Risk aversion trades are back in full swing as the dollar gradually joins the yen in drawing risk-aversion after having struggled earlier in the week by the combination of falling treasuries and struggling equities as well as leader of Japanese opposition Party calling for halting Japan’s purchases of US treasuries (despite the fact that this appears to be all political posturing). The dollar may further join the yen in benefiting from reduced risk appetite at the expense of CAD (1.19), NZD (0.5750). Note that sterling has finally broken below $1.51 as dollar strength builds on the BoE’s negative outlook. A break of $1.50 and move towards $1.4960 appear possible.
While both oil and equity indices reveal preliminary signs of a consolidation, downward momentum may particularly weigh on oil. This is especially supported by the possibility that oil prices may underperform metals, which is signalled by a looming potential rebound in the Gold/Oil ratio. The chart below cogently illustrates how the turning points in the Gold/Oil ratio tend to be driven by commodity markets' vote of confidence for the economy. Notably, the "green shoots" theme of the past 8 weeks unleashed substantial gains in oil prices (60% from Feb lows), which in relative terms outpaced the recovery in gold (12% from Jan lows), silver (24% from Jan lows) and copper (47% from Jan lows). Thus, it is no surprise that the Gold/Oil ratio is down 40% from its 14-year highs reached in February.
With equity indices apparently due for a prolonged pullback (macro picture does not seem to justify shares' further nearing to fair value) and the prospects for another govt-driven boost for banks in Q2 diminishing, risk aversion trades appear set to re-emerge in favour of metals (led by silver), the yen and the dollar (to lesser extent than yen) possibly at the expense of equities and energy prices. US Treasuries may be given a respite as yields may temporarily retreat towards the 3.00% level.
Oil technicals suggest an initial test of $54 may occur by early next week, followed by a possible test of $51.80, with any attempts for a rebound seen limited at $57.80. Gold and silver trends still appear to be positive backed by the notion of a potential win-win situation for gold, silver and copper whereby: (i) further gains in equities could fuel metals on improved global risk appetite (what's good for China & the green shoots theory may be seen as good for metals) and; (ii) any pullback in equities (and banks) could fuel the rotation from financials into metals and ETFs. Technically, each of the last 3 attempts by gold to break below its 200-day MA has failed over the past 4 weeks. $935 appeared as the initial resistance for gold, followed by $975. A clear break of $1,100 may be possible on trend after the end of Q2.
No comments:
Post a Comment