Gold Futures Surge as Retail Fizzle Counters Inflation Surprise
This article by Luzi Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:
Global markets were whipsawed last week after U.S. wage data spurred investors to reappraise the outlook for global inflation and weigh consequences for monetary policy and asset valuations. While investors often seek gold as a haven during times of turmoil, the metal fell on the same concerns that helped spark the selloff in stocks: the prospect of higher interest rates. Bullion regained some ground early this week.
The retail sales number “is one of the moving gears that can cause the Fed to actually take a step back from raising interest rates,” Daniel Pavilonis, a senior market strategist at RJO Futures, said in a telephone interview. “There’s a lot of uncertainty in the market and it’s helping gold. Traders are asking, is this number problematic enough to hold off on raising rates, or it is just temporary?
Eoin Treacy’s view
Gold has been ranging mostly below $1350 since the middle of 2016 in another of a succession of 18-month ranges seen over the last 15 years. Gold is a hedge against financial troubles that reduce investors’ purchasing power so if there is any chance that the Fed will fall behind the curve of rising inflation, gold can be seen as a sound hedge.
Thanks to a subscriber for this report from Cantor Fitzgerald which may be of interest. Here is a section:
As markets get spooked by the rising yield environment, (US 10 -year treasury’s at 2.7%, up 11% ytd and the German 10 year Bund at 0.67%, up c.55% ytd) investors continue to question equity valuations following a 9 year bull run as bond/bund yields begin to factor in a rising interest rate cycle.
Given this backdrop we’ve seen a rotation out of bond proxy/high yield stocks like telco’s and utilities into the banking and insurance sectors. The chart below shows the correlation between the European banking sector and the German 10 year bund over the last year.
As you know we have been positive on the European banking sector for some time, given the improving economic backdrop across the Eurozone which bodes well for the sector. The latest European Q4 GDP came in ahead of expectation and when you look at historical data, 2016 estimates for Q4 2017 were 1.4% but came in at 2.7%.
Specific to the banks, balance sheets have been repaired, lending growth is accelerating, consumer spending is improving, and confidence levels are going in the right direction. Both core and peripheral European banks are primed to take advantage of this upturn and to some extent has been reflected in higher moves over the last year or so.
The sector though continues to trade at attractive valuations due to historical legacy issues but we believe that these issues, including Non-Performing Loans “NPL’s”, have been well managed and should be less of a headwind going forward. Quantitative Easing “QE” from the ECB is nearing an end, per recent comments from the central bank, as the market moves to a more normalised interest rate environment over the coming years to the benefit of the banking sector.
Two of the consequences of quantitative easing were to rob savers of yields and to compress the profitability of banks by reducing the interest rates they could earn on short-term paper. The change to raising rates is a net positive for the banking sector. There is ample evidence of this in the USA following the announcement of the tax cuts and as the Fed gradually raises rates.