Wednesday, January 8, 2020

US-Iran tensions escalate; will gold continue to make gains?

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks
  • Oil

Market Recap: Stocks look set to fall, while safe haven assets and oil could surge on Wednesday

Stocks in the US slipped on Tuesday, as investors remained cautious because of rising tension escalating between the US and Iran. But the Nasdaq remained flat as chipmakers curbed losses for the tech-heavy index. Micron surged 8.78% on Tuesday after the company was upgraded to outperform at investment bank, Cowen, and as investors expect memory chip prices to start a recovery cycle.

ADSS_Morning_Brief_Stats_Image

Better-than-expected data from the US services sector and higher demand for safe haven assets drove the greenback on Wednesday. The Institute for Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) rose to 55.0, beating expectations and signalling continued expansion in the services sector in the US. But the slower pace of employment in the sector may be a sign that December’s payrolls may not grow as much as expected. 

ADSS_Morning_Brief_Stats_Image

Gold continued to gain momentum, rising to 1574.37, while the yen retreated against the dollar on Tuesday. US Treasuries mostly fell, with benchmark 10-year yields rising slightly by 1bp to 1.82%.

ADSS_Morning_Brief_Stats_Image

ADSS_Morning_Brief_Stats_Image

Oil prices ended Tuesday’s session lower but spiked on Wednesday morning after the Pentagon confirmed that Iran had fired a series of rockets at two Iraqi air bases housing US troops. WTI Crude Oil futures surged 4.31% to US$65.46 per barrel as of 8.24am (GMT +8).

ADSS_Morning_Brief_Stats_Image

Major indices in Asia fell on Wednesday morning as well after news of Iran's attack. The Nikkei, KOSPI and ASX200 indices all started lower and continued to fall during the morning. US equity futures were lower as well, suggesting that global stocks look set for losses on Wednesday.

ADSS_Morning_Brief_Stats_Image

ADSS_Morning_Brief_Stats_Image

Economic data releases for the day ahead includes Germany’s Factory Orders for November at 11am (GMT +4) and Employment Change by Automatic Data Processing (ADP) for the US in November at 5.15pm (GMT +4).

Today’s Analysis: Gold likely to continue its uptrend in the medium term

Gold rose to 1611.42 on Wednesday morning, reaching its highest level since 2013 after Iran’s attack on US troops. But prices for the precious metal have been gaining since the end of 2019, as investors hedged against the stock market reaching new highs after it was announced the US-China phase one trade agreement would be signed on January 15th. The dollar also started to weaken as investors pulled out of their positions thanks to a reduced threat of a global economic slowdown.

ADSS_Morning_Brief_Stats_Image

As gold tends to be affected by the dollar, today's ADP Employment Change Report will likely impact it as well. Yesterday's ISM Non-Manufacturing PMI report showed employment in the services sector expanding at a slower rate in December. But coupled with slowing employment in the manufacturing sector, ADP employment change will likely grow but at a lower level than economists' forecast of 160,000. The dollar should weaken as a result, with the Dollar Index possibly reaching 96.56's level, boosting gold to higher levels.

December’s Non-Manufacturing PMI report shows employment and new orders expanding at a slower rate

ADSS_Morning_Brief_Stats_Image

But with the US-China phase one agreement set to be signed next week, demand for safe haven assets may fall slightly in the short-term although it is likely that the market has already priced this in. In the medium term, gold is likely to continue to rise, since it is still doubtful that the US-China phase one trade deal will solve the trade issues between the two superpowers. Post-Brexit UK is also surrounded by uncertainty, as the timeframe in which British Prime Minister Boris Johnson has to negotiate a trade agreement with the EU is likely too short for a detailed deal. Political tensions between the US and Iran will also likely drive demand for gold in the short to medium term.


In the short term, gold is likely to continue to range at current levels, with a possible correction to 1577.69's level. But if tension between the US and Iran escalate further, then gold will likely surge past 1600.00, towards 1610.00's level. In the medium term, expect gold to continue to rise, likely past 1620.00's level.

ADSS_Morning_Brief_Stats_Image