Market Update: Resilience
US equity indexes fell on the week: S&P500 -2.5%, NASDAQ -2.6%, and DJIA -2.1%. S&P 500, now down over 10% from July's peak, entered correction territory joining NASDAQ. Market participants focused on the US 10 year yield's wild ride. The yield traded above 5.00% on October 23rd before retreating to 4.80% on October 24th, rose again to 4.97% on October 25th only to end the week at 4.84%. WTI Crude is holding above USD 85 per barrel, gold broke topside USD 2,000, and bitcoin topped USD 35,000 for the first time since May 2022 this week. Importantly, US economic data continue to show resilience.
US Economic Data and Fed Pricing:
The US economy expanded at a stronger than expected pace in Q3, with real GDP rising 4.9% q/q annualized. Consumer spending was strong this summer, contributing 2.7 percentage points to overall GDP growth. September personal spending data were released, coming in above expectations at 0.7% m/m. Real personal spending was up 0.4% m/m showing that there was positive momentum heading into Q4. However, spending outpaced income as real disposable personal income fell 0.1% m/m. The personal saving rate lowered to 3.4%. Core PCE inflation came in at 3.7% in September vs 3.8% in August - headed in the right direction but still elevated. Overall, these data indicate that the US economy continues to show remarkable resilience in the face of higher interest rates.
Fed fund futures are pricing in the peak fed funds rate for January 2024 at 5.40%, moving it back one month. There are approximately 82bps of rate cuts priced in for 2024 - somewhat more than what the Fed has forecasted. The November FOMC policy decision is next week. Markets are pricing in that the Fed will remain on hold at that meeting. There is approximately a 24% probability that the Fed will hike 25bps in December.
Chart: US Personal Consumption Expenditure and Core PCE Prices M/M%
Gold and silver prices are being supported by their safe haven status due to the ongoing conflict in the Middle East and concern that it could widen. Portfolio risk stemming from both geopolitical events and the "higher-for-longer" Fed messaging, is a reminder to maintain an allocation to precious metals including the diamond commodity for diversification and safe haven purposes.
Diamond Industry: De Beers provides flexibility for Siteholders and Petra is positive on measures taken to curb supply and demand imbalance
DIAMINDX fell 0.2% on the week at USD 4,210 . The diamond industry is in the midst of an inventory overhang at the manufacturing and retail levels, which is weighing on natural diamond prices. The natural diamond industry is addressing this inventory overhang. In addition, the US consumer, the world's largest buyer of diamond jewelry, is holding up well into the holiday season. Longer term, the outlook is positive as natural diamond supply is diminishing. De Beers notes in its 2023 Diamond Insight Report that mine depletion will take approximately 15 per cent of global volumes produced in 2022 off line - a notable supply drop.
The Anglo American-De Beers Q3 production report was released. De Beers reported a 23% decline in rough diamond production for Q3 2023, amounting to 7.4 million carats. This decrease was primarily due to a planned reduction in operations in South Africa as the Venetia mine transitions to underground operations and begins to ramp-up, along with planned mining maintenance activities in Botswana. De Beers maintained its production guidance for 2023, projecting a production range of 30 to 33 million carats. The unit cost guidance for 2023 is also unchanged at around USD 75 per carat.
It was noted in the release that "Going forward, De Beers will continue to support its Sightholders to help re-establish equilibrium between wholesale supply and demand by providing full flexibility for rough diamond allocations in Sights 9 and 10 of 2023."
Petra Diamonds Limited released its Q1 2024 operating update this week. Production increased 12% from the previous quarter to 696,639 carats as the Williamson mine resumed operations ahead of schedule. Revenue rose 96% from Q4 2023 as some rough diamond tenders in Q4 were deferred to Q1 but revenue fell 4% year-on-year.
In its press release, Petra stated: "We believe the actions taken by the major producers to curb supply and the two-month Indian diamond import moratorium will assist in stabilising the market and supporting prices as inventory levels reduce. Whilst we continue to see support for the market in the medium to longer term as a result of the structural supply deficit, we are taking prudent steps to enhance our business resilience in light of these market challenges and uncertainties that are expected to continue over the coming months."
Gold and Silver
Gold rose on the week by 1.3% to USD 2,007 - breaking topside USD 2,000 - a key resistance level. Silver fell 1.2% on the week to USD 23.10 after having gained strongly for the previous two weeks. Both gold and silver rallied late Friday in the New York trading session on the Bloomberg News headline stating that Israel's army was expanding its ground activity in the Gaza strip. This pushed gold topside through USD 2,000 and silver through USD 23.00.
Physically backed global gold ETF flows remained negative for the week ended October 20th. Net outflows were USD 1.6 billion according to the World Gold Council. They have been negative since the week ended May 19th. Even some stemming of these declines in ETF flows would further support the price of gold.
Chart: Safe haven asset performance since start of Israel-Hamas Conflict - gold in the lead
USD (DXY Index) was up 0.4% on the week to 106.56 and also rose late in the trading session on Friday on the latest news regarding the conflict. The DXY Index remains above 106.00 support. A Fed emphasizing rates higher for longer, a resilient US economy so far, (especially when compared to slowing growth in Europe) and geopolitical risk should continue to support the USD into year-end.
EURUSD, the DXY Index's largest component, fell 0.2% on the week, coming in at 1.0569. EURUSD is holding for now above the key 1.0500 support. A decisive downside break of that level could see the single currency back to parity - a level it last reached in November 2022. The ECB held its policy rate steady at 4.00% at this week's policy meeting and had some dovish comments on the economy, which suggests it is at the end of its rate hiking cycle.
JPY gained mildly vs USD on the week, but at 149.57 remains near the 150.00 level - where MoF intervened last fall.
Chart: US 10 year yield vs DXY Index - rising together
Next week sees key US events which could cause market reaction. On Wednesday, the FOMC will announce its monetary policy decision followed by a press conference by Chairman Powell. The Bloomberg consensus expects no change in the policy rate but Powell's comments will be carefully examined. On Friday, US payrolls for October will be released. The Bloomberg consensus expects a rise of 190k vs September's 336k rise. The UAW strike, which began after the survey week for September payrolls, will impact the October results having a dampening effect.
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.