Market analysis: Gold retains status as safest asset

Since the start of this month and in the aftermath of the Brexit vote, the markets have been largely range bound.

The British pound went through a brief renaissance in large part because the Bank of England (BoE) held benchmark interest rates unchanged at 0.50 per cent – the markets had been expecting a cut to 0.25 per cent. Perhaps more surprising was how strongly the bank’s monetary policy committee voted in favour of keeping rates unchanged (8 to 1).

This led to a short-term resurgence in the pound, which moved higher against the greenback before finding stiff resistance just below 1.35. Sterling looks to remain entrenched between 1.30 and 1.35 against the greenback.

Upcoming data, through to the end of July, from the UK, which includes inflation data – month on month expected at 0.2 per cent and year-on-year expected at 0.4 per cent – along with employment data should not be enough to shake the pound out of this range.

Maintaining a long strategy for the pound is extremely short- sighted, as the currency is still very fragile and looks highly anaemic in medium term.

Gold continued its consolidation in the 1,300s. Support has held at 1,320 levels, with upsides capped at 1,375. The recent uptick in global equity markets has stalled the recent gold bull run, and the coup attempt in Turkey over the weekend was too quickly dispelled for any risk-off sentiment to make a significant impact on safe haven asset classes.

Gold remains the safest long play among the asset classes and another move towards US$1,300, which remains a strong support level, will provide good value for a short term to medium-term long strategy.

Of all the asset classes, the star has been global equities. The FTSE100 dropped after the Brexit vote but has since rebounded by more than 12 per cent and now finds itself trading up above 6,600 levels, the highest in a year. A lot of this move is as a result of short covering following the Brexit sell-off and a larger flow into British asset classes following a cheapening pound.

Across the Atlantic, the Dow Jones ended last week above 18,500, with the S&P500 closing above 2,100 levels. These indexes are trading at record highs after three consecutive weeks of gains.

The US equity markets have been in a rampant mood following a stronger than expected US non-farm payrolls report, which showed that 287,000 new jobs were added last month, well above the expected 170,000. The figure bounced back strongly after a disastrous gain in May, in which only 38,000 new jobs were added – this figure was later revised down to only 11,000 in July’s report. The unemployment rate worsened one point to 4.9 per cent on the back of a growing labour force – the participation rate increased to 62.7 per cent.

Perhaps more notably, wage growth slowed in the short term. Month-on-month, growth fell to 0.1 per cent while the longer term reading remained consistent at 2.6 per cent year-on-year.

Although the latest employment report showed slight signs of improvement, the lack of consistency in the figure will keep the outlook for upcoming US growth as cautious at best.

We expect any talk of a US Federal Reserve rate hike this year to continue to fade through the rest of the year and, as a result, risk sentiment and the ensuing volatility will continue, as has been the theme for the first half of this year.

The European Central Bank convenes on Thursday. It will be the first time we hear from Mario Draghi since the Brexit vote. We expect Mr Draghi to follow the BoE governor Mark Carney and leave rates unchanged: benchmark rate at zero, marginal lending facility at 0.25 per cent and ECB deposit rate at 0.40 per cent.

As per tradition, the ECB president will hold a press conference, in which we will get a more detailed view of the ECB’s stance towards further easing. Volatility will no doubt increase in the euro crosses. However, the euro and dollar rate will find support at 1.08 levels, with upside resistance at 1.12 levels in the short term.

Gaurav Kashyap is the head of futures at AxiTrader ME.

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