Weekly Market Overview | 18 March 2022
As demand for anti-risk assets tapered off this week, the yellow metal took advantage of the weaker dollar on the back of an interest rate hike on Wednesday by 25 basis points. This however comes as a surprise because gold has historically been sensitive to rate hikes from the FED as it increases the opportunity cost of holding onto the asset. The only inference one can make is that the market has remained positive and resilient because of the confident stance FED chair Jerome Powell has in the U.S economy. He noted that “the American economy is very strong and well-positioned to handle tighter monetary policy”, and seemingly the markets welcomed the central bank’s confidence in the economy despite numerous uncertainties.
With this in mind, investors should be cautious in their approach amid signs of progress between Russia and Ukraine in their ceasefire talks. This optimism over a potential diplomatic solution to the war could potentially cap the gains that gold has made as a safe-haven asset during the war, which means that buyers should manage their expectations of the price smashing above the $2 070 level before committing to a bullish outlook. Conversely, there is strong support around the $1 900 level where new buyers could enter the market as this area represents a new higher low and offers a discount for new buyers to enter the market with a view to retest the $2 070 mark and potentially surpass it or range between the new high and this newfound level of support.
It’s no secret that the pandemic came with loose monetary policy that left a lot to be desired from a fiscal point of view, with record debt being added by means of several stimulus measures. However, the U.S Federal Reserve hinted on Wednesday that this would be coming to an end as it plans a more aggressive policy and plans six further interest rate hikes for 2022 to fight record-high inflation.
In terms of stocks, Wall Street indexes rose overnight to close out their biggest three-session percentage gains since November 2020. The S&P 500 and Dow Jones each rose 1.2% and the Nasdaq 1.3%. These results come on the back of Powell expressing high confidence in the economy coupled with the historical data that suggests tighter monetary policy has often been accompanied by solid gains in stocks.
Following the rate hikes in the U.S, the Bank of England followed by raising their interest rates on Thursday by 0.75% as expected in an attempt to grapple with rising inflation. The stark difference though is that it had a much more gentle tone in its forecast in terms of future rate hikes for the remainder of the year but remained watchful as inflation is predicted to reach around 8% in April – almost a percentage point higher than previously forecast. Coupled with that, the impact of the war in Ukraine is yet to be felt hard by Europeans as energy costs are set to jump in the autumn when regulated tariffs are reset, on top of a 50% rise coming next month.
In terms of stocks, the pan-European STOXX 600 index rose by 0.2% and was on track to erase losses recorded in the month of March when fears about the Ukraine conflict pounded financial markets, while the German DAX gained 3.76% alongside the French CAC 40 index rising by 3.68% and the FTSE 100 index adding 1.75% by midweek.
On the back of information coming to light from both sides of the delegations regarding the progress of ceasefire talks and their lack of tangible progress, the oil price rose sharply and back over $100 overnight and Brent crude futures were up another 2% to $108.73 in early trade along with commodity exporters’ currencies. The effect that these talks have on the oil price is significant because if they collapse or stall, the current tight sanctions are prolonged and as such continue the disruption of oil supply in the world.
In terms of technical analysis of the chart itself, we see strong support coming in at the $92 level this week, which is in line with the fundamentals discussed above. As we head into the weekend and the fourth week of the war, we could see the price range between the key levels of $92 and the $109 level while investors wait for clarity and a way forward.
Bitcoin remained unphased on Friday morning on the back of comments made by three European regulatory agencies warning investors that they could lose all their money. The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) “warn consumers that many crypto assets are highly risky and speculative.”
This however remains in stark contrast to what many other commentators are saying, as there is a growing consensus that the fact that nation-states are able to hold all the permissions for one to participate in the global financial system is increasingly making people seek alternative forms of finance. The sanctions on Russia’s financial system is regarded in some circles as the day Fiat-currency lost its prominence over alternatives because you cannot cancel the largest energy producer from a monetary system without massive repercussions. Arthur Hayes, the co-founder of the cryptocurrency exchange Bitmex affirms that these repercussions may push individuals and nation-states to transact and store their money in different ways, and these include Bitcoin as well as Gold.
In terms of technical analysis, the consolidation continues with the formation of a bullish setup. A breakout from this formation could be the key to triggering a bull run. A break above the horizontal resistance barrier at $44,418 will trigger a move to $53,629. If this bullish setup plays out as such, the price will likely make a run for the $60,000 psychological level and perhaps the all-time high at $69,000 if bullish momentum sustains. However, if it breaks below $34 700, then we could see a bearish scenario that could test the $29 000 level.
The Optimal Play
As the U.S dollar continues its mild recovery after a four-day pullback on the back of peace talks between Russia and Ukraine, geopolitical concerns have appeared late in the week and this has caused the dollar index to bounce at the 97.70 level where strong support has been found by new buyers of the currency. This perceived increase in risk aversion since the peace talks have stalled has given strength to the Dollar in relation to a basket of other global currencies. Investors are advised to keep a keen eye on the call between President Biden and China’s Xi Jinping regarding the war in Ukraine, as this could provide greater clarity about the direction of the strength of the dollar in the current economic climate.
In terms of technical analysis, the index seems to be currently ranging between a high of 99.40 and a low of 97.67. A break above 99.29 would open the door to the 99.41 level, which is a monthly high and the dollar would potentially rally to the 99.97 level which was last tapped in May 25 2020. On the flip side, the next down barrier emerges at the 97.72 level which is the weekly low, followed by 97.71 then 97.44 which was the monthly high in January.
With that being said, investors are advised to remain watchful of the different fundamental and technical factors that are lined up as the week draws to a close and as we enter the latter half of the Month. If the Dollar rallies according to the scenarios discussed above and you would like exposure on your portfolio, the Aluma Multi-Asset Global Note is still the perfect blend of offshore exposure to diversify your portfolio adequately while providing capital protection to your investment.