Outlook for gold prices in the current term remains dim – Century Financial Weekly Market Report

By Al Press

Currencies

USD strong against safe haven JPY

The US economy grew at a robust annual rate of 4.2 percent in the second quarter, the best performance in nearly four years. A 3 percent growth average in the second half of this year would leave the annual growth in 2018 at 3 percent. That would be the best performance since 2005. With risk appetite returning to global equity markets, USD should rally against safe haven currency JPY.

Optimism over NAFTA deal

GBP/CAD rate took a beating on Friday, as Canadian GDP beat expectations and optimism over NAFTA gets a shot in the arm. The GDP growth in July came in at 0.2% better than expectations. Moreover, sentiments were further buoyed with news that NAFTA negotiations were continuing despite the deadline drawing near, and that the US and Canada could be close to a deal. On the other hand, the latest UK GDP data came at 0.4%. While this may have been in line with forecasts, GBP investors were disappointed to see the annualized rate fall below expectations, coming in at 1.2% against a predicted 1.3% rise. Looking ahead to next week, the Pound could come under pressure in the first half of the week when the UK’s latest PMI figures are published.

Fall in Euro due to Italian Budget

Euro is likely to fall after Italy’s government agreed a budget seen by some investors as defying Brussels. The new government proposed a 2019 budget with a deficit three times bigger than the previous administration’s target, sparking a sell-off of state bonds. Meanwhile, Australian Dollar is likely to recover as commodities look set for a bounce back.

Equities

Bullish Sentiments for Earnings season

US economic growth accelerated in the second quarter at its fastest pace in nearly four years. Moreover, durable goods orders rose 4.5% in August, rebounding from a revised 1.2% drop the month before. Moreover, comments from Fed chairman Jerome Powell that the FOMC weren’t seeing any evidence of significant inflationary pressure, helped push yields off their highs this week and led to a rally in the US indices. With weekly jobless claims at their lowest levels since November 1969 and Septembers consumer confidence at an 18 year high, the US markets are poised to rally further. Moreover, with the earnings season on the cards, sentiments are bullish on the street.

Strong Fundamentals

S/4 HANA, SAP’s flagship suite of business software designed to help companies engage in the “digital economy”, added 400 customers in the quarter, placing the total at 8,300 – up 43 per cent from 12 months ago. In January SAP announced it would acquire front-office solutions group Callidus Software for $2.4bn. The deal has now closed and it has lifted its 2018 outlook, projecting non-IFRS cloud subscriptions and support revenue in a range of €4.95bn to €5.15bn in constant currencies, or more than 31 per cent higher than the €3.77bn recorded in 2017. We expect SAP to gain further in 2018.

Metals

Rising rates and yields

Global gold prices hit a fresh six-week low on the last trading day of the month as the dollar firmed after upbeat US economic data supported the Federal Reserve’s resolve for steady interest rate hikes, putting the metal on track for its longest monthly losing streak since January 1997. The outlook for gold prices in the current term remains dim as such in lieu of rising rates and yields amidst buoyant U.S. economic conditions. Moreover, Gold is no longer considered as the safe-haven and with China cancelling all its planned trade talks with the US, the trade war continues to favor the U.S. dollar and this will generally dampen gold’s upside.

Energies

Demand remains strong

Oil prices continued their upward momentum and the price of Brent crude rose to $82.72 per barrel. This was the first weekly closing above $80 since October 2014. West Texas Intermediate hit $73.25 per barrel. The recovery in oil prices owes much to the strength of global oil demand. When OPEC met in November 2014 and decided to change its market strategy, global oil demand was about 92 million barrels per day (bpd). It has now grown to nearly 100 million bpd, with crude inventories down below the five-year average. The fall in Iran’s oil output has yet to result in growth in OPEC’s output because the market supply/demand balance is still not in a supply deficit. This is why OPEC’s decision for an output increase will follow Iran’s output decline inversely for the rest of 2018. OPEC’s output is likely to rise in 2019 as needed.

Decline in Production

The sugar production of Brazil is likely to decline by 8 million tonnes from last year to around 28 million tons for MY 2018/19 due to steep decline in volumes of cane and mills prioritize ethanol production at the expense of sugar due to better returns for the biofuel. The Brazilian Sugar industry prompted sugar millers to make less sugar and divert more sugarcane for ethanol production. Ethanol is used as an alternative fuel to run vehicles in Brazil. With the decrease in production and also some short covering we expect the sugar prices to recover.

This article provided by NewsEdge.