Stocks: Sentiment improved a little on Tuesday after Monday’s big rout amid concerns about the fallout from Evergrande’s debt woes had roiled markets. The markets started to recover late in the day on Monday as dip buyers took advantage of beaten down prices, although it didn’t prevent the S&P from posting its biggest lose since May. But by Tuesday morning, calm had returned to the markets and US futures were trading higher alongside European stocks. The better mood is a reflection of optimism about travel returning to some form of normalcy after the US announced it will allow fully vaccinated people to travel to the US. This helped underpin travel stocks, while crude oil and energy firms also rebounded. On a micro level, Royal Dutch Shell shares advances after the company offered shareholders a pay-out from the sale of shale oil fields.
FOMC: Investors’ focus will turn to the US Federal Reserve meeting on Wednesday. The FOMC is expected to provide some confirmation that QE will be tapered in the coming months. How the dollar – and in turn – gold will react to this will be determined by the size and the speed of the reduction. It is possible we could see renewed weakness for stocks if Chairman Jerome Powell suggests QE will be tapered quicker than expected amid surging inflationary pressures around the world.
FX: Thanks to calmer conditions in the stock markets, the pressure has eased a little on the US dollar, with the commodity dollars enjoying a short-covering rebound. For gold traders, the direction of the dollar is going to be just as important as the equity markets. To this end, the US currency might perform mixed until at least the FOMC day on Wednesday. With risk assets dropping on Monday, the greenback might start to rebound later if sentiment starts to turn cautious again. So, watch out for the dollar to outperform against commodity dollars, but against haven currencies like the yen, it will probably under-perform. For this reason, gold might be able to stay supported – for now.
Gold: Precious metals have been the worst-performing sector in commodities this year, and although it is too early to say whether that trend has changed, the last couple of days has certainly been among the better days for gold. With uncertainty over the stock markets remaining elevated despite Tuesday’s rebound, it is not unreasonable to expect some haven flows coming into gold. It is possible we may see even firmer gold prices is stocks resume selling amid risk of contagion from the debt crisis at developer China Evergrande Group or if concerns over stagflation intensify.
But the gains have so far been very limited, and it remains to be seen whether gold will be able to set itself free from the shackles that have prevented it from flying like other commodities have enjoyed previously. The last few days aside, gold has been behaving quite strangely over the last several weeks. It would merely stabilise for a few days when whenever yields fell, only to then resume lower when yields rose. Until now, investors were still happy to buy the dips in stocks than gold. But let’s see if the global stock markets will resume lower after Tuesday’s recovery and whether this in turn might save gold from a bigger collapse.
If the stock market selling returns, this might reduce the prospect of central banks reducing stimulus in the coming months. This should lead to lower yields and potentially a stronger gold price.
Gold tehcnicals: Gold is trying to form a base here – it has potentially created the right shoulder of an inverse head and shoulders pattern around $1750 support. However, it will still need to confirm this potential reversal by breaking a few resistance levels such as $1780 and $1880 before making a higher high above $1808/9 area. Until such a time we see that confirmation, treat any bullish price action with a pinch of salt.
