Gold drops significantly

August 31, 2016

Despite the recent market upturn, the majority of emerging markets are still considered undervalued compared to their historical averages.

“The global and domestic situation, which determines the dynamics of the emerging markets, is generally positive, even taking into account the prospects of the FED rate increase,” – said Danske Bank in one of their research statistics.

Last week the rally on the emerging markets lost momentum as the FED head Yellen sparked speculations of a rate increase this year. There are hopes for even two as the first one is rumoured to happen in September.  Unquestionably, the rate hike will lead to a selloff in the emerging markets, but the scope of the whole situation might be overestimated. The gradual rate change will help to avoid further shocks in the markets. Even more, it will keep borrowing costs at a relatively low level in the long term.

It’s wise to bet on a moderate upturn on the commodity markets including the oil and steel. Amid the weakening of the US dollar and the reduced oversupply, there are downside risks in connection with the possible increase in the FED rates. Among the internal factors of support, analysts mention that the prospects of an economic growth in the emerging marketers are quite possible as the relatively stable situation of the currency market. Nevertheless, the political and budgetary problems need to be carefully considered in certain countries such as South Africa. The medium-term outlook for the emerging market stocks is moderately positive, as growth in the EM, is likely to be somewhat weaker than in the past decade.

Currently, the futures on FED funds price rate at a 36% probability of a rate hike in September. If the rate hike does happen within next month and the FED extends its hawkish rhetoric’s hinting on a Decembers’ tightening, then the emerging markets can lose their support as investors will return back to Gold and the US Dollar. August payrolls data will probably throw the light on the FED plans forcing investors to adjust their risk appetite according to the possible changes in the US monetary policy.

The dollar futures trade higher today at 95.73 (+0.21%), with the biggest gains against the Japanese Yen (+0.39%) and Swiss Franc (+0.22%). The GBP/USD erased declines despite the weaker than expected Mortgage and Consumer Credit data, as Brexit short-term risks seem to have no impact on the Pound. The crude Oil sees gains as Gold dropssigns that the buoyancy in the commodity markets will extend for some time.

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