Precious Metals Bid Following US Inflation Data

Traders paid attention to Tuesday’s Consumer Price Index (CPI) data, which came out above market estimates. The headline CPI jumped 0.6% month-on-month instead of the expected 0.5% jump, and 2.6% year-on-year instead of the expected 2.5%.

That was the biggest monthly jump since June 2009 and the biggest Year on Year jump since August 2018, as CPI followed PPI higher.

Federal Reserve (Fed) governors have said many times that they are prepared to ignore periods of inflation climbing above its 2% threshold without changing their accommodative policy stance. They see these episodes as temporary in nature.

Earlier in the week, the Fed’s James Bullard said that the central bank should start tapering its bond-buying program when 75% of the US population will have immunity to the virus, either from the vaccine or from a previous infection. Assuming the pace of vaccination stays the same, that threshold should be reached by the end of summer. 

Additionally, markets are now pricing four rate hikes over the next two years, which tells us that the Fed will be pushed into action if inflation continues to run above 2%. That should come sooner rather than later.

If the Fed starts normalizing monetary policy, it is hard to see a bullish scenario for precious metals. For now, the gold’s 1,680 USD support is holding, and a small rally started, but gold needs to make a significant break above 1,765 USD to start some bullish momentum. Silver is trying to stay above 25 USD for now. 

To conclude, should the Fed announce tapering, yields, and USD will most likely rise, which should be negative for precious metals. It looks like gold topped in August 2020, and the bull market has ended, for now. 

Bonds Bleed as Rate Hike expectations Soar

As the pace of vaccinations remains slow in the EU but continues to rise in the US and the UK, traders are pricing in the end of the pandemic this year, and that most of the world’s economies will reopen to full capacity. That is pushing inflation expectations higher and higher, along with other things. 

Recently, traders paid attention to Friday’s payrolls report, and it was spectacular. In addition to a massive 916,000 jobs added in March amid broad-based job creation, the unemployment rate fell to 6% from 6.2%, while the underemployment rate declined to 10.7% from 11.1% – from 7% pre-pandemic.

“we will return to the pre-pandemic level of jobs by year-end,” said Bank of America (BoA) chief economist, “[the risk] is that the rate of job growth actually accelerates further given the stimulus-induced boost to spending and economic reopening.”

That, of course, means more inflation is coming, and with higher inflation, the Federal Reserve (Fed) will be expected to tighten monetary policy sooner rather than later. 

At the moment, markets imply more than one rate hike by the end of 2022. Additionally, almost 140bps of tightening – almost 6 rate hikes – is now priced in between the end of 2022 to the end of 2024. 

As yields soar, along with rate hike expectations, bonds have been suffering. The world’s largest credit ETF scored its worst month of outflows since it began trading about two decades ago.

Investors took nearly 3.6 billion USD from the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) in March, according to data compiled by Bloomberg. That massive outflow came as the 42 billion USD fund suffered its biggest quarterly rout in 12 years.

What’s next? For us, it is hard to imagine precious metals and non-profitable tech stocks advancing in such an environment. The pressure on the Fed will continue to mount as inflation is clearly running loose across the globe. 

Large-cap companies should perform better than small caps as they are more resilient to rising rates due to more solid balance sheets. 

When it comes to the USD, it should be supported in this environment, and therefore we don’t expect the EURUSD pair to rise further above this year’s highs of 1.23.

Is the Gold Bull Market Over?

To answer that question, it’s looking it is. According to the Bank of America (BoA), there are three main reasons for the decreasing value of gold: the weakening of physical demand, a lackluster jewelry market, and a lack of investor interest.

The central banks’ demand decreased by nearly 60 percent in 2020, according to the World Gold Council (WGC). In the fourth quarter of 2020 alone, central banks bought a net of 44.8 tons of gold from about 140.7 tons a year before that.

Additionally, the jewelry market has been hit hard by the pandemic. Last year, the total annual demand for gold pieces was 34 percent less than it was in 2019, which marks a new annual minimum in history according to observations by the WGC.

The current market sentiment also favors lower gold prices. Traders are pricing in three rate hikes, starting in late 2022, as inflation expectations have risen sharply. The Federal Reserve (Fed) will need to tighten monetary policy sooner than previously thought, or the central bank risks inflation getting out of control. 

Rising US yields are usually positive for the USD, and the greenback has been rallying recently, hitting multi-month highs against most of its major peers. 

Vaccinations are ramping up, and the return to normalcy might be expected later this year. Another bearish sign for gold is that investors would rather hold stocks of companies with rising revenues rather than gold which has no dividends or no interest. 

Technically speaking, the last bullish support for gold is in the 1,680 to 1,670 USD area, where the uptrend line from 2019 and 2020 lows is converged with the strong horizontal demand zone of Summer 2020 lows. 

Should the price decline below that support zone, it might be the last nail in the coffin for gold, with a possible return to 1,500 USD. 

Markets Expect Inflation, the Fed Doesn’t but Who’s Right?

The US 5-year Breakeven Rate just hit 2.65%. The last time it hit this level was in 2006 when the US was in the middle of a massive housing bubble and oil was on its way to 150 USD per barrel.

Another inflation scare comes from US yields, which have been roaring higher recently, and the 10-year yield climbed to 1.75%. Last seen in January 2020.

Additionally, most commodities are in steep bull trends, signaling higher prices are here to stay. 

Traders and investors are buying some new, untraditional assets, such as cryptocurrencies. The most famous one, Bitcoin, is up more than tenfold since its March 2020 lows. All the markets are screaming inflation is coming. Investors are buying hedges against inflation, but the Federal Reserve (Fed) believes inflation won’t even hit 2% for three more years.   

“[Cryptocurrencies] are more of an asset for speculation, so they’re not particularly in use as a means of payment. It’s more a speculative asset. It’s essentially a substitute for gold rather than for the dollar.” said Fed Chair Jerome Powell said on Monday.

So, if gold usually goes higher when inflation rises, and now bitcoin is on the run, what does that tell you? Everyone excepts higher inflation except the Fed. 

Most of the time, the market is right, and the Fed is wrong. The central bank is reactive instead of proactive. We think that the Fed has it wrong this time as well, and inflation will overshoot their official 2% target sooner rather than later. 

What happens next? Well, the Fed should start tapering quantitative easing and raise rates, but that would pop the bubble in equities. The bank is stuck in a tricky situation. Not doing anything will lead to uncomfortably high inflation, while doing something could lead to a crash in the stock market. The show is just beginning, there will definitely be more to come. 

Greenback Unstable Ahead of the FOMC meeting

The USD continues to increase, although the momentum seems to be waning as market participants are in a wait-and-see regime ahead of the Federal Reserve’s (Fed) next meeting. 

On Wednesday, the critical Federal Open Market Committee (FOMC) meeting will conclude, and since Jerome Powell failed to deliver a dovish turnaround at his last speech, investors continue to be afraid of higher inflation. Thus, bond yields remain in a steep uptrend, undermining stocks.

Additionally, the passage of the 1.9 trillion USD American Rescue Plan should provide another boost to the US economy. However, the latest surveys have shown that 50% of check receivers in the United States want to spend the new money on trading stocks.

Therefore, the inflation impact will most likely be smaller than if all the money went straight into the economy. 

The Fed will also provide its own economic projections, and traders will be eyeing Gross Domestic Product (GDP) and inflation expectations. 

On the one hand, rising inflation expectations lead to higher US yields, something which has recently strengthened the USD. However, high yields might hurt the US economy, and the Fed knows that. The only question is where is their maximum pain threshold, is it 2% for 10-year maturity? Most likely, yes.

So, bond yields could continue trending higher until the Fed intervenes again. At that point, yields are expected to drop, along with the greenback, and stocks with precious metals might go higher again. 

Till that happens, the EURUSD might trade sideways at around 1.19, but the USDJPY – which is the most correlated pair with US yields – pair is at nine-month highs above 109.

Is Oil Heading to 80 USD?

The big oil rally seems to be far from over, and the WTI (West Texas Intermediate) benchmark rose above 67.50 USD on Monday for the first time since October 2018.

Offshore oil and gas development is set to recover from the shock that prices and demand went through due to the pandemic. It’s also set for a new record in project commitments in the five years leading up to 2025, according to Rystad Energy. This news was well-received by oil companies last week. 

Additionally, oil operators are expected to commit to developing a record number of offshore oil and gas projects over the next five years.

According to the Goldman Sachs correlation analysis, based on daily charts, oil and copper are among the best-performing assets during inflation times. Oil is up hundreds of percent from its April lows when the price went negative for a day. 

Earlier in the month, Goldman raised its Brent crude forecast by 5 USD per barrel to 75 USD for the second quarter of 2021, then pushed it further to 80 USD for the third quarter.

Last Thursday, OPEC (Organization of the Petroleum Exporting Countries) started another rally in oil price after the decision to keep output quotas unchanged in April. This happened despite market expectations for supply to notch up to meet demand, as the world progresses in COVID-19 vaccination campaigns.

It looks like oil could hit the 70 USD level sooner than later, especially if central banks and governments continue to flood the markets with liquidity. Therefore, Goldman’s 80 USD target is looking pretty realistic this year. 

On the downside, the first stronger support is seen at February highs of 63.50 USD for WTI, with the other demand zone most likely at around 60 USD.

Are Rising Yields Going to Spoil the Bullish Party?

US yields are seeing another day of highs. The US 10-year yield rose to fresh cycle highs on Monday and was trading slightly below the 1.4% handle as traders keep dumping bonds due to inflation expectations. 

Based on Federal Reserve (Fed) funds futures markets, the chances of a 0.25% Fed rate hike by the end of 2022 have increased from 50% to 70%. The same market sees a 95% chance that if the rate hike doesn’t take place in 2022, it will by March of 2023. 

At the same time, economists have been rapidly increasing their 2021 Gross Domestic Product (GDP) forecasts. The majority of them now expect the US economy to grow by 5% in 2021 as lockdowns ease and people return to their normal lives.

However, it’s not that simple. Stronger economic growth could prompt a faster rise in rates, driving up borrowing costs and weighing on risky assets such as stocks and high-yield bonds, limiting economic growth.

It looks like equities are starting to roll over; on Monday the tech-heavy NASDAQ 100 index saw its fifth day of decline. Tech, growth and small-cap stocks are usually hit the hardest by rising rates. 

And since stocks can only go up, as the favorite mantra goes, the Fed needs to step in soon and start doing something to stop the rise in yields. Otherwise, we can really experience a larger correction. 

Another sign of a waning bullish mood could be from the hedge funds’ positioning as they turned short on small caps two weeks ago, then widened their bearish bets a week later. As of Friday, their net short exposure, at 9,000 contracts, is the largest in eight months.

Additionally, it seems that rising yields are not helping the USD as inflation expectations continue to rise. At least something “good” came out of it for foreign investors. 

USD Remains Low Despite Spiking US Yields

Over the previous days and weeks, we’ve seen some severe “spikes” in longer-term US yields, while short-term yields remain depressed near record lows. The yield curve has steepened notably, which has always been a bearish sign for the overall economy and financial markets. 

The US 30-year yield rose back to a 2-handle, above 2%, the highest level since February 2020 making it a new post-pandemic high. The 10-year yield jumped above 1.2%, a level last seen in March of 2020.

Simultaneously, the Federal Reserve (Fed) noted that monetary policy would stay accommodative for a very long time. On February 10, Chair of the Federal Reserve Jerome Powell said the true unemployment rate is actually 10%, in a speech on the labor market. Moreover, he reiterated that rates would stay low.

It’s only a matter of time before the Fed will need to officially announce the yield curve control and start buying large quantities of long-term bonds to suppress the advancing yields. Inflation expectations are rising fast, making bonds less attractive, and a “smarter” investment could just be to dump bonds and buy stocks. 

Meanwhile, the USD remains low against most of its major peers. The USDJPY which tends to be closely correlated to US yields, is the only pair that’s gone higher. 

As long as the EURUSD trades above 1.2050, the medium-term outlook seems bullish, while the GBPUSD pair is approaching the psychological level of 1.40.

One of the biggest underperformers lately have been gold and silver. Gold is stuck in a bearish trend since August highs, while silver tried to move above 30 USD but was smashed lower. 

On the other hand, the clear winners in this inflationary environment are oil and copper, rising without any interruptions. 

Forex Brokers Unprofitability – February 2021

As the year 2020 has come to end, a lot of Forex brokers have updated their traders’ unprofitability numbers as required by the ESMA regulations. Even though these numbers have to be updated by Forex/ CFD brokers on a quarterly basis, not all regulated European brokers do that regularly. However, the vast majority of brokers already refreshed their risk warning, so we can finally check the updates. 

We suppose the percentage displayed by brokers includes the number of all losing accounts divided by the number of all accounts during the last 12 months, since it is only the middle of the first quarter. We have checked 20 companies. The reason why some companies publish losing accounts percentage and some don’t (or stop publishing) is due to companies leaving/entering ESMA jurisdiction.

We can see that the lowest percentage of losers is 50% (TriumphFX), while the maximum is 82.78% (TradeFW). However, it is not actually possible to get a meaningful and believable percentage value due to the distorted data published by brokers reporting a range instead of a single number and by brokers with not enough EU traders.

The list of 20 brokers and unprofitability of their retail traders (sorted in an ascending order):

EBH Forex 51.38%
Valbury Capital 68%
Saxo Bank 70%
Trade 360 70.33%
City index 73%
IG Markets75%
CMC Markets76%
ETX Capital76.42%

Oil Rally Continues, How High Will It Go?

As of Wednesday, West Texas Intermediate (WTI) crude oil has been seeing gains for eight consecutive days, and at the time of writing is trading near 58.60 USD. Oil gained 135% in February alone, making it one of the best-performing commodities. 

Last April, WTI dropped below zero with the subsequent front-month contract trading at around 15 USD. This means oil has seen a staggering 280% gain since May 2021, and it looks like the rally is not over yet. 

Total, a French multinational integrated oil and gas company, and one of the 7 supermajor oil companies, reported a net loss of 7.2 billion USD for 2020, down from a profit of 11.27 billion USD in 2019, suggesting oil demand was incredibly weak last year.

Considering continued global lockdowns, demand could still be very low in the first months of 2021, putting further pressure on oil companies. 

Nevertheless, oil price is moving higher nearly every day. Oil and copper tend to be from the best inflation hedges in the world. When investors expect rising inflation, they buy hard assets, such as commodities. 

Since central banks and governments are flooding the system with money, inflation expectations are spiking higher, and oil will most likely continue to outperform other assets. We would not be surprised to see oil north of 70 USD, despite the global economic depression. That is what happens when uncontrolled money printing becomes a reality. 

Technically speaking, the next major resistance is most likely at 2020 highs in the 65 USD area. If that level is broken to the upside, oil could rise toward 2018 highs near 75 USD. 

Alternatively, the major support now stands in the 52/54 zone, and while oil trades above it, the medium and long-term outlooks look bullish.