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Morning bid: Fed fears overwhelm AI theme, gold recoils

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A look at the day ahead in U.S. and global markets from Mike Dolan

And then there was one.

In an extraordinary turnabout in just five months, financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year – compared to the six built into futures prices at the start of 2024.

The good news is that’s largely down to the sheer strength of the ongoing U.S. expansion – the bad news is that very strength makes it harder for the Fed to see inflation hitting its target and keeps it hesitating on a first rate cut.

Thursday’s reversal of fortunes on Wall St reflected all that clearly, with surprisingly strong business and labor market updates seeding the worst day of the month for despite Nvidia (NASDAQ:)’s near 10% surge on another blowout earnings report infused by the artificial intelligence boom.

Even though the broader tech sector ended the day higher, the 10 other major stock sectors were left in the red. And the equal-weighted S&P500 lost 1.4%.

Fed fears 1 – AI 0.

With just 35 basis points of Fed easing now priced for the year, two-year Treasury yields climbed back to within 4bps of the 5% threshold. The dollar jumped back to its best level since mid May and that in turn triggered a reversal in lofty gold prices – clocking their worst day in month and worst week of the year.

The bounced back more than a point from pre-pandemic lows.

A so-called “bear-flattening” of the yield curve saw the inversion of the 2-10 year yield gap deepen to its most negative this year – with yields at both tenures rising but short rates up by more.

The yield curve has been inverted for almost two years solid now and its reliability as a harbinger of recession has been shot to bits – underscoring the peculiarity of this particular cycle and how the Fed may be struggling to cool it down.

Ahead of the U.S. Memorial Day holiday on Monday, all the major price indicators have given back a bit of Thursday’s moves – with up 0.2% ahead of the bell and both Treasury yields and the dollar off a touch.

But the Fed rate jitters rippled across the world overnight, with bourses in Tokyo, Seoul, Hong Kong and Shanghai losing more than 1% on Friday.

China’s ongoing military exercises around Taiwan have not helped investor confidence.

Europe’s two-day loss continued – with regional interest rate and political concerns of its own.

Even though the European Central Bank is still nailed on to deliver its first rate cut next month, unexpected strength in May business readings and a surprising acceleration of negotiated wage settlements in the first quarter have dragged market pricing for full-year ECB easing back below 60bp.

The rethink of the Bank of England’s trajectory this week has been even more dramatic as sticky UK inflation readings combined with news of a snap election for July 4.

Although Friday’s data showed UK retail sales plunging far more than forecast last month, money markets have wiped out chances of a BoE cut next month and now only see a 1-in-3 chance of a move in August.

Sterling, whose broader trade-weighted index is back up at 8-year highs to pre-Brexit referendum levels, recaptured some of Thursday’s losses against the dollar.

Elsewhere, traders monitored the G7 finance meeting in Italy and a Friday speech from Fed governor Chris Waller in Iceland.

In company news, a 7.55% tumble in Boeing (NYSE:) on Thursday after the U.S. planemaker forecast negative free cash flow in 2024 accounted for over 90 points to the downside for the blue-chip .

Ticketmaster-owner Live Nation slumped almost 8% after the U.S. Justice Department along with a group of 30 states and the District of Columbia Thursday sued to break up the concert promoter.

In Europe on Friday, shares of Renault (EPA:) rose 4% after the French carmaker announced a share buyback plan. And Britain’s National Grid (LON:) regained nearly all of Thursday’s 10% plunge on plans to raise about 7 billion pounds ($8.9 billion) in a rights issue.

Abrdn shares slipped after the UK fund manager’s CEO Stephen Bird stepped down.

Key diary items that may provide direction to U.S. markets later on Friday:

* U.S. April durable goods orders, University of Michigan’s final May household survey reading

* G7 finance ministers and central bank Governors meet in Stresa, Italy

© Reuters. AI (Artificial Intelligence) letters and robot hand are placed on computer motherboard in this illustration taken, June 23, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

* Federal Reserve Board Governor Christopher Waller speaks

* U.S. corporate earnings: Workday (NASDAQ:)

(By Mike Dolan, editing by Nick Macfie mike.dolan@thomsonreuters.com)

Commodities

BofA: Gold could hit $3,000/oz over the next 12-18 months

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Bank of America analysts predict a potential surge in gold prices, with estimates reaching $3,000 per ounce within the next 12-18 months. However, they acknowledge current market flows don’t necessarily support this price point.

BofA explains that reaching $3,000 hinges on increased non-commercial demand. They believe a Federal Reserve rate cut could trigger this, leading to inflows into physically backed gold ETFs and higher trading volumes.

Central bank purchases are another key factor. “Ongoing central bank purchases are also important, and a push to reduce the share of USD in foreign exchange portfolios will likely prompt more central bank gold buying,” BofA says.

This shift is driven by gold’s status as a long-term value store, hedge against inflation, and effective portfolio diversifier.

BofA’s model considers various factors, including mine output, recycled gold, and jewelry demand. However, to estimate a balanced market price, they also need to factor in investment demand. Currently, non-commercial purchases support an average price of $2,200 per ounce year-to-date. A significant increase could push prices towards $3,000.

The report highlights a recent World Gold Council survey indicating central banks’ intention to purchase more gold. This aligns with the growing concerns around US Treasury market fragility, potentially prompting further diversification into gold by both central banks and private investors.

While a Treasury market breakdown isn’t BofA’s base case, they acknowledge it as a potential risk. “Under this scenario, gold may fall initially on broad liquidations but should then gain,” they conclude.

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Commodities

Oil edges higher as demand expectations offset dollar strength

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By Paul Carsten

LONDON (Reuters) -Oil prices firmed slightly on Monday as traders weighed support from expected summer demand and geopolitical tensions against a stronger dollar.

futures were up 22 cents, or 0.3%, at $85.46 a barrel by 1053 GMT. U.S. West Texas Intermediate crude futures were up 19 cents, or 0.2%, at $80.92. Both benchmarks gained about 3% last week for their second consecutive weekly gains.

“The chief underlying reason behind the price strength … is the growing confidence that global oil inventories will inevitably plunge during the summer in the northern hemisphere,” said Tamas Varga of oil broker PVM, referring to seasonal demand for oil products.

Geopolitical risks in the Middle East and a ramp-up in Ukrainian drone attacks on Russian refineries are also underpinning oil prices.

EU countries on Monday agreed a new package of sanctions against Russia over its war in Ukraine, including a ban on reloading Russian liquefied (LNG) in the EU for further shipment to third countries.

However, a strengthening U.S. currency has made dollar-denominated commodities less attractive for holders of other currencies.

“The U.S. dollar … appears to have broken higher following better U.S. PMI data on Friday night and political concerns ahead of the French election,” said IG analyst Tony Sycamore.

The , measuring performance against six major currencies, climbed on Friday and was up slightly on Monday after data showed U.S. business activity at a 26-month high in June.

© Reuters. FILE PHOTO: A view of the Phillips 66 Company's Los Angeles Refinery (foreground), which processes domestic & imported crude oil into gasoline, aviation and diesel fuels, and storage tanks for refined petroleum products at the Kinder Morgan Carson Terminal (background), at sunset in Carson, California, U.S., March 11, 2022. Picture taken March 11, 2022. REUTERS/Bing Guan/File Photo

In Ecuador, state oil company Petroecuador has declared force majeure on deliveries of Napo heavy crude for export after the shutdown of a key pipeline and oil wells owing to heavy rain, sources said on Friday.

In the United States, the number of operating oil rigs fell by three to 485 last week, the lowest since January 2022, Baker Hughes said in a report on Friday.

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Commodities

Gold prices creep higher; strong dollar, inflation jitters weigh

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Investing.com– Gold prices rose slightly in Asian trade on Monday but remained within a tight trading range amid pressure from a stronger dollar, and as traders positioned for key U.S. inflation data this week. 

The yellow metal has hovered largely around the low $2,300 an ounce level for about two weeks, as uncertainty over U.S. interest rates kept traders averse to the yellow metal. 

rose 0.2% to $2,325.52 an ounce, while expiring in August rose 0.3% to $2,337.85 an ounce by 00:04 ET (04:04 GMT). 

Gold pressured by strong dollar, PCE data awaited 

Gold prices were pressured chiefly by strength in the , as the greenback hovered around its strongest levels since early-May. 

Strength in the dollar came as traders priced out expectations of interest rate cuts by the Federal Reserve, especially after strong purchasing managers index data on Friday.

The reading pushed up fears that strength in the U.S. economy will give the Fed more headroom to keep rates high for longer.

Focus now turns largely to upcoming data, due on Friday. The reading is the Fed’s preferred inflation gauge, and is likely to factor into expectations for interest rate cuts. 

The PCE data is expected to show some cooling in inflation, but is expected to remain well above the Fed’s 2% annual target. 

The prospect of high for long interest rates bodes poorly for precious metals, given that it increases the opportunity cost of investing in non-yielding assets. 

Other precious metals retreated on Monday after remaining largely rangebound in recent weeks. fell 0.3% to $1,005.10 an ounce, while fell 0.2% to $29.895 an ounce.

Copper prices muted amid dollar strength, China jitters 

Strength in the dollar also weighed on industrial metal prices, with copper also coming under pressure from fears of  a trade war between China and the European Union.

Benchmark on the London Metal Exchange fell 0.1% to $9,677.50 a tonne, while one-month steadied at $4.4205 a pound.

Sentiment towards China, the world’s biggest copper importer, was battered after the EU imposed tariffs on Chinese imports of electric vehicles. The move drew ire from Beijing, with Chinese officials raising the possibility of retaliatory tariffs and a potential trade war between the two economic giants.

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