Gold and Yen Scorched by Rising Yields, Nvidia Saves Stocks

• Dollar continues its grind higher, empowered by Fed bets and risk aversion
• Gold gets burned by rising yields, central bank divergence hits Japanese yen
• Stocks close lower, but Nvidia (NASDAQ:NVDA) earnings turn markets around after-hours

Market participants are becoming more confident the Fed might raise rates one final time this summer and that rate cuts won’t come into play anytime soon. Some remarks by Fed Board Governor Waller and the minutes of the latest FOMC meeting reinforced this notion yesterday, with both stressing the lack of meaningful progress on inflation.

There’s a growing rift among Fed officials on whether further tightening is required. Some prefer to pause completely and monitor the lagged impact of previous hikes, others want to keep raising rates, while most are still on the fence and want to examine incoming data. The one thing that unifies everyone is that even discussing rate cuts is premature.

Since there is so much emphasis on economic releases and the latest round of business surveys was solid, markets now assign a 30% probability for the Fed to hike in June, which increases to 65% for July. Meanwhile, only a single rate cut remains baked into the cake this year.

The reassessment of the Fed’s rate trajectory has breathed life back into the US dollar, with some safe-haven flows and emerging signs that the US economy is outperforming Europe also helping to resurrect the world’s reserve currency. If next week’s jobs report highlights the resilience of the US labor market or equity markets remain volatile, there’s scope for the dollar to run further.

Yen and gold hammered by rising yields

While rising Fed bets are a blessing for the dollar, they are a curse for the yen, which continues to be tormented by the Bank of Japan’s reluctance to shift into tightening gear. Investors have dialed down wagers that the BoJ will tighten, although the strength in the Japanese data pulse suggests the case is not closed, putting extra weight on the Tokyo inflation stats tomorrow.

After nearly reaching a record high earlier this month, gold has been struggling to attract buyers, trampled under the hooves of rising real yields and a fired-up US dollar. The downward correction might persist for now as these detrimental forces remain in effect, with any violation of the $1,950 region turning the spotlight towards $1,915.

In the big picture though, the latest trend of sovereign gold purchases by nations with cold relations with the West is a game-changer for bullion dynamics as it almost establishes a floor under prices. Similarly, any whiff of a recession or Fed rate cuts would likely reawaken the metal, helping to frame the latest retreat as a correction within a broader uptrend.

Nvidia bails out the stock market

It was another stormy session on Wall Street, with the major stock market indices losing some ground as the Fed was repriced and the negative link between yields and equities reestablished itself.

The weakness did not last, though. Nvidia reported earnings after the bell that far surpassed analyst estimates while it also boosted its revenue forecasts for the next quarter, sending its stock price into overdrive. Nvidia shares soared 25% in after-hours trading to reach new record highs, single-handedly erasing all of the Nasdaq’s losses for this week.

In other words, Nvidia saved the stock market this time, although the fact that just a handful of companies are now carrying the indices on their shoulders is becoming worrisome, compounding valuation concerns. The ‘reality check’ might be a story for this summer, as liquidity dries up after a debt ceiling deal is finally reached.

Speaking of the debt ceiling impasse, credit agencies have started to tighten the screws on lawmakers, with Fitch placing the US on ‘rating watch’ - a warning that a downgrade is coming if no deal is reached in time.