Market Update: Fluid Situation
US equity indexes were mixed on the week: S&P 500 -0.1%, NASDAQ -1.1%, and DJIA +0.6%. It was a holiday shortened week. The VIX Index is below key level 20 at 18.4. The BoA MOVE Index, which measures implied volatility of one month treasury options, rose from 135.9 to 147.7 this week. The KBW regional bank index fell 2.8% and the wider KBW bank index was down approximately 2%. Some slowing in US economic data was seen (see data section below) coming at a time when further tightening of bank lending standards is likely ahead. This weighed on market sentiment and is a reminder that this data dependent market environment remains fluid which can lead to choppy trading conditions. While it is becoming consensus to anticipate a recession ahead in late 2023, there is little agreement on its depth and duration.
The table below shows select financial market indicators, which we review for month-end March. In March, US equity markets rallied as US bond yields fell and expectations of Fed rate cuts were aggressively priced in for the second half of this year. The US 2 year yield was down 78bps on the month and the US 10 year yield down 45bps. It looks like 2s10s put in the bottom for this cycle as yield curve has steepened (see table, yield curve 2s10s). Lower US yields weighed on USD - the DXY Index fell 2.3%. Lower bond yields, weaker USD, and risk aversion stemming from the banking sector turmoil boosted gold and silver which rose 7.8% and 15.2% respectively on the month. Bitcoin gained over 22% - a rally sparked by the banking sector turmoil as some market participants look to it as an alternative to the banking system.
We will talk Q1 2023 market developments and look ahead to Q2 in our Diamond Standard Quarterly Market Commentary Webinar on April 13 at Noon EST.
__Table: Monthly Returns __
In other market developments this week, OPEC+ announced surprise oil output cuts on Sunday of about 1.16 million barrels per day (bpd). The cuts start in May and last until the end of the year. It is thought OPEC+ is taking preemptive steps ahead of a US economic slowdown, but the cuts come ahead of the start of the US summer driving season. WTI crude was up USD 5.00 on the week to USD 80.70 and Brent crude rose USD 5.35 to USD 85.12. Unless an economic slowdown is imminent, this won't help the Fed's inflation fight from a headline CPI and PCE prices perspective and could further squeeze US consumers.
__On the data front: __
The March ISM Manufacturing Index remained in recession territory for fourth consecutive month, coming in at 46.3 down from 47.7 previously. The March read is a three year low. The March ISM Services Index fell to 51.2 from 55.1 previously. This was below expectations, but still in expansion territory. Both the ISM Manufacturing Services Indexes saw their respective prices paid components move lower, which was a relief to markets.
US payrolls for March came in on expectations at 236k. However, the "whisper number" on trading floors was lower so this number is effectively a beat. The unemployment rate ticked down to 3.5% from 3.6%. The previous month's payroll number had a small upward revision up 15k to 326k. Average hourly earnings ticked up from the previous month rising 0.3% m/m. This keeps a 25bp rate hike squarely on the table for the May FOMC meeting. The labor market seems to be starting to cool a bit but in an orderly way.
__Chart: US ISM Indexes: Services and Manufacturing __
Fed Pricing:
Fed funds futures have the peak in the terminal rate priced at 4.95% in May. As of Thursday, market pricing is split on whether there will be a 25bp rate hike at the May FOMC meeting - a 25bp rate hike is 50% priced. The market is signaling that the peak fed funds rate is either here or near. Post the May FOMC meeting through January 2024, there is approximately 100bps of rate cuts priced. This is a bit more than last week, reflecting some of the softer US economic data through Thursday (pre-payroll release).
Turning to the Diamond Commodity:
DIAMINDX fell 1.1% on the week to USD 5,280. The chart below highlights how the diamond commodity, gold, and the S&P500 have performed during the two most recent crisis periods. Both of these crisis events were not possible to time, so the chart demonstrates that a strategic holding of safe haven precious metals can be beneficial. Both the diamond commodity and gold had positive returns over the periods. In addition, the diamond commodity had lower volatility than gold throughout these periods. The swings in US bond yields throughout March's banking turmoil did move gold around. For a look at performance through other crisis periods - see here.
Chart: Recent Crisis Periods, % chg
In diamond industry news, DS Director Neshiva Chan gives an update on Botswana: Mokgweetsi Masisi, President of Botswana, recently proclaimed, "the dawn of a new era for the diamond industry in Botswana." This statement highlights the new relationship Botswana is embarking on by initiating a 24 percent equity stake in HB Antwerp. In addition, state-owned diamond trader Okavango will supply the company with diamonds for five years. HB Antwerp focuses on mineral infrastructure, gem processing, mining, and distribution of diamonds. The company wants to help Botswana move up the diamond value chain to sell polished products, which carry a higher value than rough. HB Antwerp has signed an agreement to take over 20,000 square meters in the Botswana innovation hub to build a 15,000-square-meter facility, where about 90% of its production will be "designed, analyzed, and planned in Botswana, by the people of Botswana, and will be sold, branded, and marketed from Botswana."
This new development brings further focus to the ongoing negotiations regarding the long-term contract between DeBeers and the government of Botswana, which is up for renewal in June (discussed previously in our Feb 17 Week in Review). Debswana Diamond Company is an equal partnership between Anglo American, which owns DeBeers, and the Botswana Government and is the most significant contributor to the De Beers Group rough diamond production. President Masisi continues to look for more mutually beneficial contract terms. For its part, the De Beers Group remains confident that negotiations will result in a deal, and Bruce Cleaver, Co-Chairman, voiced this sentiment publicly at Israel Diamond Week.
__Gold __
Gold rose 2% on the week to end at USD 2,007 after reaching a high of USD 2,020. Some profit taking likely occurred, but gold remained above the key US 2,000 level. The World Gold Council reported that March reversed two weak months of global gold ETFs and futures investment, which surged then to the highest monthly inflows since 2019.
__Silver __
Silver rose 3.6% on the week ending at USD 24.97. The next resistance level is USD 25.00.
USD
USD was down 0.4% on the week. The DXY Index broke downside 102.00 support earlier in the week, but then rallied above 102.00 on Friday morning post the US payrolls report which was on expectations. At the time of writing, DXY has settled at 102.07, which remains key support/resistance.
EURUSD, the DXY's largest component, fluctuated above and below 1.0900 this week, ending at 1.0898 at the time of writing on Friday. ECB-speak this week was hawkish as President Lagarde, Vice President de Guindos, and Chief Economist Lane indicated that inflationary pressures would require further interest rate hikes. Reserve Bank of Australia kept its policy rate on hold and Reserve Bank of New Zealand hiked 50bps - more than expected. Both currencies were down modestly on the week vs USD, falling 0.2%. RBNZ's surprise 50bp rate hike supported NZD vs AUD. AUDNZD fell 1.1% in reaction to the announcement before retracing some of that move.
The IMF released its Currency Composition of Official Foreign Exchange Reserves ("COEFER"). The report shows that the USD continues to dominate global FX reserves. While the USD's share has moderated slowly over time, the greenback still comprises over 58% of global reserves. CNY as of Q4 2022 made up about 2.7% of global reserves - down a bit from Q3 2022. But CNY has risen as a share of reserves from just over 1% in 2017.
Chart: USD (DXY Index) vs US 2 year yield during US payrolls release on Friday (last point on chart)
Ahead - select events: Key releases include: the FOMC minutes, US CPI, US retail sales
Monday, April 10 World Bank and IMF Spring meeting ("Bank-Fund meeting") commences in Washington DC
Tuesday, April 11 Chicago Fed Pres Goolsbee speaks Philly Fed Pres Harker discusses US economic outlook Minneapolis Fed Pres Kashkari speaks at a Town Hall
Wednesday, April 12 US CPI (Mar)
FOMC Meeting Minutes Bank of Canada rate decision - expected to remain 4.50% BoE Gov Bailey speaks in Washington DC on the shifting risk sentiment
Thursday, April 13 UK monthly GDP
Friday, April 14 US Retail Sales (Mar) U of Michigan Sentiment (April p)
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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.