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Market Update: Volatile

Written by Amelia Bourdeau
July 7, 2023
5 min read

US equity indexes were down on the week: S&P500 -1.2%, NASDAQ -0.9%, and DJIA -2.0%. US equity indexes took a hit mid-week on more hawkish than expected June FOMC minutes and a strong June ADP employment report, which surprised to the upside. In reaction to that release on Thursday, the US 2 year yield climbed intraday to 5.12% - a yield not seen since 2007. The US 10 year yield moved back above 4.00%. The BoA MOVE Index, a measure of bond market volatility, spiked to 134.

In reaction to the ADP employment result, expectations became heightened for the June US payrolls report released on Friday. June payrolls came in under expectations at 209k (225k expected). However, the unemployment rate ticked down to 3.6% from 3.7% and average hourly earnings, an inflation read, were higher than expected at 0.4% m/m (0.3% m/m expected). This report will not get in the way of a July rate hike by the Fed. US yields backed off from Thursday's rise post the strong ADP report. The bond market remains volatile - the US 2 year yield has been moving around - reflecting the uncertainty of policy expectations in terms of how many Fed rate hikes are to come. This is a result of the heavy data dependent stance of the Fed.

Fed Pricing:

FOMC minutes from the June "pause" meeting were released and were more hawkish than market expectations. The minutes noted that in April "core PCE price inflation was 4.7 percent—the same as the 12-month percent change recorded in January." So no movement lower.

While the decision to pause the rate hiking cycle was unanimous, that agreement seemed tenuous. The notes state that "almost all participants" judged it appropriate to pause at the meeting. There were participants who favored a 25bp hike at the meeting.

The peak in the fed funds rate is priced as November at 5.43%. 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 25% probability priced in currently). Currently, there is approximately 100bps of rate cuts priced for 2024.

Chart: US June Payrolls - the monthly result came in below consensus. The 3 mo movg is relatively unchanged.

Jul 7 - Chart 2

Precious Metals:

Precious metals investors are keeping an eye out for the peak fed funds rate - the timing of which has been more difficult to pinpoint than originally thought. The consensus has continually missed the mark on this prediction - both level and timing. The peak will likely signal a subsequent turn in US rates and also USD, both of which would support precious metals. However, as the US economy remains resilient, one of the risks to that view is that while the Fed could stop hiking, US rates could stay higher for longer. As a result, a "pivot" in US rates and USD may not happen quickly post the peak fed funds rate. It could take a bit longer to come to fruition.

It is important to consider, though, that these remain unusual times for economic, financial market, and also geopolitical responses. This is a macro risk that should not be discounted. For this reason, we continued to see the need for an allocation to precious metals in a portfolio both as a safe haven investment and for diversification to hedge against these uncertain times.

DIAMINDX fell 0.4% on the week to USD 4,880.

In industry news, in a much anticipated announcement, the government of Botswana and the De Beers Group announced a new agreement for sales and the mining license. It seemed that negotiations went down to the wire. However, the joint press release said that the parties have reached an agreement "in principle" and still had to "finalize the implementation of the formal Sales and Mining Agreement which expired on 30 June." While the details are being worked out, the now expired agreement will remain in place.

The new sales agreement for Debswana's (the 50-50 partnership between DeBeers and Botswana) rough diamond production covers 10 years through to 2033. The Debsawana mining licenses are extended for 25 years, through to 2054. This is key to the future of the De Beers Group, as about 70 percent of its diamonds are mined in Botswana. De Beers is the world's second largest diamond miner by volume. Russian state-owned Alrosa is the largest diamond miner by volume. Together, De Beers and Alrosa are the sources of approximately two-thirds of global diamond supply.

Under the terms of the new agreement, Botswana will capture a larger percentage of rough diamonds. Currently, 25% of Debswana's rough diamonds go to Botswana’s state-owned Okavango Diamond Co (a trading unit) and 75% go to De Beers. Now, Okavango will receive 30% of rough diamonds from Debswana from the start of the new contract, progressively moving up to 50% by the last year of the agreement - year 10. Over the decade ahead, De Beers will control less of the rough diamond supply and a third party, Okavango will control more.

The agreement also includes economic development aspects including:

The creation of a Diamonds for Development Fund, with an upfront investment by De Beers of USD 75 million and further contributions over the next 10 years that could total up to USD 750 million.

A Botswana jobs initiative, which aims to create new jobs in Botswana both within an expanded Botswana-based diamond industry and emerging sectors, with a focus on supporting the growth of a knowledge-based economy.

The news of the agreement was released Friday, 30 June after New York market close. On Monday, De Beers parent company Anglo American's stock rose more than 4% in reaction.

Gold rose 0.3% on the week to USD 1,925. It recovered post the US payrolls report on Friday as US rates backed off. Gold has been ranging USD 1,900 - 1,935 since late June. Again, gold is being capped by expectations for more fed rate hikes and movements in US rates, which are volatile but generally shake out as higher yields.

World Gold Council noted that June saw outflows in global gold ETF's of USD 3.7 billion (-56t), resulting in H1 net disinvestment of USD 2.7 billion (-50t). The June result halted three months of inflows. Outflows were concentrated in Europe and North America, which collectively lost USD 3.5 billion (53t) in June.

Silver rose 1.4% to USD 23.09 this week. USD 22.00 is support - a big level. Silver has been trading in a narrow USD 22.35 - 23.35 range.

In last week's episode of our Diamond Standard podcast Clarity, we were joined by Michael DiRienzo, Executive Director and Secretary of The Silver Institute. We discussed findings from the Institute's recently released flagship publication the World Silver Survey 2023. You can find Clarity Episode Four with Michael DiRienzo on the Diamond Standard Institutional Media page.

Chart: Gold ETF Flows monthly Jul 7 - Chart 3

__USD __

The USD (DXY Index) fell 0.6% on the week, ending at USD 102.26 area. USD was trading in a tight 102.75-103.50, but broke downside on Friday.

JPY halted its slide vs USD at least for this week and was the best performing G10 currency vs USD. JPY rose 1.5% vs USD to end at 142.14. BoJ Governor Uchida said a "balanced" approach should be taken to its yield curve control ("YCC"). Some are looking at the BoJ July meeting for a signal YCC will be tweaked.

EURUSD rose 0.5% on the week to 1.0968. GBPUSD rose 1% this week to end at above 1.2838. Most of the upside move in these pairs came Friday afternoon as USD lost steam.

__Chart: USD (DXY Index) and US 2 year yield __ Jul 7 - Chart 1 (1)

Ahead next week:

June US CPI is the key release. U of Michigan preliminary July Sentiment and inflation expectations will also be watched. There are a number of Fed speakers throughout the week. ECB minutes for the June meeting will be released. On the UK front, BoE Gov Bailey speaks. BoC has a rate decision - expectations are for a 25bp hike.

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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.