【Market Morning】US stocks close higher, Oil retreats from multi-year highs , Gold firms

Yesterday Market Review

Gold firms as yields pull back; focus on U.S. jobs data

Spot gold price was up 0.1% at $1,760.78 per ounce. Spot silver fell 0.6% to $22.52 per ounce.

“Gold has taken a backseat to other safety assets, and a lot hinges on the U.S. nonfarm payrolls data, with the metal likely to move sideways until then,” said Bob Haberkorn, senior market strategist at RJO Futures.

The yield on 10-year U.S. Treasuries pulled back after hitting a more than three-month high, but remained above 1.5%.

Taking cues from surging energy prices that could spur inflation and interest rate hikes, the U.S. dollar rose, making bullion expensive for holders of other currencies, and restricting gains.

Following data showing a strong rise in U.S. private jobs in September, investors’ focus shifts to key U.S. non-farm payrolls data on Friday that is expected to shape the Federal Reserve’s tapering plan.

Xiao Fu, head of commodities markets strategy at Bank of China International, said that even if the non-farm payrolls data is not “spectacular and just in line with expectations”, some Fed members already think the condition for tapering has been fulfilled, and that is putting pressure on gold.

Reduced stimulus and higher interest rates could dull bullion’s appeal as it translates to higher opportunity cost.

While “months of continued ETF liquidations reflect the poor sentiment that is pervasive across the precious metals complex”, reasons to own gold are growing more compelling, TD Securities analysts said in a note.

Dollar climbs as energy surge drives inflation worries

The dollar climbed across the board on Wednesday, as surging energy prices fueled concerns about inflation and interest rate hikes, knocking investors’ appetite for riskier assets and driving flows to safe-havens.

With crude oil prices hitting their highest in seven years, shares fell and government bond yields rose across the world early on Wednesday, before reversing some of the moves later in the session.

“What you are seeing this week is more inflationary fears percolating into the overall market,” said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California.

Rising inflationary pressures could pose headwinds to growth and have implications for how soon the Federal reserve can raise interest rates.

The Federal Reserve has said it is likely to begin reducing its monthly bond purchases as soon as November and then follow it up with interest rate increases, as the U.S. central bank’s turn from pandemic crisis policies gains momentum.

“The question will be, does it force the Fed to move faster than expectations,” Trang said.

The U.S. Dollar Currency Index , which measures the greenback against a basket of six currencies, was 0.3% higher at 94.228. The index hit a 1-year high of 94.504 last week.

Investors remained on edge regarding U.S. debt ceiling negotiations, even as the top U.S. Senate Republican Mitch McConnell said his party would allow an extension of the federal debt ceiling into December, a move that would head off a historic default with a heavy economic toll.

Friday’s non-farm payrolls data is expected to show continued improvement in the labor market, with a forecast for 473,000 jobs to have been added in September, a Reuters poll showed.

“If we are somewhere in the ballpark ... it supports the dollar trend that we have been seeing,” Trang said.

Sterling/dollar implied volatility, a gauge of expected swings embedded in currency options, rose to a seven-month high around 7.9% on Wednesday, as soaring energy prices and a surge in bond yields sent the pound 0.3% lower against the greenback.

The U.S. payrolls report at the end of the week, which could provide clues to the U.S. Federal Reserve’s next move, remains a point of focus for investors.

On Wednesday, Poland’s central bank raised its main interest rate to 0.5% from 0.1% on Wednesday, it said in a statement, moving to increase borrowing costs earlier than analysts had expected to counter a surge in inflation. The move helped lift the Polish zloty up about 0.4%.

The greenback’s strength, combined with an aversion toward riskier currencies, sent the New Zealand dollar down 0.7% despite New Zealand’s central bank hiking interest rates on Wednesday for the first time in seven years and signalling further tightening to come.

Oil retreats from multi-year highs after U.S. stock build

Oil prices dropped nearly 2% on Wednesday, pulling back from multi-year highs, as an unexpected rise in U.S. crude oil inventories prompted buyers to take a breather after recent torrid gains.

Brent crude oil hit $83.47 a barrel, its highest since October 2018, but settled at $81.08, down $1.48 a barrel, or 1.8%. U.S. crude climbed to $79.78, highest since November 2014, before retreating to $77.43 for a daily decline of $1.50 or 1.9%.

"We saw some profit taking as oil had run up significantly," said Gary Cunningham, director at Tradition Energy in Stamford, Conn.

The price of global benchmark 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.

The latest surge in the crude prices had been underpinned by the refusal of the Organization of the Petroleum Exporting Countries and allies to boost output and concern about tight energy supplies globally.

On Monday, OPEC, Russia and other allies, known as OPEC+, chose to stay with a plan to increase output gradually and not boost it further as the United States and other consumer nations have been urging. 

The market slipped late in the day after U.S. Energy Secretary Jennifer Granholm, speaking to the Financial Times, broached the possibility that the United States could combat higher prices by either releasing oil from strategic reserves or potentially halting crude exports.

Oil priced dropped following that news, but the decline was modest. The United States ended a 40-year ban on crude exports in late 2015 and now ships out more than 3 million barrels of crude daily. "I don't think we're at a point where we want to limit exports of crude oil or natural gas," Cunningham said.

U.S. production increased to 11.3 million barrels per day, recovering from storm-related shut-ins more than a month ago to rebound near pandemic-level highs but still far from the 13-million bpd record set in 2019.

With shale companies constraining drilling to concentrate on investor returns, U.S. output has not offset the OPEC+ cutbacks.

Dow closes up 100 points on possible debt ceiling deal progress, recovering 450-point loss

Stocks staged a comeback on Wednesday as investors grew optimistic about a debt ceiling deal and bought into technology stocks.

The Dow Jones Industrial Average rose 102.32 points to 34,416.99, earning back a 459-point loss from earlier in the session. The S&P 500 advanced 0.4% to 4,363.55, after falling 1.27% at its session low. The technology-focused Nasdaq Composite rose 0.5% to 14,501.91, after dropping as much as 1.2%.

Stocks reversed course on news that Senate Minority Leader Mitch McConnell told a closed meeting of Republicans that he would offer a short-term debt ceiling extension later Wednesday. That would help relieve some pressure on Congress to avoid a U.S. default currently expected on Oct. 18.

“To protect the American people from a near-term Democrat-created crisis, we will also allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” he said in a statement posted to Twitter.

Investors bought the dip in some key technology stocks. Microsoft rose 1.5%, Amazon gained nearly 1.3%, and Nvidia popped 1.2%. Alphabet also advanced 1.1%. All of the so-called FAANG stocks closed in the green.

Meanwhile, some stocks tied to the economic reopening drifted lower. American Airlines and JetBlue led reopening plays lower, falling 4.3% and nearly 2.7%, respectively, following a downgrade by Goldman Sachs. Goldman cited higher fuel prices and slower near-term demand.