Week In Review: Uncertainty

US equity indexes were mixed on the week: S&P500 +0.45%, NASDAQ -0.18%, and DJIA +0.79%.  Sudden geopolitical risk weighed on US equity indexes toward the week's end and rallied bonds a bit. Market participants focused on the uncertainty stemming from the Hamas attack on Israel and further potential ramifications in terms of a prolonged and/or wider conflict.  The US 10 year yield, which stood at 4.800% last Friday retreated to 4.620% this Friday - lower but still elevated. Volatility increased - the VIX Index rose breaking topside 20 at one point this week and now sits at 19.3. The BoA MOVE Index was elevated at 126, indicating there is bond market volatility.  The US economy is holding up despite facing higher US yields, still elevated inflation, and global geopolitical risk on a new front. 

US Economic Data and Fed Pricing:

US CPI for September rose 0.4% m/m at the headline to come in at 3.7% y/y - both readings were higher than expected. Energy prices remain volatile indicating that the journey back to the Fed's 2% inflation target has challenges. Core CPI came in on expectations at 0.3% m/m and 4.1% y/y - remaining elevated. 

September FOMC Minutes indicated that members agreed that the policy rate should remain restrictive for some time and noted that risks to "the achievement of the committee's goals had become more two-sided." The next FOMC meeting announcement is November 1. The surge in the US 10 year yield since the September meeting has led market participants to believe that it is possible that the terminal fed funds rate has been reached.  Some Fed-speak this week has indicated that that could be the case. However, the September FOMC minutes noted that a majority of the committee members thought one more rate hike "would likely be appropriate."

Fed fund futures are pricing the peak in the fed funds rate as December at 5.43%. There are approximately 80bps of rate cuts priced in for 2024 - somewhat more than what the Fed has forecasted. 

Chart: US Core CPI Y/Y%, Fed Funds Effective Rate, and US Recessions Shaded.In previous periods, when US core CPI turned lower, the Fed was cutting its policy rate and the US economy went into recession. This time, so far, has been an anomaly.

Precious Metals:

Gold and silver prices gained strongly this week as investors sought safe-haven assets in response to sudden geopolitical risk. This surge in prices is a reminder to maintain a portfolio allocation to precious metals including the diamond commodity for diversification and safe haven purposes as market risks and uncertainty stem from both the "higher-for-longer" Fed messaging and now geopolitical risk on a new front. Recently, the World Gold Council's Joe Cavatoni joined us on our podcast Clarity. From minutes 13:00 - 20:30 he discusses gold's diversification properties in a portfolio, market risk factors ahead and why they need to be managed, and the increasing frequency of geopolitical risk. Listen here.

DIAMINDX fell 0.5% on the week at USD 4,220 . To review, the diamond industry is in the midst of an inventory overhang at the manufacturing and retail levels, which is weighing on natural diamond prices.  Currently, the natural diamond industry is addressing the inventory overhang pressuring diamond prices (see below).

The medium to longer term outlook remains positive for natural diamonds:  the US economy (diamond jewelry's largest market) continues to avoid recession, and Signet has forecasted bridal jewelry sales to pick up in 2024.  Longer-term, natural diamond supply is diminishing.  De Beers notes in its 2023 Diamond Insight Report that several important mines are expected to cease production by 2030, taking approximately 15 per cent of global volumes produced in 2022 off line - a notable supply drop. 

Rough Diamond Sales and Measures to Curtail Inventory: 

DeBeers announced Cycle 8 rough diamond sales. Sales came in at USD 200 million -  a 61% drop year-on-year, and 46% lower from August, when sales came in at USD 370 million. Importantly, these sales figures reflect the fact that DeBeers reduced its rough diamond availability. Measures DeBeers is taking to address the midstream inventory overhang were summed up by CEO Al Cook:

“De Beers reduced its rough diamond availability and made sales of $200m as the industry’s midstream rebalances certain areas of stock accumulation. De Beers will continue to support its Sightholders to help re-establish equilibrium between wholesale supply and demand by providing full flexibility for rough diamond allocations in Sights 9 and 10 of 2023, suspending De Beers Group online rough diamond auctions for the remainder of 2023, and investing an additional $20m in natural diamond marketing to help drive consumer demand during the holiday season," said Cook. The USD 20 million marketing spend is directed at bringing back the iconic "A Diamond is Forever" campaign. Independent diamond analyst Avi Krawitz discusses this campaign in Episode Eight of our podcast Clarity at 35:30. Link here to listen. 

Meanwhile, Russian miner Alrosa announced previously that it canceled is September and October rough diamond sales in order to attempt to stabilize prices. DeBeers and Alrosa are the world's two largest producers of rough diamonds.

Chart: DeBeers Rough Diamond Sales (USD millions)

Gold and Silver

Gold rose a strong 5.0% on the week to USD 1,924. This is the largest weekly gain since November 11, 2022. Gold broke topside through USD 1,900 resistance on Friday on the news that Israel gave residents in northern Gaza 24 hours to evacuate as escalations rise in what defense analysts say could be in preparation for a potential ground war, further unsettling investors.

Prior to market open on Monday, gold had been headed lower to key support at USD 1,800 on rising US yields. Middle East tensions put in a safe-haven bid for gold, likely causing investors with newly made shorts to rapidly cover. So, it was quite a quick turn-around for gold this week.

Silver gained 5.1% on the week to USD 22.70, breaking above resistance at USD 22.00. Similar to gold, most of the move higher came on Friday on the news mentioned above.

Chart: Gold rises in response to jump in the VIX

USD and G10 FX - safe haven status exerts itself

USD (DXY Index) was up 0.6% on the week to 106.70 at the time of writing both on elevated US bond yields and safe-haven status.  The DXY Index remains above 106.00 resistance.  The USD gained against all G10 currencies with the exception of CHF - another safe haven currency. CHF gained approximately 1.0% vs USD on the week. CHF also gained against every G10 currency this week. USDCHF is sitting at 0.9006 and EURCHF at 0.9446 - a level last reached in September 2022. 

EURUSD fell 0.8% on the week to 1.0509, sitting right above 1.0500 support.  Earlier in the month, EURUSD tested that key support level closing the New York session at 1.0467 on October 3rd.  Another, more decisive, break of 1.0500 support could see the single currency back to parity - a level it last reached in November 2022. EUR may continue to struggle vs USD as market participants expect that the ECB has reached the end of its rate hiking cycle whereas the Fed may have an additional rate hike to go. In addition, higher energy prices weigh on the Eurozone's growth outlook. 

JPY was down only 0.1% VS USD on the week, but remained near the 150.00 level - where MoF intervened last fall. On Friday, Japan's Finance Minister Suzuki told reporters that he had told his G20 counterparts that excessive moves in the currency market were undesirable and "that there are cases that require appropriate response." (source: Bloomberg News). As a result, market participants remain on intervention watch. 

Meanwhile, the Israeli Shekel ("ILS") is under pressure, having given up over 3.0% vs USD on the week. USDILS has risen to 3.9771. Previously, ILS had been weakening vs USD since judicial reforms were announced in late January. ILS is currently down approximately 12% year-to-date vs USD. 

Chart: DXY Index (USD), US 10 year yield, and USDCHF (inverted, rs). 

Ahead:

US retail sales for September are released on Tuesday.  There is a flurry of Fed-speak next week on the US economic outlook, which will likely move US bond yields.