies like the euro and the Aussie.

Economic surprise indexes from the United States to China have slipped sharply in recent weeks while latest manufacturing surveys from Britain to Japan show the rise in coronavirus delta cases is sapping sentiment.

“The key to the narrative in the next few weeks will be how sharply the growth data can snap back globally, if at all, how the delta variant cases evolve as pupils return to school, and from a momentum perspective do we continue to see real money begin to put money back to work,” said a trader at a U.S. bank.

The weak jobs report did not spark a new wave of dollar selling on Monday as the greenback spent the Asian and much of the London session pushing higher against its rivals, prompting some major currencies including the euro and the Australian dollar to move back to pre-Friday jobs report levels.

Most of the dollar’s gains was focused on the Australian dollar which weakened 0.2% to $0.7435 ahead of a central bank decision on Tuesday where analysts remain divided on whether the Reserve Bank of Australia will call time on its stimulus plans.

National Australia Bank predicts the central bank will reduce asset purchases again, “although the optics of tapering amid protracted lockdowns means it is likely to be a close decision,” NAB analyst Tapas Strickland wrote in a report.

The euro also failed to extend its gains on Monday after rising above the $1.19 levels for the first time since the end of July. It was trading 0.1% weaker at $1.1865 before an European Central Bank policy decision on Thursday.

Economists reckon it is still too early for the ECB to call time on emergency stimulus, but it could agree to slow the pace of its bond buys after euro area inflation surged to a 10-year high at 3% last week.

Oil falls after Saudi price cuts

Crude oil prices fell on Monday after Saudi Arabia's sharp cuts to crude contract prices for Asia revived concerns over the demand outlook.

Brent crude oil fell as much as 1.4% to $71.51 before paring its losses. WTI crude also fell as much as 1.4% on Monday before paring its losses, although trading was thinner due to the Labor Day holiday. It stood 0.66% lower at $68.83 in European trading.

Saudi Aramco, the kingdom's state-owned oil company, told Asian customers on Sunday it will cut October's official selling prices by at least $1 a barrel, according to Reuters. The cuts, which apply to all crude grades delivered to the region, were considerably bigger than expected.

"Evidently Saudi Arabia had overestimated the strength of oil demand in Asia a month ago and has now been forced to backpedal," said Commerzbank analyst Carsten Fritsch in a note on Monday.

The Organization of the Petroleum Exporting Countries and its allies are currently raising output after slashing production to support prices during the pandemic-induced economic crash of 2020. Global oil prices have risen sharply since the start of the year, as growth has boomed in advanced economies.

Yet the spread of the Delta coronavirus variant and global oil supply-chain problems are now dragging on a return to economic normality. This was seen clearly on Friday, when data showed that US nonfarm payrolls rose at their slowest in seven months in August as the jobs recovery stuttered.

Delta variant cases have caused particular concern in Asia, leading China to limit activity at some ports, further snarling up supply chains. Concerns have grown that these factors will dampen crude oil demand.

Bjarne Schieldrop, chief commodities analyst at SEB, said Brent crude is likely to fall back to around $63 a barrel in 2022, as COVID variants hamper the demand recovery and OPEC+ and other oil producers increase supply.