Morning Call: Ultra-dovish Fed prompts broad risk-off
The extent of the Fed's circumspection at yesterday's policy meeting has sent the US dollar and equities lower, while the usual safe havens – gold and the yen – are poised for gains.
Head of Commodity Strategy
Summary: It’s been a stormy week for global financial markets and commodities were no exception as they struggled under the pressure exerted by sinking equities, rising US interest rates and a strong dollar.
Commodities remained exposed to broad-based selling this past week. For a third consecutive week, the sector struggled to put up a defence against the challenging combination of rising US interest rates, a strong dollar and the global equity rout, which has now spread to the US market.
The Bloomberg Commodity index, which tracks a basket of key commodities in energy, metals and agriculture, was down 2% on the week, with losses in energy, industrial metals and grains offsetting renewed safe-haven demand for precious metals, led by gold.
The global rout in stocks has spread to the US with the major indices having seen their gains for the year wiped out. The Nasdaq index, which contains several of the technology bellwethers, is currently on track to record its worst monthly performance since the Global Financial Crisis in 2008.
Financial markets are waking up to the fact that the strength of the so-called central bank “put” is weakening, as QT (quantitative tightening) in the US slowly begins to drain the excess dollar liquidity that global markets have thrived on for the past decade. During this time volatility stayed compressed in the belief that any weakness in bonds and stocks would be bought as the above mentioned excess liquidity needed to find a home.
As per our recently released Q4 Outlook we believe the "lower growth leading to lower demand" narrative eventually will take its toll on crude oil prices. However, we also believe that the market may have jumped the gun too soon with the supply disruption impact from Iran not yet fully known. Opec’s and especially Saudi Arabia’s pledge to “produce as much as they can” could backfire should the need for additional barrels rise by more than expected.
In such a circumstance the market will begin to worry that lower spare capacity would leave the market exposed in the event of production outages from other producers such as Iraq, Venezuela, Libya and Nigeria.
Overall it is our belief that the above uncertainty is likely to provide some short-term support once the panic selling is over. With $75/b now acting as support, we see Brent crude oil making its way back up towards $80/b in preparation for US sanctions taking their full toll on supply.
Gold benefits from flight to safety
The month-long sell-off in gold increasingly looks like it’s over with the yellow metal focus having switched from the headwind of a stronger dollar to the tailwind being created by renewed safe-haven demand in response to the global market rout in stocks. This change has further been supported by demand for Japanese yen and US government bonds where the yield on 10-year notes has fallen back below 3.1%. The break above this level caused widespread panic back on October 3 and it helped trigger the rout in US stocks.
Given gold’s relative strong performance so far this week (+0.8%) despite the stronger dollar (+1%) it is likely that resistance at $1,240/oz could be challenged and broken very soon. Not least considering continued stock market weakness on Friday following disappointing results from technology behemoths Amazon and Alphabet.
Gold’s weak performance was until recently strongly linked to the direction of the yuan, which has fallen by 7% so far this year. That correlation is now fading with the rout in equity markets and lower bond yields attracting a safe-haven bid that so far has proven to be stronger than the headwind caused by the dollar reaching the highest level since June 2017.