Week in Review: A USD Respite, but Fed Ahead

US equity indexes finished the week strong: S&P 500 +3.9%, NASDAQ +2.2% and DJIA +5.7% for its fourth positive weekly gain in a row. In the US, equity funds had USD 21.4 billion of inflows in the week through October 26. BoA said that the inflow into equities was led by hedge funds and private clients and that over the past three weeks, the inflows into single stocks as a percentage of the S&P 500 market capitalization were in the 99th percentile of history since 2008. BoA, citing EPFR data, also noted that global equity funds saw about USD 23 billion in inflows in the week through Oct 26, the largest since March. The rush into equities is predicated on the Fed becoming less hawkish ahead. Last Friday, a WSJ article was released which said that the Fed would hike rates by 75bps in November and then debate the size of future hikes. This gave market participants hope that a "Fed pivot" was near and boosted US equity indexes on the day.

This week, the Bank of Canada hiked its policy rate 50bps to 3.75%, which was less than the 75bps the consensus expected. In addition, BoC Gov Macklem signaled that the BoC could be nearing the end of its monetary tightening cycle. The BoC decision further supported market participants hope that the Fed also could become less aggressive with rate hikes after November's FOMC. The FOMC decision is released on November 2 and a 75bp rate hike is expected by consensus. Currently, futures imply that the Fed Funds rate will peak at 4.885% in May 2023.

The spread between rates on the 3-month bill and 10-year Treasury fell below zero this week, inverting that part of the curve. The 2 year - 10 year yield curve has been inverted since June. The more portions of the US yield curve invert, the more it signals an impending US recession.

Chart: US Yield curve 3mo-10yr inverts (black line)

On the international front, Former UK Chancellor Rishi Sunak became the UK's new prime minister this week. He is the UK's youngest PM in modern times and the UK's third PM in seven weeks, highlighting the country's state of political turmoil. In his first speech, PM Sunak warned that the UK "was facing a profound economic crisis..." Watch here. China concluded its 20th Party Congress, confirming President Xi Jinping’s third five-year term as the country’s leader. Unfortunately, market participants were disappointed as Xi Jinping did not announce the end of zero Covid policy, which was expected. Instead, he recommitted to zero Covid policy. A more pro-market turn also did not materialize - see chart below for focus on the issues. Security was the primary issue mentioned the most at the party Congress. Chinese equities sold off heavily on Monday as a result. Geopolitical tension continues in several parts of the globe: Russia/Ukraine, North Korea, and China/Taiwan.

Some respite from USD strength The USD, while still very strong, backed off a bit this week as US equities rallied and the US 10 year yield lowered (chart below). The DXY Index fell 0.95% on the week, to 110.97 on Friday at the time of writing. On Thursday, the ECB hiked its policy rate 75bps as expected. ECB President Lagarde, in her press conference, noted that the depreciation in EUR has added to inflationary pressures. The single currency, which is the DXY Index's largest component, strengthened mid-week to above parity with the USD, but ended the week below it once again. The announcement that Rishi Sunak would become the UK's PM boosted GBP vs USD. Sterling moved from around 1.1300 more than two big figures higher, ending the week at 1.1575 at the time of writing. GBP gained the most this week vs. USD within the G10 currency space - up 2.4%. After last week's MoF intervention in USDJPY when the currency pair reached a 32 year high of near 152.00, USDJPY stayed below 150.00 this week ending the week at 147.72.

Chart: DXY Index vs US 10 year yield and SPX Index (inverted).

Diamonds DIAMINDX was down 0.52% on the week. Gold and silver fared worse, however, falling 0.81% and 0.91%. Despite USD strength easing a bit this week and the US 10 year yield lower, DIAMINDX did not see a bounce (chart below). These USD and US yield moves lower helped support gold and silver temporarily mid-week. As discussed last week, DIAMINDX is seasonally weaker in October and November, but bounces back in December on average.

Chart: DIAMINDX (white) did not bounce when the DXY Index and the US 10 yr yield backed off (pink and yellow lines, inverted), but Gold did bounce temporarily (blue line).

In diamond market news:

DeBeers reported that for Q3, "rough diamond production increased by 4% to 9.6 million carats, primarily due to the treatment of higher grade ore at both Orapa (Botswana) and in South Africa, and continued strong performance in Namibia." Its production guidance for 2022 remained unchanged at 32–34 million carats. DeBeers cautioned that "While consumer demand for natural diamonds continues to be robust, a deterioration of global economic conditions, reduced consumer spending and continued Chinese Covid-19 lockdowns have the potential to impact demand for diamond jewelery."

On the Russia / ALROSA sanctions front, as reported by Reuters, some members of the Kimberley Process have called for diamonds from Russia to be labelled conflict diamonds. Belarus, an ally of Russia, has applied to be the KP's vice chair in 2023 and chair in 2024. UAE, according to Reuters, also bid for the 2024 chairmanship. UAE has kept a neutral stance of the Russia/Ukraine war.

Two landmark pink diamonds are to be sold within a week. Nov 8: the 18.18-ct Fortune Pink - largest pear-shaped fancy vivid pink diamond ever to be auctioned. Nov 15: the 170.2-carat Lulo Rose, believed to be largest pink diamond found in the last 300 years, at a rough tender. These upcoming sales follow the October 7 sale of the 11.15-carat Williamson Pink Star diamond. It sold for approximately $57.7 million (including the auction premium) at Sotheby’s Hong Kong.

Disclaimer:

This report has been prepared by the Strategy Team of Diamond Standard Inc. (“Diamond Standard”). This report, while in preparation, may have been discussed with or reviewed by persons outside of the Strategy Team, both within and outside Diamond Standard. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities.

Opinions and estimates offered constitute our judgement and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security, and it should not be assumed that the transactions discussed were or will prove to be profitable.