Market Update: Good Vibes
US equity indexes were up on the week: S&P500 2.3%, NASDAQ 2.2%, and DJIA 2.0%. Year-to-date results: S&P500 +15.9%, NASDAQ +31.7%, DJIA +3.8%. H1 2023 was the best first half for NASDAQ in 40 years. On Friday, Apple became the first company to close with a USD 3 trillion market cap - another example of big tech's upward march. US economic data, on the whole, was solid this week and inflation indicators (PCE prices) moved lower. All in all, Q2 and H1 2023 ended with good vibes.
Fed Chair Powell spoke at a European Central Bank forum in Sintra, Portugal this week. Powell was hawkish, saying that back to back rate hikes ahead were a possibility. “I wouldn’t take moving at consecutive meetings off the table at all,” he said. Powell went on to say, "Although policy is restrictive it may not be restrictive enough and it has not been restrictive for long enough." (source: Bloomberg)
Fed fund futures pricing places the probability of a 25bp rate hike in July at 87% and another 25bp rate hike in September at 20%.
The peak in the fed funds rate is priced as November at 5.41%. Approximately 13bps of rate cuts are expected by January 2024. Market pricing has essentially converged to the Fed's forecast and narrative of no rate cuts this year. Market participants are onboard for a 25bp rate hike in July but are still questioning a second 25bp rate hike in September (only a 20% probability priced in currently).
Chart: S&P 500: Market cap weighted (purple) vs equal weighted (black). Tech took off.
Macro market themes tend to simmer in the background, causing volatility and sudden directional moves when they move to the forefront. As we move into H2 2023, The Fed, ECB, and BoE reminded investors this week that rates were expected to head higher and remain there for longer (more in the USD section). There is uncertainty about lagged impacts of policy moves on growth and differing opinions on the global growth outlook - especially the outlook for the US. The re-opening of China has been disappointing. Geopolitical risk remains and was seen last Saturday with the Wagner Group mercenaries' march toward Moscow and then sudden retreat. Financial markets were not impacted by this incident which was over before Asia open. However, this episode serves as an example of how abruptly geopolitical risk can occur. For these reasons, we continued to see the need for an allocation to precious metals in a portfolio both as a safe haven investment and for diversification in these uncertain times.
DIAMINDX fell 0.6% this week to USD 4,910, returning to pre-pandemic levels. YTD DIAMINDX is down 8%. To put this move in context, the run-up in diamond jewelry sales and prices during the pandemic was strong. So strong in fact that it has been described as a "generational event" by diamond analyst Paul Zimnisky on our podcast. 2022 was a flat year, which was also considered a strong result, coming off the outsized 2021 performance. In 2023, diamond prices and demand have been softening. Prices are falling due to cautious US consumers and jewelers (the US world's largest diamond market) and a China re-opening that fizzled out (the industry had expected to act as a tailwind.)
Zimnisky recently wrote about "high jewelry" for Solitaire Magazine. He defines "high jewelry" as "one-off, typically branded, pieces made with the finest materials and craftsmanship, with price points easily breaching six figures." As we have noted in previous editions of the Week in Review, and as Zimnisky points out in his article, Cartier, Tiffany & Co, Van Cleef & Arpels, and Bulgari have had recent strong sales in high jewelry, which has contributed to driving record jewelry sales for their parent companies Richemont and LVMH. Despite weakening in diamond jewelry sales as a whole, high jewelry segment sales remain robust so far. How could this matter for the overall diamond jewelry industry? Zimnisky writes, "The related publicity that high jewelry provides could exceed the value of top-line sales if the old adage holds true: 'the big diamonds sell the small diamonds...' "
Last week, Zimnisky was a guest on our podcast Clarity and we had a wider ranging conversation about the state of the diamond industry. You can listen to that episode here.
In industry news, Botswana and DeBeers came to an agreement seemingly at the 11th hour on diamond sales and mining rights. Under the new agreement, DeBeers gets 25 year mining rights and a 10 year sales agreement (the Debswana partnership). The old agreement, which technically has expired, will stay in place while the terms of the new deal new are finalized. While the relationship between the two parties was believed to be “to big to fail” - this removes some uncertainty on overall diamond supply ahead. More details to come.
Chart: DIAMINDX reverts to pre-pandemic level after outsized gains in 2021. (US pandemic relief payments are noted).
Gold fell 2.6% q/q for Q2. The yellow metal is still holding above support at USD 1,900 despite hawkish Fed talk. In the short-term, gold may need to see US equities sell-off in order to gain fundamental support via a safe-haven bid and attract institutional investment in order to propel it above USD 2,000 once again. However, currently US equity indexes seemed focused on the fact that the Fed is nearing the end of its hiking cycle instead of its reminder that the policy rate could be higher for longer. YTD, gold is outperforming the Bloomberg Commodity Index and silver. On the year so far, gold is up approximately 5.2%, Bloomberg Commodity Index is down 10%, and silver is down 5%.
Silver rose 1.5% on the week to USD 22.76. This follows an over 7% drop last week. USD remains a key support level. This week, silver traded in a tight USD 22.28-23.08 range. Silver fell 5.5% q/q for Q2 and, as mentioned above, is down approximately 5% YTD.
In this week's episode of our Diamond Standard podcast Clarity, we are joined by Michael DiRienzo, Executive Director and Secretary of The Silver Institute. We discuss findings from the Institute's recently released flagship publication the World Silver Survey 2023. You can find all links to listen to Clarity Episode Four with Michael DiRienzo on the Diamond Standard Institutional Media page.
Chart: Gold vs Fed Fund Future Jan-2024 vs. Gold and Silver (both inverted). The rise in Fed rate expectations dampens gold, silver.
The USD (DXY Index) was flat on the week, ending at USD 102.90. Resistance is 103.00.
GBPUSD had some sizable moves this week. Sterling fell all most a big figure on Thursday, digesting BoE Governor Bailey's hawkish comments at Sintra. Bailey said that rates could be higher for longer. Investors chose to focus on the likelihood that higher rates could bring economic pain to the UK. However on Friday, USD gave back some of its gains and GBPUSD moved again - approximately a big figure higher to end the week at 1.2700 - relatively flat.
EURUSD remains in a tight 1.0850 - 1.1000 range it has been in since mid-June. It ended the week at 1.0910, up just 0.2% on the week. ECB President Lagarde spoke at the ECB conference in Sintra. Her comments stressed further rate hikes are likely needed and the importance of "a more persistent policy", maintaining restrictive conditions, given the inflation outlook.
JPY remains weak vs USD. USDJPY broke topside 145.00 intraday on Friday during the Asia trading session for the first time since November. This is in the territory of USDJPY levels that triggered intervention back in September. Japan's Finance Minister Suzuki verbally intervened, saying on Thursday that he will take appropriate responses if there are excessive foreign exchange moves (as reported by Bloomberg). JPY fell 0.4% vs USD this week to end at 144.29. Meanwhile, BoJ Gov Ueda also made comments at the conference in Sintra, saying "We haven't had any serious monetary tightening for three decades." Hence, the reason for JPY weakness when his remarks are compared to Fed, ECB, and BoE hawkishness.
Chart: USDJPY and US 2 year yield - both higher
Ahead next week:
It is a holiday shortened week in the US with the July 4th holiday. Market participants will focus on the ISM Manufacturing and Services readings for June. FOMC Minutes will be released.
The most important release of the week will be the June US Payrolls result on Friday. Bloomberg consensus expects a rise of 200k - a moderation from May's unrevised result of 339k. Happy 4th of July to those who celebrate it.
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.