Market Update: Navigating by the Stars

US equity indexes were mixed on the week: S&P500 0.8%, NASDAQ 2.3%, and DJIA -0.5%. Nvidia's earnings came after the bell on Wednesday. The company announced another stellar revenue forecast that was much stronger than expected. This propelled its share price to a record high on Thursday, but US equity indexes fizzled out on the day - perhaps due to some nervousness or profit taking ahead of Fed Chair Powell's Jackson Hole speech on Friday (see below). On Friday, the US 2 year yield rose to 5.09% during Powell's speech before retreating to 5.06%. After hitting its highest intraday level since 2007 on Tuesday, the US 10 year yield fell back to 4.24% to end the week relatively unchanged.

Fed Chair Powell's Jackson Hole Speech There was little new in Powell's speech which leaned neutral to hawkish. Powell emphasized his commitment to bring inflation down to 2%, stating "two percent is and will remain our inflation target." That sentiment dashed expectations that the Fed could tweak its inflation target higher.

Powell referenced core PCE prices, down from their peak of 5.4% y/y in February 2022, but at 4.1% y/y currently - saying that "it remains too high." Powell said that a "period of below-trend economic growth" is needed to bring inflation sustainably back to target.

Powell described monetary policy as "restrictive" currently and that it will need to remain so ahead - signaling that no rate cuts should be expected soon. But he also acknowledged that policymaking will need to be "agile" ahead as there are uncertainties about the "duration of the lags with which monetary tightening affects economic activity and especially inflation." Also, in somewhat of a disappointment to market participants, Powell did not identify R-star saying, "But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint."

Powell ended his speech by saying "...we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical." The Fed remains data dependent.

It seems to be a high hurdle to hike at the September FOMC meeting. Market participants expect a pause. The peak in the fed funds rate is priced as November at 5.48%. There are approximately 108bps of rate cuts priced in for 2024. Stronger growth in 2023 may cause sub-par growth in 2024.

__ Precious Metals:__

Gold and silver remain capped due to high US bond yields and a strong USD. Precious metals would benefit from a dovish pivot in Fed language, signaling that rate cuts are ahead. As discussed above, Powell is still leaning hawkish - determined to bring inflation down to the 2% target.

A soft landing for the US economy and consumer would be positive for diamond prices, especially as we enter the back half of the year and into the holiday periods, when diamond jewelry sales seasonally pick up. We focus on the US as it is just over 50% of global diamond market demand.

With geopolitical risk, the timing of a US economic slowdown being fluid, and a US election year ahead, an allocation to precious metals could benefit a portfolio through both diversification and safe-haven attributes.

__DIAMINDX __fell 1.4% to USD 4,600 as summer tends to be seasonally weak for diamond sales.

Analyst Edahn Golan from Tenoris took a look at July performance of lab grown diamonds ("LGD"). Golan notes that an important tipping point for LGD's share has been reached among US specialty jewelry retailers: "Of all the loose diamonds sold in July, 49.9% were lab grown. Natural diamonds accounted for 50.1%." Despite this LGD gain in share, Golan reports that by value, LGD are only 25.2% of diamond sales for the specialty retailers.

As LGD have unlimited supply, their prices continue to fall - rapidly. Currently, a 1-carat round LGD sells for 77% less than natural diamonds (chart below). This poses difficulty for retailers who carry LGD on two fronts: 1. it is difficult for retailers to hold LGD inventory when their prices are falling so quickly 2. as the prices continue to fall, some jewelers are concerned about "their status as luxury retailers," says Golan.

Ahead, there is a relatively steady state of natural diamond supply, which is diminishing (unlike LGD supply). The longer-term market fundamentals remain positive for natural diamonds as demand is expected to outstrip supply in the future. If LGD's prices continue to decline, which is expected, ultimately consumers could see LGD and natural diamonds as two distinct products and value propositions.

Chart: Natural diamond price vs Lab-Grown price for 1Ct round diamond.

__Gold and Silver __

After trading below USD 1,900 last week, gold was back above that key level. Gold gained 1.4% on the week to come in at USD 1,914. Gold seems to be capped for the time being with no macro catalyst and is subject to the volatility of the back-end of the US yield curve, which is moving more than the front-end.

Silver rallied, rising 6.5% on the week to USD 24.24 - breaking resistance at USD 24.00. Gold/Silver ratio is sitting around 79-78 support.

__USD __

USD (DXY Index) broke topside 104.00 - getting as high at 104.45 and ending the week at 104.04 at the time of writing. The DXY index is continuing its steady but slow march upward, gaining 0.6% on the week. All G10 currencies with the exception of AUD fell vs USD.

Chart: USD (DXY Index) Ranges. This week, topside break 104.00

Ahead next week:

US Payrolls for August is the main release. Bloomberg consensus is expecting a rise of 168k, with the unemployment rate remaining at 3.5%. PCE prices will be released for July. Both are Tier 1 US data releases.

Sign Up for Market Commentary: Weekly insights on global markets and commodities from Diamond Standard by Amelia Bourdeau

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.