Market Update: Mixed Sentiment

US equity indexes were mixed on the week: S&P 500 -0.66%, NASDAQ +0.55%, and DJIA -2.7%. Tech bounced back on Friday, boosting NASDAQ. Disappointing US December retail sales, released Wednesday, raised growth concerns and weighed on risk taking sentiment during the week. The US 10 year yield finished the week lower at 3.4787% vs 3.5035% on 13 January.

Recent Fed-speak has mentioned that a slowing of the pace of rate hikes is warranted and indeed futures are pricing in a 25bp rate hike by the Fed in February - a slowdown from the 50bp hike in December. However, market participants are concerned about the level of the terminal rate - that it could be higher than the market has priced, leading to a more pronounced US growth slowdown. Currently futures anticipate the fed funds rate peaking at 4.90% followed by approximately 50bps of rate cuts in H2 2023.

There was some hawkish Fed-speak during the week. Vice Chair Brainard said, "Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis." New York Fed President Williams stated, "With inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do to bring inflation down to our 2 percent goal on a sustained basis."

Turning to the Diamond Commodity:

DIAMINDX fell 0.36% on the week, ending at USD 5,470. In diamond market news, the first DeBeers site of 2023 was held 16 - 20 January. While the results have not been released yet, Rapaport reports, through an anonymous source, that "De Beers has made sharp price changes at this week’s sight, with deep reductions for larger goods and increases for smaller stones. Prices fell by as much as 10% in 2-carat rough and above, with lower-quality items seeing the most significant drops. Prices of diamonds under 0.75 carats rose by similar percentages."

The first DeBeers site of 2023 comes during a time of an uncertain outlook for consumers in the US and China (near-term) - the world's two largest consumers of diamond jewelry. December US retail sales, released this week, fell 1.1% m/m, its largest decline in a year, and rose 6.0% y/y. In addition, the November sales figure was downwardly revised. Retail sales ex auto also fell 1.1% m/m and rose 7.0% y/y. Both monthly results were below the consensus estimate. For 2022, headline retail sales rose 9.2% and ex autos rose 10.6%.

China saw its December total retail sales decline 1.8% y/y and 0.2% for 2022. December retail sales of gold, silver, and jewelry fell 18.4% y/y. For 2022, that category was down 1.1% y/y. Retail sales for the year were impacted by Covid lockdowns.

The DeBeers site also comes ahead of China's Lunar New Year holiday, starting the evening of 21 January. This annual holiday period pre-Covid was know as the world's largest human migration as people traveled back to their town or city of origin. This is the first time people in China can travel freely for the holiday since the Covid-19 pandemic began. Market participants are concerned that the migration could become a Covid super-spreader event potentially hindering China's economic reopening, which is a key theme for both the jewelry industry and wider financial markets in 2023. The jewelry industry is looking to China's consumers to offset some of the anticipated slowdown in US consumer demand in the year ahead.

Both the Lunar New Year holiday (January) and the US Valentines Day holiday (February 14) have led to seasonal increases in DIAMINDX in those months.

On 18 January, Richemont, the world's second largest luxury conglomerate, reported results for Q3 (ended December 2022). Group sales rose 8% y/y at actual exchange rates. Richemont noted that this was on the back of strong comparatives for 2021 and "significant disruption to retail trading due to the massive Covid resurgence in mainland China." Jewelry Maisons Buccellati, Cartier and Van Cleef & Arpels sales rose 11% y/y for Q3 at actual exchange rates. In the nine months from April to December, jewelry sales jumped 19%.

Gold rose 0.36% to end the week at USD 1,927.13. The USD declined modestly on the week (see below section). Gold has been benefitting since mid-October 2022 from USD's weakening on lower US yields. More recently, it seems that gold has been supported by its haven properties as well as market participants focus on company layoff announcements, declining US retails sales, and concerns of slowing global growth.

Silver fell 1.3% on the week to USD 23.96 - below the key USD 24.00 level. Silver has been rangebound 23.22-24.50. The gold to silver ratio moved up to 80.42.

__Chart: DIAMINDX, Gold, and Silver since our diamond coin IPO. __

USD Modestly Lower

The USD (DXY Index) was modestly lower on the week, falling 0.23%, to 101.97. DXY has been trading in a 102.88-101.52 range since late last week. The DXY's direction is being driven largely by the US 10 year yield (chart below).

EURUSD, the DXY's largest component was flat on the week, ending it at around 1.0853 at the time of writing. The single-currency was supported by hawkish comments by ECB President Lagarde. Speaking at Davos, Lagarde said, "Inflation by all accounts, whichever way you look at it, is way too high...We shall stay the course until such time we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.”

The BoJ monetary policy decision was much anticipated after the December surprise. This week, the BoJ kept its accommodative monetary policy stance, maintaining a zero percent target for 10-year JGB yields with an unchanged range of plus or minus 50 bps around that target. This caused USDJPY to spike (on 18 January) to 131.57 from 128.39 (chart below). USDJPY ended the week at 129.57. JPY was the weakest currency vs USD in the G10 this week.

Also of note, NZDUSD had a bit of a swing this week as NZ PM Jacinda Ardern announced her resignation on 19 January. NZDUSD moved 2.5% lower over two days (Wednesday and Thursday) on a larger risk off move in US equities and the unexpected local political news. NZDUSD rebounded by the week's end, however, finishing up 1.2% at 0.6449. Late Friday NY trading session, it was announced that Chris Hipkins will become the next NZ PM.

Chart: US 10 year yield, USD - DXY Index, USDJPY. USD is largely tracking the US 10 year yield lower. USDJPY spiked initially on the BoJ decision.

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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.
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