Risk assets have been getting some relief this week on two fronts. Firstly, there has been no new escalatory moves in the Middle East between Israel and Iran, and secondly, US corporate earnings season for Q1 2024 has been delivering the goods once again. As has been the case in recent earnings seasons, the trend has been for S&P500 companies to beat expectations, and while there is still some way to go before Q1 earnings season wraps up, the early signs have been positive. The results are that stocks have turned higher after taking a beating over the previous week.
Tesla was all the talk on Tuesday, and while the EV maker’s sales and profit numbers were even more disappointing than anticipated, the company managed to win back some favour with investors by rejuvenating plans to make a more affordable vehicle. While this news has given the Tesla stock a reprieve, it remains to be seen how well this new model Tesla will fare against increasing competition from Chinese EV makers when it finally hits the showroom floors.
While global equity markets have been on the rebound, the gold price has moved in the other direction. The precious metal has fallen this week due to a pullback in safe haven buying demand, on the absence of any new, negative headlines from the geopolitical hotspots around the world. Safe haven demand has been a prime driver of the gold price in recent times, and for the moment at least that buying demand has eased.
Previous pullbacks in gold have been shallow with buyers waiting in the wings to purchase the yellow metal, and the same could be true again this time, although the strong USD and high bond yields are providing headwinds for gold. In order for the broader upward momentum to be maintained, support levels at $2307 and $2279 may need to hold to prevent a larger pullback towards $2239. On the upside, immediate resistance awaits at $2350.
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In currency circles, the USD remains well supported although the Dollar Index (DXY) did lose the 106 handle after some surprisingly weak US manufacturing data. Meanwhile the yen remains soft ahead of the BOJ meeting on Friday, as the guessing game continues as to just how low Japanese officials will allow the yen to go before pulling the trigger on currency market intervention to prop up the yen.
The problem for the Ministry of Finance (in Japan) is that elevated US bond yields are a key reason behind the current USDJPY levels, and if they intervene, much of their efforts and ammunition will be used trying to fight the treasury market. This may not be an efficient use of resources and could explain why we have not seen any evidence of intervention yet. It will be interesting to hear what the BOJ has to say on Friday about the yen and the inflation outlook.
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Looking ahead, investors will be keenly watching advance US GDP figures (due Thursday) and also the Core PCE Price Index (due Friday). Both macro data releases have the ability to influence the interest rate outlook for the FOMC, and as such, an upside surprises could further push out the timeline for US rate cuts. Gold, the USD and equity markets could swing based on how these results shape up.
