Friday, May 22, 2020

Week ahead: Will gold retest new high amid talks of negative rates?

NBHM Research Team

Global stocks were relatively positive last week as investors reacted to the higher oil prices, reopening of economies, better retail earnings, and improving economic data.

The price of crude oil rose because the market started to price-in more demand as countries started to reopen. That was boosted by data that showed that oil rigs in the US were falling at an unprecedented pace. Inventories data from the American Petroleum Institute (API) and the Energy Information Administration (EIA) also revealed an increase in drawdown. Meanwhile, news from Bloomberg said that demand from China had gone to pre-coronavirus levels.

Corporate earnings boosted US stocks. Retailers like Walmart, Target, Home Depot and Lowe’s released better-than-expected results. That was because the last month of the quarter saw increased demand as many states started imposing travel restrictions.

We also received some promising data from Europe and the United States. Flash manufacturing and service PMI data showed that activity was slowly returning as countries start to open. At the same time, talks of negative interest rates remained in the US and the UK. While Jerome Powell ruled out these rates, his British counterpart said that the bank would consider them.

Gold: Gold prices rose to a seven-year high of $1765 last week as the talk of negative rates continued. It was also boosted by a statement by Jerome Powell, who suggested that the US economy would weaken for a considerable amount of time. As a result, analysts believe that the Fed will increase its asset purchases, which is viewed as being positive for gold. Some analysts also believe that the balance sheet will end the year at about $10 trillion. That is an unprecedented amount because the balance sheet was less than $500 billion before the last crisis. On the daily chart below, gold price rose after forming a bullish pennant pattern.

NBHM Weekly outlook

Euro: The euro started the week well but lost momentum on Friday. Economic data from the eurozone showed that business activity was starting to come back. At the same time, news that Angela Merkel and Emmanuel Macron had reached a financing deal provided further support to the euro. This week, we will receive several economic data from Europe. We will get German business climate and current assessment data today. On Tuesday, we will receive the consumer climate data from Germany followed by the Spanish consumer prices data and eurozone business confidence on Thursday. On Friday, we will receive the eurozone preliminary CPI data. The chart below shows how the euro reversed against the US dollar last week.

NBHM Weekly outlook

US dollar: The US dollar index moved sideways last week as the market continued to price-in the likelihood of negative interest rates from the United States. Data from the US showed that the economy is facing an unprecedented slowdown. For example, existing home sales dropped by 18% in April while the number of people filing unemployment claims rose by more than 2 million. While the manufacturing and services PMI were still in contraction, they showed some improvement. This week, we will receive the house price index, consumer confidence, new home sales, durable goods data, GDP data, and personal income and spending.

S&P500: The S&P500 index was relatively positive last week following positive retail earnings. The market was positive about a coronavirus vaccine and the fact that many states were starting to reopen. This week, the index will be affected by any escalation between the United States and China. Signs of second infections in states that are reopening will also affect the performance. Most importantly, investors will watch out for corporate earnings. The companies that will report are AutoZone, Micron, Viasat, Costco, Autodesk, Nutanix, Salesforce, Box, and HP among others.

Canadian dollar: The Canadian dollar rose last week mostly due to the surging crude oil prices. Investors were also optimistic because the number of coronavirus cases in Canada. This week, traders will continue to watch the oil prices because there will be no major economic data from the country. The only major news will be the second reading of the Canadian first-quarter economic data that will be released on Friday. Statistics Canada will also release the corporate profits and raw materials price index data.

Crude oil: The price of crude oil rose last week as investors became optimistic about rising demand and falling supplies. Data from the EIA and API showed that inventories declined by more than 4.5 million in the previous week. Also, the market grew optimistic that demand was coming back as countries started to reopen. This week, we will receive the inventories data from the two organizations and see whether inventories are still falling.

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