Gold Dominates as Oil Falters: Top Trends in the Market

By Wayne Cole

(Reuters) – A comprehensive look at the day ahead in European and global markets from Wayne Cole

Asian stocks are starting the week cautiously, as gold reaches a new peak and Treasuries face profit-taking after significant gains. Oil experiences an early rally but fails to hold onto gains following news of attacks on commercial shipping in the Red Sea.

Three vessels came under attack in international waters on Sunday, while Yemen’s Houthi group claimed missile attacks on two Israeli vessels in the area.

The threat to a major global shipping route could contribute to inflationary pressure, though the impact appears limited at this point. Notably, oil prices lost early gains and Brent eased around 57 cents to $78.31 a barrel amid doubts over OPEC+ maintaining planned output cuts, especially by some African countries. [O/R]

Simultaneously, U.S. oil output is at record levels above 13 million barrels a day, with rising rig counts. This means the U.S. is currently producing more oil than Saudi Arabia.

Gold, on the other hand, surged suddenly this morning to surpass $2,111 an ounce for the first time before settling at $2,086. [GOL/]

There was no clear trigger for the surge, leaving dealers speculating on the involvement of trend-following CTAs and algo funds following the break of a triple-top around $2,107.

Central banks have also been gold buyers, purchasing a net 800 metric tons in the year to September, a record for that period. Bullish investors are now eyeing chart targets at $2,240 and $2,400.

Market pricing indicates early and aggressive rate cuts, a positive for non-yielding gold, with Fed fund futures currently implying a 59% chance of a U.S. cut as early as March. A week ago, that probability stood at around 20%.

Additionally, there are 125 basis points (bps) of easing implied for all of 2024, up from 80 bps a couple of weeks ago.

Moreover, markets are pricing in an 80% chance of ECB easing in March, despite the head of Bundesbank pushing back against such prospects in an interview over the weekend.

ECB President Christine Lagarde will have an opportunity to comment in a speech and Q&A later on Monday.

Such extreme pricing leaves the market susceptible to pullbacks, and both Fed funds and Treasuries faced selling on Monday. Yields on U.S. two-year notes rose almost 4 bps, following a drop of 40 bps last week.

German two-year bunds also appear vulnerable to profit-taking after yields plunged 41 bps last week.

Bonds really need U.S. November payrolls on Friday to be solid enough to support the soft-landing scenario, but not so strong as to threaten the chance of easing.

Median forecasts are for payrolls to rise 180,000, keeping unemployment steady at 3.9%.

Many analysts suspect risks are to the upside, with Goldman Sachs predicting 238,000 new jobs, including workers returning from strikes, and a jobless rate of 3.8%.

Key developments that could influence markets on Monday:

– Speech and Q&A by ECB President Christine Lagarde

– Riksbank First Deputy Governor Anna Breman speaks, Riksbank publishes minutes from policy meeting

– German trade data for Oct, Euro Zone sentiment index for Dec. Data on U.S. durable goods and auto sales

(By Wayne Cole; Editing by Edmund Klamann)


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