Michael Brown
DIGEST – Precious metals encountered vicious selling pressure on Tuesday, though markets elsewhere were considerably calmer, as news- and data-flow remained light. UK CPI highlights the docket today.
WHERE WE STAND – I guess the precious metals complex is the only logical place to start this morning, after a bit of a bloodbath across the complex yesterday.
Spot gold notched its biggest one-day decline in over a decade, spot silver fell as much as 8% on the day and slipped back under $50/oz, while platinum and palladium plunged as well. If nothing else, I guess this will stop folk from screaming about the complex being ‘overbought’ for a short while.
As for catalysts driving that downside, it must be said that there wasn’t an especially obvious one, with data- and news-flow again being rather light. Instead, it all looks like a classic case of a market with very stretched long positioning, that’s rallied in parabolic fashion for a week or so, finally getting a bit of a reality check.
Naturally, this will prompt the usual round of ‘top pickers’ to declare that the bull run is over, but I’d not be so sure. In the case of gold in particular, this recent rally is actually the latest leg higher of a bull market that begun in mid-2023, and one that remains largely fuelled by reserve allocators seeking increased diversification after the seizure of Russia’s FX reserves at the start of the war in Ukraine. Add on top of that runaway government spending across developed markets, the ongoing possibility of inflation expectations becoming unanchored, plus a generally higher desire to hold hedges in an increasingly risky world, and the fundamental bull case still holds water in my mind.
Some context is, of course, key here, as while every man and their dog gets all over-excitable about yesterday’s decline, they appear to forget that not only is bullion trading well over 50% higher YTD, but also that gold is one of those assets, like most commodities, that once a long-term trend is in place, those trends tend to continue. With that in mind, though it’s too early to be sure that yesterday’s flush is a ‘one and done’ sort of move, I’d be looking at buying dips if we get to test the $4,000/oz mark.
Away from the precious metals complex, yesterday brought another bout of dismal fiscal news’ here in Blighty yesterday, after an utterly grim slate of September public finance data. The budget deficit stood at £20.2bln last month, the highest September borrowing figure in 5 years. In the financial year to date, borrowing now stands at £99.8bln, a record figure for the first six months of a year, excluding the pandemic-affected figures in 2020. That £99.8bln, meanwhile, is not only 17.2% wider than the budget deficit was this time last year, but also £7.2bln above the OBR’s forecast – on its own, that essentially wipes out all of the fiscal ‘headroom’ that Chancellor Reeves had left herself at the Spring Statement.
I guess, in many ways, this all serves to reaffirm what we already knew, as opposed to providing any pertinent fresh information. The overall backdrop remains the same, with a huge ‘black hole’ to be plugged at the Budget next month, further tax hikes to plug said ‘hole’ will simply serve to choke off economic growth to a greater extent, while Gilt participants are set to remain very sceptical indeed unless and until the government begins to demonstrate spending restraint. All in all, I still see little reason to sit in any position other than short at the long-end of the curve.
Elsewhere, Tuesday proved a day of notable USD firmness, with the buck gaining ground against all G10 peers, as the JPY lagged the pack amid a return of the ‘Takaichi Trade’ after her confirmation as Japan’s first female PM, having won the necessary Diet votes yesterday. To me, those dollar gains stem in part from the Fed’s ‘run it hot’ approach tilting risks to the outlook to the upside, and in part from the whole idea of the ‘cleanest dirty shirt in the laundry’ – aka, nothing else in G10 is especially attractive, so participants buy into the buck as the ‘least bad’ option.
One thing that has caught my eye, though, is the Swissie which, as near as makes no difference, trades at its firmest against both the USD and the EUR since ‘that’ day in 2015. This piques my interest as, with rates at the zero lower bound (ZLB), and there being little-to-no desire at the SNB to take rates into negative territory, the FX channel is essentially the only tool that policymakers have in order to avoid a return to the days of deflation. I’d not be at all surprised to find the SNB making themselves known sooner, rather than later – minutes from the September meeting, due tomorrow, might shed some light on this.
I’ll wrap up with stocks, which is quite rare for me to leave until last, but also feels warranted considering that Wall St benchmarks, and bourses in Europe, didn’t really do much yesterday. That said, my view remains that the ‘path of least resistance’ leads us higher from here into year-end, as both earnings and economic growth stay solid, the monetary backdrop becomes looser, corporate buybacks resume, and FOMO/FOMU flows likely intensify from here.
LOOK AHEAD – Today’s docket is a relatively light one as, you guessed it, the ongoing US government shutdown sees us remain in a data vacuum.
We will, though, be getting the latest UK inflation figures this morning, with headline CPI set to have risen 4.0% YoY in September, and the closely watched services CPI metric seen having risen an even punchier 4.8% YoY. The Bank of England’s latest forecasts pointed to September being the peak for price pressures, though policymakers will want to be sure that’s the case before embarking on further rate cuts which, coupled with pre-Budget uncertainty has me pencil in the next 25bp cut for February 2026.
Elsewhere, the US sells 20-year bonds this evening, with that being an auction that one can’t infer too much from, given 20s’ status as by far the most unloved segment of the curve. We’re also due to hear from ECB President Lagarde, and Vice President de Guindos today, while earnings highlights include Tesla (TSLA), IBM and SAP after the close.
Brown is a Senior Research Strategist at Pepperstone
