Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Commodity Strategy
Summary: Gold’s price action and gains during the past week has in our opinion showed us the correct direction for 2023, but while the direction is correct, we believe the timing could be wrong, and with momentum showing signs of slowing ahead of key resistance, and a weak US CPI print on Thursday having been priced in, the risk of correction has risen.
Gold pushed higher overnight supported by general metal strength amid the current focus on the reopening of the Chinese economy and pent-up seasonal demand ahead of the Lunar New Year holiday. Developments that are being supported by a softer dollar and a drop in US bond yields ahead of tomorrow’s US CPI print, which is expected to show further softening, leading to speculation the FOMC may slow the pace of future rate hikes. While momentum supports technical and speculative buying - for now primarily through short covering - activity in ETF market from longer-term investors remain tepid, raising the short-term risk of a correction. The next major hurdle for gold being $1896, the 61.8% retracement of the 2022 correction, with support now at $1865 and $1830.
This was my morning comment in Saxo’s daily financial market preview, and, if I should be the devils advocate, I see an increase risk of a disappointment tomorrow, not least considering the rally seen so far and how much a ‘lower-than-expected’ CPI print is being talked about. No doubt the initial reaction on a sub 6.5% print could send gold higher to test the mentioned resistance level around $1900, but after that we may see profit taking emerge. Gold’s price action during the past week has in my opinion showed us the correct direction for 2023, but while the direction is correct, I believe the timing could be wrong. The first few weeks of a new year often see prices move as investors throw money after the themes they believe will work for the year ahead. Once that initial demand has been saturated, the follow through buying requires action from longer-term focused investors, and many of these are unlikely to react until the market in our opinion start to reprice the ultimate level of medium to long term inflation expectations higher from the current low level below 2.5%.
What to do?
If tactical long: start thinking about reducing exposure.
If long term bullish: hold on and accept this will be a marathon, and not a sprint
If contemplating buying gold: have patience as I still see the risk of a correction lower towards $1830’ish
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