Spooky Sell Signal
Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
The eurozone’s purchasing managers' index (PMI) gauges business activity in the bloc. And based on the latest results, things are going from bad to worse. The eurozone PMI dropped for a fifth consecutive month, from 47.2 in September to a three-year low of 46.5 in October. That’s well below the crucial 50-mark that separates expansion from contraction, and defied economist expectations for a slight improvement to 47.4. Given this lackluster start to the current quarter and the anticipated economic contraction last quarter, the eurozone is most likely headed for a technical recession (defined as two back-to-back quarters of negative growth). This downturn can be attributed to several headwinds, including the European Central Bank's aggressive rate-hiking campaign, a global economic slowdown, and rising energy prices due to renewed conflict in the Middle East.
Speaking of which, the ECB left interest rates unchanged this week, bringing to an end its unprecedented streak of 10 consecutive hikes that took borrowing costs from minus 0.5% to 4% in just over a year. The decision was widely expected by analysts in the wake of eurozone inflation more than halving from its peak and the economy showing signs of weakening. But the central bank did not rule out another rate increase, while adding that it was totally premature to discuss any potential cuts.
Finally, the US economy grew at the fastest pace in nearly two years last quarter, driven primarily by a surge in consumer spending. Growth in the world’s biggest economy soared to an annualized rate of 4.9%, a significant increase from the pace seen in the second quarter and ahead of the 4.5% forecast by economists. Personal spending, a key driver of economic growth, surged by 4% despite higher prices and a big increase in borrowing costs. The enduring strength of the job market and subsequent boost in household demand is the primary factor behind this resilience, which is complicating the Fed’s efforts to bring inflation down to its 2% target. Looking ahead, the sustainability of economic momentum in the fourth quarter as well as inflation’s future trajectory will influence the Fed’s officials' decision on whether to hike interest rates further. Many economists anticipate a slowdown in growth towards the year's end, as higher borrowing costs curb major purchases and student loan payments resume.
The 10-year Treasury yield briefly crossed above 5% for the first time in 16 years on Monday, extending a multi-week rout in bonds. The selloff has been fueled by expectations that the Fed will maintain interest rates at their current high levels for longer, and that the US government will further boost bond sales to cover its widening budget shortfall. In fact, growing concerns over the government’s near $2 trillion annual budget deficit prompted Fitch Ratings to downgrade the US’s credit rating in August, adding upward pressure to yields. The latest bond rout means Treasuries with maturities of 10 years or longer have now declined by nearly 50% since their peak in March 2020, putting them on course for an unprecedented third year of annual losses.
But it’s not just bond investors that will be feeling the pain: the 10-year Treasury yield is often considered the risk-free rate against which all other investments are benchmarked. So a higher yield could lead to declining values in other asset classes too. What’s more, the yield impacts borrowing rates for households and businesses. The average rate on a 30-year fixed mortgage, for example, soared to around 8% in recent weeks, while the cost of servicing credit card bills, student loans and other debts has also climbed. The big concern now is that these elevated borrowing costs, which are already hindering the US economy's momentum, could dent consumer spending and business investment enough to bring about a recession.
And 5% could be just the start because: a recent study by Bloomberg Economics, for example, suggests that the cumulative effects of persistently high government borrowing, increased spending on climate change initiatives, and accelerated economic growth could result in a nominal 10-year bond yield of around 6%. That could help explain why futures traders are more than ever betting on bonds to drop.
Typically, gold prices exhibit an inverse relationship with real (i.e. inflation-adjusted) Treasury yields. As real yields increase, gold often declines, and the opposite holds true. This correlation becomes clearer when considering the two main factors influencing real yields: government bond yields and inflation. If nominal yields increase, the "opportunity cost" of holding gold, which offers no income, rises. Consequently, gold becomes less appealing when bonds offer higher returns, leading to a drop in its price. On the other hand, when inflation surges, fiat currencies and future bond payouts lose value due to rising consumer prices. In such circumstances, investors are drawn to gold’s stability and the value that’s baked into its limited supply.
However, gold’s relationship with real yields has broken down in the face of the substantial rise in real yields since the start of 2022, and there are a few explanations for this shift. First, gold demand has been propped up by record buying from central banks over the past 18 months, as some countries looked to diversify their reserves to reduce their reliance on the dollar after the US weaponized its currency in sanctions against Russia.
Second, gold has been buoyed by strong investor demand in China, as a property crisis, a falling yuan, and tumbling yields boost demand for the shiny metal. This booming demand is reflected by the local price of gold in Shanghai, which surged last month, at times commanding a record premium over international prices of more than $100 an ounce. This contrasts with a decade-long average premium of less than $6.
Third, gold's reputation as a safe-haven asset has recently bolstered its performance amidst the ongoing geopolitical and economic turbulence. The price of the precious metal surged as much as 10%, hitting a five-month high, after conflict broke out in the Middle East earlier this month. And with central banks significantly raising interest rates – a move often resulting in financial market instability, as evidenced by the spate of bank failures earlier this year – it's understandable that investors have been drawn to gold.
The price of bitcoin surged past $35,000 for the first time since May last year, driven by anticipation of increased demand from ETFs. The possible approval in coming weeks of the first US spot bitcoin ETFs – something firms like BlackRock, Fidelity, Invesco, Grayscale, and WisdomTree have been trying to get authorized for years – is fueling increased speculation for the cryptocurrency. These proposed funds would let investors access bitcoin by simply purchasing shares, similar to buying stock, eliminating the need to own the crypto in a digital wallet. That whole new way to easily invest in bitcoin without directly owning the asset could boost its value, which is why traders are buying in anticipation of the potential US approval of the first spot bitcoin ETFs.
General Disclaimer
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.
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Spooky Sell Signal
Gold Shines at New Highs
The ECB Cuts Again
Slowing Disinflation
Golden-Week Rush
China’s Massive Package
The Fed’s Big Rate Cut
The ECB Cuts Again
Banks Turn Bearish On China
Million-Dollar Gold Bar
Bonds Are Back
Black Monday
Diverging Rate Decisions
Still Strong
Smaller Is Better
The Name Is Bond, Green Bond
Landslide Victory
AI-Frenzy Takes a Break
Bye Apple, Hello Nvidia
The Fed Stays Put
An Indian Rollercoaster
The Name’s Bond, Convertible Bond
Nvidia Does It Again
A Small Relief
From Boom To Bust
Higher For Longer
Still Magnificent
Halve And Havoc
Stubborn Inflation
Choc Shock
An End Of An Era
Britain Bounces Back
China's Goal
Bye iCar, Hello iAI
Nvidia Beats Expectations
Germany Overtakes Japan
Riding The Dragon
China’s Falling Behind
India Outshines Hong Kong
Aging Dragon
US Inflation’s Accelerating
Tesla Lost Its Crown
2023 Market Wrap-Up
The Last Samurai
Fed Teases 2024 Rate Cuts
Bond Market's License to Thrill
Cyber Week Bonanza
OpenAI's Leadership Shuffle Drama
Inflation’s Cooling In The US And UK
Back Into Deflation
Triple Hold On Rate Hikes
Inflation’s Refusing To Come Down
Investors Are Bracing For A Dip
An End In Sight
Rate Hike Recess
End Of An Era
China's #1 Ambitions Are Fading
Americans’ Piggy Banks Are Running Low
Trying To Break The (Wage-Price) Spiral
China: A Nation In Deflation
Uncle Sam Gets Downgraded
Twin Hikes
Stagnating Dragon
A Tale Of Three Inflation Stories
Silver Is Shining Bright
UK Inflation: Defying Gravity
The Fed Calls A Timeout
A One-Two Punch
Shrinking Dragon
Keep Calm And Carry On
The AI-ffect Of The AI Mania
SLOOS: Crunch Time Looms
Last Republic
LVMH Pops The Bubbly
India Takes The Population Throne
The End Is Nigh
OPEC Drops the Pump
Why Gold Is Glittering
Can't Stop Won't Stop
To Hike Or Not To Hike
China’s An Underachiever
Cash Is King
What Energy Crisis?
The Name’s Bond, Japanese Bond
The AI War Has Begun
Hikes Everywhere
What Recession?
Shrinking Population
Grab Your Box And Leave
A Gloomy Prediction
It's Darkest Before The Dawn
Elon Fires Himself…
Triple Whammy
No More Zero-Covid?
Eight Billion And Counting
Another One Bites The Dust
No Santa Pause
Big Tech, Big Disappointment
The Lettuce Won
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