Market Update: Big Events

US equity indexes were up on the week: S&P 500 0.4%, NASDAQ 0.1%, and DJIA 0.3%. The S&P 500 surpassed a 20% gain from its October low, an indication to some analysts that it is now in a bull market. However, other analysts see the gain as a bear market rally. Equity indexes are being propelled higher by AI enthusiasm and the fact that a notable US economic slowdown or recession has not yet arrived. Big events next week include the US CPI release and the FOMC meeting decision and are likely to guide markets in the near-term.

Fed Pricing:

US employment data has been mixed. May payrolls surprised to the upside, coming in at 339k vs expectations of 195k. However, this week, US initial jobless claims climbed from 233k to 261k - their highest level since October 2021. This result dampened market expectations of a rate hike next week at the June FOMC.

Market pricing expects a pause at next week's FOMC meeting. There is only a 27% probability of a 25bp rate hike priced in. However, the market is not sure this is the end of the rate hiking cycle and has a 52% probability of a 25bp hike in July priced. With the possibility of a rate hike still on the table, it seems as though the market is expecting a hawkish pause next week - ie the Fed will hold off hiking and continue to talk tough on inflation.

Post July through January 2024, there is 38bps of rate cuts priced. Market pricing is slowing coming around, converging, to the Fed's forecast of no rate cut in 2023.

Chart: US Initial Jobless Claims Jump - a sign that cracks are forming in the labor market?

Precious Metals:

We launched our new Diamond Standard podcast Clarity on Friday. This is a podcast where we discuss investment themes that impact the diamond commodity and the wider precious metals market.

Our first guest is John Reade, Market Strategist for the World Gold Council. John has over 30 years of experience in the gold industry and related fields. We have a wide ranging discussion including: structure of the gold market, differences between the physical gold market and the ETF market, and central bank buying of gold since the Russia sanctions. You can catch the podcast on Spotify, Apple podcasts, and our Diamond Standard Institutional media page.

DIAMINDX was unchanged on the week at USD 5,100. It continues to hold above the USD 5,000 level.

In diamond industry news, Petra Diamonds postponed its Tender 6 rough diamond sales due to a slowdown in the market for rough diamonds as a result of elevated inventory in the midstream.

"The diamonds originally earmarked for sale in June will now be tendered in August, which historically coincides with stronger demand due to the end of northern hemisphere summer holidays and the commencement of manufacturing orders being filled ahead of the seasonally strong end of year festive period..." said CEO Richard Duffy.

Members of Diamond Standard’s diamond buying and operations team visited JCK Las Vegas last week, the year’s biggest diamond and jewelry trade show. These large trade shows give an indication of the demand for diamond jewelry. The trade show was mixed - sentiment was positive but diamond suppliers had low expectations going into it. Rapaport quoted Michael Indelicato, CEO of RDI Diamonds, as saying "'Las Vegas this year was more about developing future business than closing immediate orders.'" Overall, the impression from the show was that consumers were cautious given inflation and uncertainty about the economic outlook. However, demand from high end luxury consumers remained strong.

Gold and Silver

Gold traded choppy this week. However, it managed to gain 0.7% on the week, coming in at USD 1,961 after rebounding Thursday post the higher than expected US initial claims read. Price action in gold is being driven by US rates and USD moves.

The monthly ETF report from the World Gold Council ("WGC") noted that another month of inflows in May (USD 1.7bn, +19t) flipped gold ETF year-to-date demand positive (USD 1bn, +6t). North American funds were dominant. WGC stated, "...we believe that US debt ceiling negotiations and looming banking industry concerns also led investors to seek safe-haven assets, contributing to the positive trend in May." Positive flows from Europe were from the UK and France.

Silver rose 3.0% on the week, breaking topside USD 24.00 to come in at USD 24.30. Similar to gold, silver rallied on Thursday post the initial claims result. Support is USD 24.20. Resistance at USD 24.50 and 25.00

Chart: Gold ETF Flows (tonnes, World Gold Council)

__USD __

The USD (DXY Index) fell 0.5% on the week to 103.53. This is the USD's second consecutive weekly decline. The DXY Index broke support at 104.00 on Thursday as higher initial jobless claims caused some fear of recession. However, the index is holding above 103.00 support and is still well above its recent mid-April lows, when it slipped sub-101.00.

AUD and CAD both gained this week vs. USD, rising 1.9% and 0.6% respectively. Both the RBA and BoC surprised markets with rate hikes this week, boosting their currencies. It seems that higher inflation readings are sticking around longer than these central banks would like. EURUSD, the DXY's largest component, rose 0.4% on the week to 1.0750, remaining below resistance at 1.0800. EURUSD support is 1.0600 - a key level.

FX volatility indexes are their lowest levels since February 2022, when the Russian invasion of Ukraine started (chart).

In other FX news, Turkey is in a currency crisis as TRY has lost over 16% vs USD since Turkey's election result a couple of weeks ago.

Chart: JP Morgan Global FX Volatility Index

Ahead next week:

US CPI for May, the June FOMC decision and press conference, and May US retail sales are the main events to guide the market next week. In addition, the ECB has its policy meeting and is expected to hike 25bps.

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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.