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Gold sparkles, stocks hit turbulence ahead of Fed minutes

5 January 2023

Global markets got off to a nervous start this year. Investors have been loading up on defensive assets such as gold and bonds, while reducing their exposure to riskier plays like tech stocks and crude oil, positioning for what could be a rocky year for the world economy. Gold has been on a roll, hitting new six-month highs in early trading Wednesday with a little help from the sharp decline in yields, a softer US dollar, and some seasonal factors as the months around the turn of the year tend to be favorable for demand.

A macroeconomic landscape characterized by heightened recession risks and central banks concluding their tightening cycles bodes well for gold this year, with the next major barrier to watch on the upside being the $1,875 region.

Dollar takes step back, aussie pops 

The sense of caution spilled over into the FX complex as well. The yen has been a star performer so far, drawing strength from the drop in global yields and mounting speculation that the Bank of Japan might roll out its first rate increase to exit negative rates by April. Meanwhile, the US dollar has been more volatile, edging lower today after a solid start to the year. Traders seem to be on the fence, waiting for some clarity from upcoming events before drawing any conclusions on the reserve currency. The ISM manufacturing survey will be released today, ahead of the minutes of the latest FOMC meeting.

Both are top-tier releases that can send ripples through a liquidity-starved market. The manufacturing index is expected to fall deeper into contractionary waters, while the minutes will be scrutinized for any discussions on the Fed’s terminal rate, which policymakers saw above 5% at this meeting but market pricing refused to endorse as much.

Elsewhere, the aussie popped higher today on reports that China is considering plans to resume imports of Australian coal, which Beijing banned in 2020 after Canberra supported an international investigation into the origins of the coronavirus. Coal is among Australia’s top exports and China accounts for half of global consumption, so any easing of restrictions would spell greater demand for the Australian dollar.

Tesla and Apple drag Wall Street down

In the equity realm, Wall Street edged lower on the first trading day of the year, suffering collateral damage from a sharp selloff in Apple and Tesla shares. Apple lost 3.7% on reports that it instructed its suppliers to build fewer components for its products amid faltering demand, while Tesla fell a whopping 12% after missing estimates for quarterly car deliveries.

European markets didn’t get the memo, though. In a surprising twist, equities across Europe shot higher, capitalizing on a deceleration in German and French inflation that might allow the European Central Bank some room to slow the pace of its rate increases. The German DAX is currently less than 12% away from record highs, with the persistent decline in energy prices feeding hopes that any economic downturn might be relatively mild after all.

One of the main differences between American and European equities is the valuation gap, with US markets commanding a large premium over Europe. This gap boils down to the weaker growth trends in Europe over the last decade, as well as the absence of any tech juggernauts. Still, the fact that European markets are trading much closer to ‘fair value’ means that any downside might be more limited in case of a global selloff.

By XM.com

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