Head of Commodity Strategy
Summary: Gold briefly traded above $2000 at the start of the European trading session, after the market responded with caution instead of relief to the high drama that unfolded in Switzerland over the weekend. The short-term direction of precious metals will, besides further developments on the banking and liquidity front, be dictated by Wednesday’s FOMC meeting, the outcome of which is turning out to be most unpredictable in years
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Global Market Quick Take: Europe
Gold briefly traded above $2000 at the start of the European trading session, after the market responded with caution instead of relief to the high drama that unfolded in Switzerland over the weekend. The Swiss National bank trying to avoid contagion from a worsening liquidity crisis at Credit Suisse, arranged what can best be described as a shotgun wedding that sees UBS take over Credit Suisse with several liquidities guarantees and a massive eyebrow-raising wipe-out of Credit Suisse’s Tier1 debt.
The fact that shareholders got spared and Common Equity Tier 1 (CET1) being rated above Additional Tier 1 capital (AT1) has put a $275 billion bond market in focus, potentially sending this funding market for banks into a tailspin. “The Swiss have killed this key corner of funding for lenders” a UK bank CEO told Bloomberg, and it is this focus that instead of supporting the European market opening, has kept in a nervous state about what may happen next. Adding to the confusion but also reducing some of the stress about the AT1 market was a statement from European regulators reiterating that CET1 will take losses before AT1 debt.
The statement helped reduce some of the liquidity-driven worries and after hitting a fresh one-year high at $2010 gold has since retraced lower to around $1980. Gold priced in other currencies raced higher as well with XAUAUD hitting a record while XAUEUR came within 1% of reaching a new high. Gold and silver ended up 6.5% and 10% last week, and together with Bitcoin they are currently being seen as safe havens and a gauge for the underlying market risk sentiment.
Heading into the latest crisis, precious metals were under owned by traders and investors who had been heavy sellers during the February correction. ETF holdings in gold jumped the most in a year last week but at 2871 tons it remains almost 450 tons below the 2022 peak while speculators in futures cut their net long positions by 78% during a five-week period to March 7.
The short-term direction of precious metals will, besides further developments on the banking and liquidity front, be dictated by Wednesday’s FOMC meeting, the outcome of which is turning out to be the most unpredictable in years. In less than two weeks, the market has gone from pricing four rate hikes to zero and with the swap market pricing in a cut of around 130 basis point during the next twelve months. Any further escalations before then could even trigger a surprise cut, an outcome the very front end of the yield curve is pricing with three-month money currently trading 70 basis points richer than two-years, down from 90 basis point earlier in the session.
We maintain a bullish outlook for gold, especially if the FOMC, driven by the current banking and liquidity crisis, is forced to change its focus away from fighting inflation to maintaining stability. Peak rates have on three previous occasions during the past 20 years triggered a prolonged period of gold strength and given the current situation a repeat cannot be ruled out. The current level of uncertainty, however, has increased volatility, and in the short term, the combination of Fridays near 40-dollar rally and today’s rejection above $2000 may trigger some profit taking, but in our opinion not a change in direction.
Short-term Gold seems overbought, and a correction if gathering pace could see it target $1931, the 0.382 Fibo retracement of the latest run up since March 8. Overall, gold is in an uptrend short- and medium-term and could test all-time highs around $2,074
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
