Happy Friday, traders. We’re here for our market wrap on what has been a truly exception week for markets in general and for the gold market specifically. We have an emergency Fed Day to discuss, as well as the market moves that have seen gold prices briefly marking a $100 gain for the week as the yellow metal has bounced back from last week to regain its position as a preeminent safe haven asset.
So, what kind of week has it been?
An Exceptionally Volatile Week for Gold Prices Began with a Relatively Calm Monday
When our weekly preview post went up on Monday morning, it looked as if global markets were still unsure just what their attitude and outlook would be. Encouraged by last Friday’s inter-meeting statement from Federal Reserve Chairman Jerome Powell, Asian markets began the week with a rebound performance but by the time New York desks were opening up European markets had reversed their intraday gains and US equity futures were looking shaky.
In the gold market, while the start of US trading had seen prices fall back below $1600/oz there were already signs that gold’s momentum was beginning to overcome the trio of counterbalancing pressures which pushed the yellow metal lower last week despite a historic surge in risk-aversion. Mid-morning brought a disappointing print from ISM’s Manufacturing PMI which, clearly impacted by Covid-19’s economic drag, came in marginally above the 50.0 breakeven. Gold charts had very little reaction to the report. I think this was due to the fact that prices at the time were already pressing against what was strong resistance at $1600, but also because equity markets were starting to signal the positive day ahead of them.
Stocks would indeed surge higher to close the day on Monday, boosted especially by the rest of the G-7 central banks and finance ministers joining Powell’s promises to act as needed and announcing plans for a teleconference the next day to discuss their joint options. Even as risk assets rebounded, gold prices turned in their own solid performance managing to price above $1590/oz throughout the days and showing signs of recovery and renewed interest after last week’s deep selloffs.
The Fed’s Emergency Rate Cut Fails in Its Purpose While Driving an Explosive Gold Rally
Equity markets around the world had a similarly uncertain start to Tuesday’s book of trading business. While many major overseas markets turned in a solid performance overnight, in a taste of trades to come the Japanese Topix Index sank by more than 1% as its domestic markets took a dim view of the likelihood that the Bank of Japan’s increased stimulus measures (announced Monday) would have a sustained impact. The return of creeping risk anxiety served to elevate gold prices back above $1600/oz. With the open of US equity trading approaching, global investors and business were disappointed that the teleconference of G-7 moneymen seemed to only result in a promise that they were “ready to cooperate” in response to the Covid-19 crisis which lacked in specifics. The tangible disappointment in risk markets served to keep gold prices supported above $1600.
The passivity wouldn’t last, of course. Shortly after US markets opened, the Federal Reserve announced the first “emergency” between-meeting cut since the financial crisis in 2008. The target policy rate range was slashed by 0.5%, driving an immediate $40/oz surge in gold prices to nearly $1645 while yields on the benchmark US 10yr note threatened to fall below 1.0% for first time (ever.)
The move was entirely aimed at stabilizing markets by boosting investor confidence in the central bank’s ability and willingness to support the economy in the current phase and through the post-coronavirus recovery period. While it initially had the desired effect, boosting US equity indices alongside the surges in gold and treasuries pricing, the stock markets sold off fairly quickly after the announcement. The drop in stocks and in risk appetite accelerated with Powell’s press conference after the cut, as the Chairman acknowledged the obvious reality that monetary policy isn’t an effective means of combating a disease.
Highlight: “The market’s kind of telling us that it needs something more than monetary policy to impact this virus that we don’t know ultimately how it’s going to influence the real economy,” Brandywine Global Portfolio Manager Jack P. McIntyre says. pic.twitter.com/kTU10xaGkB
— Yahoo Finance (@YahooFinance) March 3, 2020
In fact, sentiment seems to be growing to the idea that monetary stimulus may not even be an effective means of supporting the economy through this period. Many, I included, are of the opinion that the only way to prevent consumers and the economy from curling up on themselves like an armadillo is a massive injection of fiscal stimulus. That theory may get a real test in coming weeks, as Congress has passed a spending package worth roughly $8 billion aimed at curbing the health crisis’ spread, and there are reports that the White House is considering additional measures to spur consumer participation and other economic relief.
As Tuesday’s wild session came to a close, it was clear that the Fed’s bet on a sudden policy boost hadn’t paid off. After initially moving higher on the announcement, US stocks ended the day nearly 3% lower; the rate cut that had been hoped to support equity prices through the week instead made sure that market uncertainty and risk-aversion would keep gold’s safe-haven value well supported at $1635/oz while driving record buying of US debt which has been holding the yield on the US 10 year at a historic level below 1.0%.
Equity Markets Flounder but Gold and Treasuries Hold Make New Gains
Those market conditions and price levels persisted following Tuesday’s impromptu Fed Day and through the Wednesday session. The monthly ADP report on private payroll growth came in broadly as expected (for the first time in several tries.) While a relatively large downward revision to the prior month’s 291,000 number could have been expected to be a risk-off signal, gold prices weakened a bit on the news. Similarly, the yellow metal saw light selling again mid-morning as ISM reported better metrics for growth in the American services sector than expected.
Despite a generally positive day of economic data and a rally in equities (led largely by the news of Congress’ emergency spending bill) that saw the S&P 500 rebound by more than 4%, gold appeared to have returned to its role as a predominant safe haven asset, holding onto the majority of its Tuesday gains. Spot prices held strong support at $1635 through Wednesday and Thursday’s trading session in Asia. As European markets opened in the early morning hours, gold had established a solid base at $1640/oz.
From that base, gold prices traded steadily higher throughout Thursday in the US, picking up another $30+ in value trading to and through $1670/oz. The initial lift for the yellow metal came from yields on the all-important US 10yr falling back below 1.0%. The market had run out of good news to trade, it seemed clear, and investors were flowing back into the best stores of safety and value that they could find: US debt, the Japanese Yen and, of course, gold. Moves in debt markets helped initiated gold’s upward trend for the day, and a further spike in equity volatility would carry it through the late-morning and afternoon hours as stocks gave back most of Wednesday’s gains.
Gold Prices Have Softened from a $100 Rise, but Look Bullish Heading into the Weekend
As this frenetic and frazzling week headed towards its Friday conclusion, these risk-off moves continued mostly unabated. The deluge into the safety of sovereign debt tore through the Asian and European sessions as investors and advisors tried to shore up risk ahead of the weekend, pushing the move far enough to briefly drop the US 10yr’s yield below an astonishing 0.7%. Gold, meanwhile, rode the fear wave higher and made it as high as $1688/oz.
Just as it seemed we might see an concerted effort to break $1700 before the weekend, the February Jobs Report arrived and—for the first time in what feels like months—an economic data point briefly overpowered the health crisis narrative to dominate gold’s price chart.
The U.S. jobless rate last month fell back to a half-century low of 3.5%, as average hourly earnings climbed a steady 3% from a year earlier https://t.co/gVjlKYVNLW
— Bloomberg Markets (@markets) March 6, 2020
With the headline unemployment rate dropping back to 3.5%, NFP was once again a blockbuster. The number of jobs added surpassed expectations by nearly 100k for the month while the previous month’s data was revised upward to a (curiously) identical +273k. Gold spot prices were pushed nearly $10 lower on the release, as we would expect from such a healthy signal for the US economy.
Of course, with US equity futures continuing to look shaky, the yellow metal in fairly short order rebounded to $1685 ahead of the cash open. The start of market trading brought some strong volatility across our most-watched assets classes: sellers finally stepped back into the treasury market to pull yields back above 70 bips and US stocks hinted at an immediate rebound; gold meanwhile saw some of its strongest selling of the week as, driven by an influx of profit-taking from short-term speculators, prices fell to as low as $1650.
Gold turns lower after failure to break February high https://t.co/HtwAQBExj4
— ForexLive (@ForexLive) March 6, 2020
Since then, we’ve seen equities’ initial momentum fade out while traders and investors grapple with anxiety ahead of another weekend of unknown developments as the global health crisis slowly transforms into some degree of global economic crisis. US stocks look certain to close at a loss of 2.5-3% for the day and gold is once again trading just below $1675—up nearly $100/oz since Sunday’s open—as we head into next week.
Next Up
US consumer inflation will be the top data point coming up, in a week where assessing and containing Covid-19’s economic destruction will be the core market narrative and investors will hope for a rebound in stocks. We’ll also be entering the pre-FOMC meeting “quiet period,” which will only encourage wild speculation about whether or not the Fed will introduce another, possibly ill-advised, round of monetary stimulus in spite of this week’s emergency cut. Should be fun.
Until then, get away from the screens and enjoy your weekend, traders. I’ll see you all back here on Monday for our regular preview of the week ahead.