Monday, November 11, 2019

S&P500 makes fifth weekly gain; does gold have more room to fall?

  • China
  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: Trump says reports on willingness to lift tariffs incorrect

Major US indices closed at record highs last week thanks to investor’s optimism on the US-China Trade War. The S&P500 made its fifth straight weekly gain, rising 0.85% from the previous week. The DJIA and the Nasdaq ended the week 1.22% and 1.06% higher. US equity futures was lower on Monday after US President Donald Trump said that there had been incorrect reporting about the US’ willingness to lift tariffs, although he also signalled that trade talks with China is progressing well. Dow E-mini Futures were down 0.27% and the S&P500 E-mini futures were 0.25% lower as of November 11th, 8.36am (GMT +4).

Safe haven assets suffered losses last week as the US-China trade dispute showed positive progress throughout the week. Gold retreated 3.65% on the week to a three-month low and the yen weakened 0.99% against the dollar over last week. US Treasury benchmark 10-year yields gained 23bps to 1.94% last week.

Stocks in Asia fell on Monday after Trump’s comments, with the Nikkei starting the day 0.13% higher but fell 0.26% as of 10.15am (GMT +4) on Monday. The Straits Times Index opened 0.15% lower on Monday. The Hang Seng Index started Monday’s trading session 1.05% lower, as Hong Kong stocks tumbled after tensions between the Hong Kong police and protestors in the financial hub escalated during the weekend and on Monday.

In the week ahead, the Royal Bank of New Zealand will be announcing its decision on monetary policy on Wednesday, at 5am (GMT +4) and GDP data for the UK, Japan, Germany and Eurozone will be released throughout the week.

Today’s Analysis: Gold to likely be affected by the US Economy and US-China Trade War

Gold prices hit a three-month low on Friday, November 8th, reaching as low as 1456.31. The recent drop in gold prices can be attributed to both a lower demand in safe haven assets and an appreciation in the greenback during the last week.

The Dollar Index gained 1.15% during the week as a result of upbeat economic data from the US. The services sector in the US remains strong despite geopolitical risk. The Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) for the Non-Manufacturing Sector in October was 54.7, beating economists’ estimates for 53.5. The University of Michigan’s Consumer Sentiment Survey Index for November was 95.7, beating economists’ estimates of 95.5 as well. With the Fed cutting rates for the third time this year at the end of October, the US economy is likely to experience the effects of the monetary policy stimulus in the near-term.

Globally, geopolitical risk has reduced in the recent weeks. Brexit has been put on pause as the UK prepares for a December 12th general election to see if UK Prime Minister Boris Johnson can regain majority in the UK’s House of Commons in order to more easily pass his Brexit Withdrawal Bill. US-China relations have also eased, as the two superpowers have announced a possible initial partial trade deal that may be signed in the next month.

While the market seems to be optimistic on the partial trade deal, it may possibly only include rollbacks on existing tariffs, purchase agreements and currency pacts. It is unlikely that it will end the US-China trade dispute in the near-term. But with Trump saying that there has been incorrect reporting about the US’ willingness to lift tariffs, gold prices are likely to inch higher today.

If the US economy shows signs of strengthening or if US-China tensions ease in the near term, gold prices are likely to decrease, possibly breaking 1458.93 to range between 1447.98 to 1458.93. But gold may also increase, if the US economy shows signs of slowdown or if US-China tensions escalates before the initial trade pact is signed, possibly to 1468.90’s level.

Scenario analysis US economy and US-China trade tensions on Gold

Will the bears be able to push gold lower? (H4)

The bears maintain control of gold, even after the Relative Strength Index (RSI) signalled that gold was oversold, allowing the bulls to push gold back slightly higher. But the bears are likely to continue to apply downward pressure on gold as the US and China get closer to signing a partial trade deal and as the US economy looks to be strengthening. The support level of 1458.93 will likely be retested by the bears.