Market Update: Worries Come and Go
US equity indexes were up on the week: S&P 500 1.5%, NASDAQ 3.0%, and DJIA 0.4%. They were supported by positive US debt ceiling negotiation headlines at least for most of the week. House Speaker Kevin McCarthy indicated that both sides may reach an agreement as soon as this weekend. However, on Friday afternoon, headlines came out that the Republican team walked out of negotiations, putting a damper on US equities. Both the US 2 year and 10 year yields rose to their highest since March this week on debt ceiling resolution hope and lack of banking sector turmoil. Markets are choppy as macro worries come and go.
Fed Pricing:
Speaking on Friday, Fed Chair Powell gave a signal that the Fed could pause its interest rate hiking cycle at the next meeting in June. "We've come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stress, " Powell stated.
Fed funds futures show the peak in the terminal rate as May and have approximately 70bps of rate cuts priced in by the end of January 2024 - less cuts than was expected last week. As we have pointed out previously, this differs markedly from the Fed's own forecast which has a median fed funds rate of 5.10% through year end 2023.
Chart: US Treasuries Yield Curve Friday May 19 vs Friday May 12. The curve has shifted upward.
Precious Metals:
DIAMINDX fell 0.6% to USD 5,110 - its lowest level since March 2021. It continues to hold above the USD 5,000 level. While US jewelers remain cautious amid expectations of a US consumer slowdown, luxury group Richemont's latest earning results show the resiliency of luxury consumers.
Richemont had strong results for FY ended March 2023. Group sales and operating profit both hit all time highs. Jewelry sales were strong - up 21% at actual exchange rates. The Jewelery Maisons had the highest level of direct-to-client engagement within the Group. Richemont's press release stated: "The Group has drawn on the strength of its Maisons and the resilience of luxury consumers in an environment characterised by geopolitical volatility, economic uncertainty and high inflation."
Turning to the G7 meeting in Japan this week: It has been widely reported that the G7 would announce some type of sanction on Russian diamonds. Alrosa, the state owned Russian diamond company, is the world's largest exporter of diamonds by volume. However, it is difficult to trace the origin of a polished diamond, which hampers progress on how exactly to implement a ban on Russian diamonds.
The G-7 announced its intentions to limit trade in diamonds of Russian origin saying “In order to reduce the revenues that Russia extracts from the export of diamonds, we will continue to work closely together to restrict trade in and use of diamonds mined, processed or produced in Russia and engage with key partners with the aim of ensuring effective implementation of future coordinated restrictive measures, including through tracing technologies." So, no new sanctions yet, but G7 leaders will discuss how to curb Russian diamond exports at a summit this weekend in Japan.Therefore, there could be an additional announcement.
Separately, the UK did announce a ban on Russian diamonds on Friday along with the import of Russian origin copper, aluminum and nickel. There were no details released yet as to how the UK will implement the Russian diamond sanction. Any additional sanctions on Russian diamonds will further restrict diamond supply to Western countries.
Chart: World Diamond Supply (carats) by Country, % Share as of 2021, which is the most recent data
Gold and Silver
Gold took it on the chin this week falling 1.6% to USD 1,977. This is its largest weekly loss since February. It is holding above support at USD 1,950. Resistance is the 50 day moving average USD 1,987. Some of gold's key drivers have begun to fade recently with the possible resolution to the US debt ceiling and no banking failure for a couple of weeks now. However, gold did curb some of its losses on Friday as the US debt ceiling talks stalled.
Central bank buying of gold was a big theme throughout Q1 2023. The World Gold Council ("WGC") reports this week that China's gold reservers rose further in April by 8t to 2,076t. In contrast the Central Bank of Turkey ("CBT") is selling gold. In this twitter thread, WGC's John Reade takes a look at the flows and concludes that "if all the sales from the CBT have been to fulfill demand for gold domestically, then retail investment demand for gold has exploded in Turkey." In addition to high inflation in Turkey, there is also uncertainty about the outcome of its election ahead - both of these issues are likely spurring the retail demand for gold. May 28 is the general election runoff between incumbent Tayyip Erdogan and his challenger Kemal Kilicdaroglu that will decide whether the Erdogan extends his rule into a third decade.
LBMA's The Alchemist released an article in its May edition titled "The Deutsche Bundesbank and its Gold: A Bond that Never Breaks?". It is an interesting read the central bank of Germany, which is the world's largest holder of gold after the the US Federal Reserve.
Silver fell 0.3% on the week to USD 23.90. This follows its large 6.4% drop last week. Support is 23.40 - the 100 day moving average. Silver has been negatively impacted by the same themes as gold - higher US bond yields and a stronger USD.
Chart: Gold, Silver and the US 10 year yield (purple, inverted). A higher US yield dragged down gold and silver
USD
The USD (DXY Index) rose 0.4% on the week, breaking topside 103.00 to end the week at 103.07 at the time of writing. This strength follows on from last week, when the DXY Index broke out of the tight 102.40-101.00 range it had been trading in since mid-April. The USD was supported by rising US yields. The USD gained vs most G10 currencies this week. The exception was the "Dollar Bloc" currencies - AUD, NZD, CAD - which have a high beta to risk seeking and gained vs USD on US equity index strength. JPY was the weakest G10 currency vs USD, down approximately 1.6% to 137.90 as USDJPY moved higher with the rise in US yields.
Chart: USD (DXY Index) and recent trading ranges (rectangles) vs US 2 year yield.
Ahead next week: US personal consumption and expenditure data for April and the FOMC minutes from the May meeting. In the minutes, market participants will look for how united or not the FOMC members are about the future path of the fed funds rate.
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