Market mood improves on recovery hopes, gold eyes $1800

Markets in Asia were mostly higher on Thursday, tracking the positive overnight cues from Wall Street as investors evaluated the U.S inflation data and latest minutes from the September Fed meeting. The improving sentiment across Asian markets was also helped by optimism over the global economic recovery and prospects of higher interest rates to tame inflation. The greenback had it rough while gold enjoyed its best session in seven months, gaining almost 2% helped by falling Treasury yields. European markets have opened higher this morning with US futures also in the green.

Dollar humbled by inflation data

The dollar weakened across the board yesterday in a ‘buy the rumour, sell the fact’ reaction following the hot U.S inflation report. Consumer prices in the United States increased 5.4% year- over-year in September after advancing 5.3% in August and 0.4% versus expectations of 0.3% on the month. The decline in Treasury yields dragged the greenback lower with the Dollar Index (DXY) tumbling towards the 94.00 level. While the firm inflation data reinforced taper expectations, it has also fuelled speculation around the Federal Reserve raising interest rates sooner than expected. This has been reflected in Fed Funds futures which have pulled forward the first interest rate hike from late 2022 to almost a full 25 basis point hike by September. The prospects of higher interest rates down the line could limit the dollar’s losses.

Fed officials see tapering in Q4

According to the minutes from September’s policy meeting, Federal Reserve officials agreed they should start tapering in mid-November or mid-December. In regard to inflation, most officials at the meeting expressed concerns over the associated risks due to supply disruptions and labour shortages. Overall, the minutes were hawkish and confirmed that tapering could start as early as next month.

Oil bulls remain in the building

Oil is continuing its upward trend, driven by the global energy crunch and supply restraints from the world’s top producers. The commodity found itself under pressure on Wednesday thanks to OPEC’s monthly report and the American Petroleum Institute reporting a larger-than-expected increase in stockpiles. OPEC cut its global demand outlook for 2021 from 5.96 million barrels per day (bpd) to 5.82 million bpd due to the Delta variant outbreaks in the summer. However, it left its forecast for 2022 unchanged at 4.15 million bpd.

All eyes will be on the Energy Information Agency (EIA) U.S crude oil inventory report and the International Energy Agency (IEA) monthly oil market report today. If they illustrate a similar outlook to OPEC, where the demand is projected to decline in 2021, this could impact upside gains.

Both WTI and Brent crude have appreciated over 60% since the start of 2021. With Brent trading around $83.88 as of writing, some analysts are targeting the psychological $100 level in 2021 which has not been seen since 2014.

Commodity spotlight - Gold

Gold prices exploded higher on Wednesday afternoon, gaining almost 2% as the dollar and Treasury yields tumbled following the hot US inflation report. With gold highly sensitive to taper expectations, real yields and the dollar’s direction, the next few weeks could be wild for the precious metal.

In regard to the technical picture, the widely watched 200-day moving average is just below $1800. But a strong move above that level could open the doors towards the summer highs at $1834. Should $1800 prove to be reliable resistance, a decline back towards $1777 could be on the cards.