Gold retreats from highs, as key questions need answering

Risk sentiment is up and down this week. After reaching fresh record highs on Wednesday, global stocks fell on Thursday and Asian markets are broadly lower on Friday. The dollar is also giving back gains and is the third worst currency in the G10 FX space, falling for the first time this week. Even gold’s scorching run has come to an end and it is back below $4000 an ounce, in contrast, silver is bucking this trend and is back at the highs of the session after an earlier sell off.

Dip buying?

The question now is, will traders see this as a chance to buy the dip? UK and European futures are little changed so far this morning, and US futures are pointing to a higher open, suggesting that the selloff could be temporary. Aside from the Nikkei, gains for global stock markets have been meagre so far this week, suggesting that the market is readying itself for a pause.

US economic data hope before FOMC

A pause in the risk rally is to be expected, as investors wait for answers to some key questions. 1 who will be the new French Prime Minister, the announcement should come later today? How did the new Japanese PM get on in coalition talks? And, lastly, how is the US economy doing? The BLS reported that some economic data, including CPI, could be released at the end of this month, which means that the Fed might have a chance of viewing the CPI data before their meeting on 28/29^th October.

Q3 earnings season gets off to a flying start

Interestingly, while fears mount about the level of tech stock valuations, the top performers on the S&P 500 on Thursday included Delta Airlines and Pepsi, who both reported earnings earlier in the day. Their stock prices both rose by more than 4% yesterday, which suggests that the stock market will react favorably to the Q3 earnings season. This sets the stage for next week, when we start to get key releases from the US banking sector.

Insurance woes

The insurance sector in Europe and the US could be in focus today, as the fallout from First Brand Group’s bankruptcy continues. Allianz, Coface and AIG all have written policies for First Brand’s partners and investors. This leaves the world’s largest insurers exposed to the car parts maker’s supply chain. We need to find out how exposed these companies are to First Brand’s supply chain, and that will determine how big the sell-off in their stock prices will be, however, Jeffries, the US bank, has seen its share price sink by more than 20% this month after it announced a $715mn exposure to the group. We do not think that First Brands bankruptcy will lead to a domino effect, with other companies falling, however, companies with exposure could take a knock later today.

French PM could make or break the bond market

Ahead today, all eyes will be on the French bond market, can yields continue to fall as we hear news of who will be the new PM, or will this be a buy the rumour, sell the fact day? Can gold reclaim the $4,000 level? We think that gold could come under pressure alongside any sell-off in the tech trade, as gold has been partly used as a hedge against lofty stock market valuations, so, as stock prices fall, the need for this hedge is reduced.

In the UK, there are signs that the labour market is stabilizing, with employers scaling back hiring at their softest pace in a year, and also signs that wage growth could be moderating, which is good news for the inflation outlook and the Bank of England.

Ahead today, the focus is likely to be on the US University of Michigan sentiment index that will be released later this afternoon, especially the inflation expectations index.