Gold managed to turn in a resilient performance nevertheless, with an advance of 1.2% over the week

Gold’s usual drivers took a backseat to generalized risk aversion in global financial markets over the past week, with the yellow metal buffeted to-and-fro by continued gyrations in equity markets in particular. In other words, short-term direction in gold has become more a function of (fickle) sentiment towards risk assets, a group in which gold is apparently now included, and less driven by developments in inflation, the US dollar, US Treasury yields, or for that matter, even oil prices. At least for now, the influence of geopolitical concerns on gold has ebbed, as well. This environment of outsized volatility and widespread uncertainty may well continue until markets come to grips with tighter monetary policies across most of the globe and, in turn, the consequences for growth.

Gold managed to turn in a resilient performance nevertheless, with an advance of 1.2% over the week to Thursday’s close leaving it up 0.7% so far this year (spot ref.: $1,842).

A 0.9% pullback in the US Dollar Index (DXY) over the week was supportive of gold at the margins, likely helping it to rebound after probing below $1,800 on Monday. Gains for the Canadian dollar (USDCAD -1.3% w/w) and sterling (GBPUSD +1.8% w/w) had a separate country but common driver in inflation data that supported market expectations for continued – perhaps even accelerated – rate hikes from the Bank of Canada and Bank of England. The UK on Wednesday reported April headline CPI at 9.0% y/y, the fastest pace of increase on records going back to 1989. Canada followed up reporting April CPI at 6.8% y/y, its fastest pace of increase in consumer prices in 31 years.

The euro made headway against the greenback as well (EURUSD +0.7% w/w) amid increasingly hawkish talk from European Central Bank officials. One was Governing Council member Knot (Netherlands), who in an interview on Dutch TV Tuesday not only said that a 25bp hike in July “seems realistic”, but also added that a 50bp move “must not be excluded either” were inflation in the Eurozone to worsen between now and then. Fellow ECB GC member Villeroy (France) explicitly brought the euro into the inflation equation by saying at a Banque de France conference Monday that “A euro that is too weak would go against our price stability objective.” Villeroy spoke in the context of the euro’s (nominal) effective exchange rate (-2.5% year-to-date), not EURUSD (-6.9%). Of particular note in the account of the ECB’s April 13-14 meeting released on Wednesday were “…the criteria for interest rate hikes were already clearly met”, and “The view that net asset purchases should end sooner rather than later in the third quarter was widely expressed.” Ending those has been the ECB’s precondition for commencing rate hikes.

Safe-haven demand for the yen and Swiss franc amid equity volatility resulted in weekly gains versus the dollar of 1.7% and 2.0%, respectively. Ex-DXY, AUDUSD rose 1.6% w/w. Cryptocurrencies steadied after last week’s tumult, e.g., Bitcoin gained 4.2% w/w.

Like equities, bond yields also yo-yoed throughout the week as expectations for tighter monetary policies and hyper-volatility took turns buffeting markets – in both directions.

US Treasury yields jumped when Federal Reserve Chair Powell remarked at a Wall Street Journal event on Tuesday that “What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that”. But while that sent the yield on the nominal 10y back up to around 3.0%, those heights didn’t last as equities also took fright and investors sought Treasuries as a port of sorts in the ongoing storm in markets. The net result for nominal Treasury yields over the week to Thursday’s close was the 2y rising 7bp to 2.63% and the 5y edging up 3bp to 2.84%, but the 10y unchanged at 2.84%. Real Treasury yields (TIPS) were similarly mixed on the week, with the 5y easing 5bp to -0.13% and 10y unchanged at 0.25%.

The recent drop in market-priced breakeven inflation (BEI) rates – the difference between nominal and real Treasury yields – has arguably hindered upside in gold. Since peaking at 3.59% (March 25), the 5y BEI has slipped to 2.97%. The 10y BEI has dropped to 2.59% from 3.02% (April 21). Lower BEIs such as these usually stymie gold. ?????

According to the CME Fed Watch Tool, the probability of the FOMC hiking its Fed funds target range by 50bp at its June 14-15 policy meeting was 94.9% at Thursday’s close.

Growth worries and hyper-volatility in equities – despite ongoing inflation concerns – helped to thwart further upside in ex-US 10y government bond yields. Germany’s 10y yield was +10bp, the UK’s +9bp, Japan’s -1bp and Canada’s flat (at 2.9%) on the week.

India’s BSE Sensex and Nifty 50 navigated their way through the volatility rather well, ending with weekly gains of 2.6% and 2.9%, respectively. Wholesale price data for April reported on Tuesday underscored inflation risks, however, with the 15.08% y/y rise in the index (cons.: 14.5% y/y), suggesting pipeline price pressures that could keep CPI above the upper parameter of the RBI’s 4.0% +/- 2.0% target range (April CPI 7.79% y/y), if not drive it higher still. Given upside inflation risks, analysts expect the RBI to hike policy rates again at its June meeting. Alleged FX intervention by the RBI, per market reports, stabilized the rupee, with USDINR little changed on the week. India’s 10y bond yield, last indicated around 7.35%, was up about 3bp versus last Friday.

China equities also fared much better than their international counterparts, that in large part owing to optimism for a return to normalcy as Shanghai begins rolling back Covid-related restrictions on activity. Hopes that the government and central bank will make good on pledges for economic assistance likely factored, as well. Local banks on Friday reduced their 5y loan prime rate (benchmark rate for mortgages) by 15bp to 4.45%. Mainland indexes gained roughly 2.0% over the week and USDCNY retreated 1.5%.?

Expectations for a relaxation of lockdowns in China and, consequently, a revival in demand buoyed oil prices. Brent and WTI crude advanced roughly 5.0% over the week.