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Gold Prices Down, Not Out as China Cheerleads Stock Markets

Gold Prices Down, Not Out as China Cheerleads Stock Markets

2020-07-06 06:35:00
Ilya Spivak, Head Strategist, APAC
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GOLD & CRUDE OIL TALKING POINTS:

  • Gold prices edge down as yields rise but US Dollar drop limits losses
  • Crude oil price action tellingly muted despite stocks roaring upward
  • Official cheerleading from Beijing might explain markets’ risk-on tilt

Gold prices are facing modest selling pressure at the start of the trading week. An optimistic tone at the start of the trading week has sent bond yields higher alongside stocks, undermining the relative appeal of the non-interest-bearing metal.

Losses are being limited by a parallel drop in the US Dollar however. The haven currency – which typically trades higher in times of market stress as investors flock to its unrivaled liquidity – is on the defensive as risk appetite improves. That is helping to burnish the appeal of anti-fiat alternatives epitomized by bullion.

Crude oil is inching cautiously higher as well, though the buoyancy seen in the equity space is not translating with anything close to comparable vigor for the cycle-sensitive commodity. That may reflect lingering worries about global economic growth amid the Covid-19 outbreak.

CHINA CHEERLEADING MAY EXPLAIN MARKET EXUBERANCE

While many countries have moved to end lockdown measures triggered to contain infection at the start of the pandemic, case growth continues to trend higher. Indeed, worries that a second wave of the disease may yet overwhelm healthcare systems in US states such as Texas and Floridaare growing.

Baseline GDP growth expectations speak to investors’ dire outlook. An average of analysts polled by Bloomberg suggests global output adjusted for inflation will shrink 3.7 percent this year, marking the worst drawdown since at least 1969.

This seems to offer some much-needed context for the stock market surge at the start of the week. The disconnect between shares and crude oil perhaps implies the former’s gains are more reflective of speculative appetite more than true optimism about improvement in the business cycle.

China is at the forefront of the rally, with Hong Kong’s Hang Seng Index adding over 3 percent and the mainland-based CSI 300 surging over 5 percent. Official cheerleading may explain such exuberance. The cover of Monday’s state-run Securities Journal stressed the importance of fostering a bull market.

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S&P 500 FUTURES HINT AT RISK-ON CONTINUATION, SERVICES ISM DATA DUE

Bellwether S&P 500 futures are picking up on the upbeat mood, whatever its catalyst. Strong gains ahead of the opening bell in Europe and North America suggest the risk-on push has scope for follow-through. That may continue to underpin oil prices while gold struggles to find a lead as yields and USD diverge.

June’s US service-sector ISM survey headlines the data docket. It is expected to show that the sector managed to stabilize last month after two consecutive months of rapid contraction in April and May. US economic news-flow has tended to outperform baseline forecasts recently, opening the door for an upside surprise.

GOLD TECHNICAL ANALYSIS

Gold prices continue to drift between the 38.2% Fibonacci expansion at 1789.78 and former resistance at 1747.74. A break higher likely aims for the 50% level at 1827.82. Alternatively, a daily close under support seemingly exposes 1679.81 next.

Gold Prices Down, Not Out as China Cheerleads Stock Markets

Gold price chart created using TradingView

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices are idling below resistance in the 42.40-43.88 area. Negative RSI divergence speaks to the loss of upward momentum but it remains to be seen whether that precedes reversal or merely consolidation before the push higher resumes. A daily close below support at 34.78 may target the 27.40-29.11 area. Alternatively, a breach of resistance probably aims for the $50/bbl mark.

Gold Prices Down, Not Out as China Cheerleads Stock Markets

Crude oil price chart created using TradingView

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COMMODITY TRADING RESOURCES

--- Written by Ilya Spivak, Head APAC Strategist for DailyFX

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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