【Market Morning】Oil settles near 3-year high, Dow climbs 480 points,Gold prices end higher

Yesterday Market Review

Gold prices end higher to notch a modest weekly gain

Gold price end higher on Friday, tallying a small gain for the week, with prices finding some support from weakness in the dollar and government bond yields even after a reading on the cost of U.S. goods and services revealed a rise for August.

Spot gold price rose $1.40, or nearly 0.1%, to settle at $1,758.40 an ounce. Spot silver rose 49 cents, or 2.2%, to settle at $22.536 an ounce.

“Three inflation numbers this week…suggest that gold should rise,” Chintan Karnani, director of research at Insignia Consultants, told MarketWatch. He referred to German import prices, which rose at the fastest in 40 years last month, Euro zone inflation, which hit a 13-year high last month and a rise in U.S. inflation in August, which left the inflation rate at a 30-year high.

“Gold is the best hedge against multi year high inflation,” said Karnani.

But for the short term, he suggests “cautious optimism in gold,” as trader sentiment is “neutral to bearish.”

Bullish investors made the case that uncertainty around the economic rebound and Federal Reserve’s policy due to inflation concerns foster a good environment for bullion and other precious metals. That is even as the Fed is set to taper monthly purchases of $120 billion in Treasurys and other bonds that helped to provide liquidity to troubled markets during the worst of the COVID pandemic.

“First of all, the start of tapering the Fed’s bond purchases is imminent and already seems to be partially priced by the markets,” wrote Carlo Alberto De Casa, market analyst at Kinesis Money, in a research note.

“Secondly, the fundamental basis for spot gold demand appears relatively solid, indicating that there won’t be a significant decline,” he wrote. He makes the case, pointing partly to Thursday’s trade, that gold investors have been bargain hunting the asset, buying following significant dips.

“This sudden rebound may show that sellers are losing power and therefore, buyers are trying to invest during a dip, now viewing gold as a more attractive choice after the recent decline,” De Casa wrote.

Looking ahead for the spot gold market, U.S. economic data releases will be in focus next week, said Karnani, with durable goods, ISM non-manufacturing and ADP and nonfarm payrolls jobs numbers set for release.

Stronger numbers will “cause another big sell off in gold and vice-versa,” he said. “These numbers will tell us the growth outlook for the fourth quarter,” and the economy will be the key driver for precious metals and currency markets in October.”

Oil settles near 3-year high ahead of OPEC+ meeting

Oil settled above $78 a barrel on Friday, just shy of a three-year high reached earlier this week, on expectations that OPEC ministers will maintain a steady pace in raising supply.

The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, meets on Monday. The group is slowly unwinding record output cuts made last year, although sources say it is considering doing more to boost production.

Brent crude oil rose 97 cents, or 1.2%, to settle at $79.28 in its fourth weekly rise. U.S. West Texas Intermediate (WTI) rose 85 cents to settle at $75.88 in a sixth week of gains.

Brent has risen over 50% this year and reached a three-year high of $80.75 on Tuesday.

OPEC+ is facing pressure from consumers such as the United States and India to produce more to help reduce prices as demand has recovered faster than anticipated in some parts of the world.

"If OPEC+ sticks to the script and only delivers the planned 400,000 bpd increase in November, energy markets will shortly be seeing $90 oil prices," said Edward Moya, senior market analyst at OANDA, adding that any increase smaller than 600,000 barrels should boost prices.

Oil is also finding support as a surge in natural gas prices globally prompts power producers to move away from gas. Generators in Pakistan, Bangladesh and the Middle East have started switching fuels.

"The most likely reason for stable crude oil prices is that investors believe the supply-demand gap will widen as the power crisis worsens," said Naeem Aslam, analyst at Avatrade.

U.S. dollar slides for 2nd day, but outlook stays upbeat

The dollar fell for a second straight session on Friday, tracking declines in U.S. Treasury yields, as investors booked profits after recent sharp gains, though the decline was viewed as temporary.

U.S. 10-year Treasury yields were last at 1.484%, down nearly six basis points.

For the week, the US dollar index posted its largest percentage gain since late August, as investors looked to the Federal Reserve’s reduction of asset purchases in November and a possible rate hike late next year.

Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit has lent support to the dollar, seen as a safe-haven asset.

“The more hawkish stance appears to have been the key factor driving the dollar higher in late September,” said Marc Chandler, chief market strategist, at Bannockburn Global Forex.

“However, more immediately, fiscal policy is the focus, though investors appear to be looking through it, as many find it inconceivable that the U.S. would default on its debt,” he added.

In afternoon trading, the dollar index slid 0.3% to 94.046, having gained 0.8% this week, the largest weekly rise since late August. Friday’s batch of U.S. data was mixed, adding to dollar weakness ahead of the weekend.

U.S. consumer spending increased more than expected in August, posting a 0.8% rise, but consumption was weaker than initially thought in July, dipping 0.1% instead of gaining 0.3%.

Inflation remained elevated, but not by much. Core inflation as measured by the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, was up 0.3% in August, unchanged from previous month.

In manufacturing, data was more upbeat. The Institute for Supply Management (ISM) said its index of national factory activity increased to a reading of 61.1 last month from 59.9 in August.

In other currencies, the euro rose 0.1% to $1.1595, falling about 1.1% for the week, its biggest percentage fall since mid-June.

The yen to dollar bounced back from a 19-month low overnight, with the greenback last down 0.2% at 111.105 yen. Commodity currencies rallied against the U.S. dollar on Friday as well.

The Australian dollar gained 0.6% to US$0.7270 and slumped 3.6% in the third quarter - the worst performance of any G10 currency against the dollar - as prices for Australia’s top export, iron ore, fell sharply.

Sterling was also an underperformer last quarter, dropping 2.5%, and posting its worst week in more than a month, amid growing supply chain problems.

Sterling was last up 0.6% though at $1.3552, just above a 9-month low at $1.3516.

U.S. stocks finish sharply higher Friday

U.S. stocks pushed higher on Friday as investors shook off a rough September and news of a new oral treatment for Covid-19 boosted shares of companies tied to the economic recovery.

The Dow Jones Industrial Average climbed 482.54 points, or 1.43%, to close at 34,326.46. The S&P 500 rose nearly 1.2% to 4,357.04, while the tech-heavy Nasdaq Composite gained 0.8% to 14,566.70 and snapped a five-day losing streak.

Shares of Dow member Merck jumped close to 8.4% after the drug maker and Ridgeback Biotherapeutics said their oral antiviral treatment for Covid-19 reduced the risk of hospitalization or death by 50% for patients with mild or moderate cases. The companies plan to seek emergency authorization for the treatment.

The new drug from Merck appeared to boost travel stocks. Shares of Royal Caribbean and Las Vegas Sands added 3.8% and 4.3%, respectively. Southwest Airlines rose 5.6% after JPMorgan upgraded the stock and said most of the group was worth buying for a trade. Bank stocks rose as well, helping the Dow outperform.

“We have seen this rotation back to the so-called reopening plays and the more cyclical areas, which I think makes a lot of sense over the next couple of weeks as we think about the Covid trends improving, with the cases falling from last month’s peak, and the news about the Merck pill appears promising,” said Angelo Kourkafas, an investment strategist at Edward Jones.

Vaccine stocks, including Moderna, pulled back following the Merck news.

“A combination of slowing growth, less accommodative monetary policy, China headwinds, fading fiscal stimulus, and nagging supply chain bottlenecks all conspired to weigh on investor sentiment as we head into fall and 4Q21,” Chris Hussey, a managing director at Goldman Sachs, said in a note.

“That’s just a squiggle. As we zoom out, it’s going to look like nothing in 12 months. I know investors are nervous, and there’s a lot of headwinds here, but as you know, when the wall of worry is big, that’s often a good opportunity for investors,” Fundstrat’s Tom Lee said on CNBC’s “Halftime Report.”