A bearish attitude on Wall Street pushed gold prices up as worries are growing about possible scenarios of a global recession, which would be accompanied by a broad decline in corporate results. Such fears forced investors to seek shelter in public debt securities or in precious metals as reasonable alternative options in face of a deeply inflationary background, according to TeleTrade analyst Ilya Frolov (https://www.teletrade.eu/pt).
However, the yield of U.S. Treasury bonds is not as high as many would like to see considering expected interest rate hikes proposed by the Federal Reserve (Fed). The annual yield of U.S. benchmark 10-year bonds approached 3.2% two weeks ago, but elevated demand lowered it to 2.77-2.87% on May 20. Thus, the reason for the current capital exodus that deepened the bearish correction of stock indexes is increasing the demand for safe haven assets but is also limiting expected profit.
The American bill of $40 billion for arming as well as functioning the state machine of Ukraine approved by the Senate and then signed by President Joe Biden without specifying the particular sources of funding, only exacerbates worries over the U.S. massive debt. TeleTrade analyst considers that this does not encourage more investments of money in U.S. Treasury assets, as their yields are 67% lower than the average inflation in the country. U.S. Dollar index futures have gained about 10% since February 24 due to the impact of Russia's invasion of Ukraine but are now trying to reverse the uptrend.
On May 13, the Dollar index topped the 105 points multi-year resistance level, the highest value since January 2003, before pulling back to the 102 points area. Despite all the recent weakness of the single currency, when EUR/USD managed to fall from 1.1350 to 1.0350 over a couple of months, now it took advantage of the U.S. Dollar reversal adding more than 300 basis points to touch the levels above 1.0650 during the trading session of May 23. Germany’s Ifo business climate for May was suddenly better than expected today, showing a 93.0-point indication vs 91.9-point in April, which also partially inspired the Euro.
Nice try for the start of the week on EUR/USD, but any further upward movement of the Euro could be limited by every step, not only by fears of a slowdown in the more Russia-exposed European economy, but also because money markets are now averagely pricing in 38 basis points of potential tightening from the European Central Bank by July. This may suggest a 0.25% rate hike on the nearest meeting plus a roughly 52% probability of an additional 0.25% move to follow, according to Refinitiv.
Caught in the crossfire of the weakening Swiss Franc, the Aussie, the Loonie, the British Pound etc, market participants tend to think about investments in precious metals or commodity futures more frequently than before, even though gold, silver, copper, or oil assets do not guarantee interest income.
Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.
Ilya Frolov, Chefe de Gestão de Portfólio, TeleTrade