The slump in gold has been brought about by a large sell order that has squeezed the markets. Five tonnes, a fifth of daily average volume have been unwound in the SGE. The SPDR Gold Shares (ARCA:GLD) holdings fell by 1.5% last Friday. The lack of implied volatility in equity markets, coupled with a stronger expectations for monetary tightening in the US are showing gold up for its distinct lack of yield and the cost of holding.
Given the volatility in the Shanghai Composite lately and the 6 month ban on liquidating any stock holdings, there is also likely a degree of gold position unwinding in order to negate investment losses.
Needless to say, the metals and mining complex in the FTSE 100 is under pressure as a result with Randgold Resources (LONDON:RRS), Fresnillo (LONDON:FRES) and Antofagasta (LONDON:ANTO) losing an average 2% in early trade. Rio Tinto (LONDON:RIO) has bucked the trend on a large share buyback and news that it is to increase its raw material sourcing in China.
The FTSE is still up 0.21% aided by the defensive sector with AztraZeneca up 0.82%. Oil companies are also in favour with Royal Dutch Shell (LONDON:RDSa) adding 1% as cost savings from BG Group (LONDON:BG) takeover are expected to be larger than previously anticipated.
The index still looks marginally toppy at current levels and the divergences in short term momentum oscillators could indicate that we are set for a sideways to a downside bias in the near term.
Rolls Royce Holdings plc (OTC:RYCEY) shares are having a better day but despite the large contract wins, a large gap will still need to be filled to 852p if we are to negate the recent stock turmoil post the recent profit warning. Rolls-Royce has been selected by International Air Finance Corporation (IAFC) to provide Trent 700 engines, worth $930m, for 20 Airbus A330 Regional aircraft. Finally off its lows for the year, the company share price has been under significant pressure. The majority of brokers are bearish, average target price is 773p. Today’s development may change some views.
News last week that staff were in for a bumper bonus have been quashed today by Sports Direct (LONDON:SPD). The company is to lower bonus targets and downgrade the profit target for the next financial year. The stock is benefiting from a broker upgrade from BNP – up nearly 2%.
A quiet day on the macro calendar today, Jack Lew is due to speak at the Better Markets event in Washington DC on the importance of financial reform.
We are calling the Dow higher by 20 points to 18,106.
Australian dollar extended losses to a fresh six year level of 0.7328, the depreciation toward the 72 – 70c mid-term target is happening in a faster pace than expected as the market absorbs without pain the additional sell-off.
First, the slowdown in Chinese economy, Australia’s major trading partner, and the instability in Chinese equity markets are weighing on commodity prices and the Aussie. The iron ore futures trade at $375 after having hit the record low of $350. The volumes hit five month lows. August’ 15 contracts are trading $80 cheaper than a month ago; June’16 contracts are $60 lower. The weak signal of recovery in the Chinese market warns that further fall in commodity prices cannot be ruled out. The Australian miners will certainly suffer as the structural shift from mining to construction transpires as being much more complicated in practice. The RBA is ready to keep the rates at the current historical lows and may even be tempted to drag them lower. If only the cheap credit needs to flow if the construction industry is to take off. The overheating house prices is the price to pay and will certainly not pull the RBA back from keeping a sharp dovish stance and a clear forward guidance on its loose monetary policy.
Secondly, the US Fed is moving toward its first rate hike, even if the US economy could only afford baby steps in this normalisation, it seems inevitable that the Fed want to appear dynamic and ultimately pioneers in the move to monetary tightening. The stronger dollar scenario should pull the Aussie toward our 72-70c target. All we need is a degree of decisiveness from the Fed Chair Yellen.
Third, the commodity sensitive countries are moving back to unorthodox policies. The Reserve Bank of New Zealand, the bravest among the high-beta markets, has stepped back by 25 basis points in June meeting and is expected to cut its official cash rate by another 25 basis points to 3% on Wednesday. Last week, the Bank of Canada lowered its benchmark rate by 25 basis point. If all the gang moves south, there is no reason for the RBA to stay aside.
The RBA minutes are due tomorrow and the second quarter inflation report is due on Wednesday. As the growth-supportive RBA hints at a fairly dovish policy statement, the anticipation of a jump in consumer prices in the second quarter, from 1.3% to 1.7% year-on-year, could be the catalyst for a short-term correction given that the Australian dollar spent the most of July at the edge of the oversold market. In three-to-six months term however, the bias remains solidly negative.