Markets wary of the war

Last week the yellow metal was all green over escalating tensions of the US China trade war. Early in the week, spot gold prices rose 1.1%, registering their best one-day percentage gain in nearly three months after China announced that it would impose retaliatory tariffs on a range of U.S. goods.

After Witnessing its biggest one day percentage loss in a month on Thursday, gold managed to stabilise at around $1286.27 an ounce.

Spot gold fell 0.8% on Thursday, its biggest one-day percentage decline in a month after risk sentiment improved.

Gold welcomed a series of key data, important numbers and crucial news over the week.

  • The equities and dollar have boosted due to strong corporate earnings created pressure on gold as equities and dollar strengthened. A firm dollar, placed gold in the red marks.
  • Furthermore, U.S. stock indexes extended gains on upbeat earnings as well as robust economic data that underlined the strength of the domestic economy. Meanwhile, the dollar index hit a two-week high against a basket of currencies.
  • The U.S. housing data showed homebuilding increased more than expected in April, while unemployment benefits fell more than expected last week, pointing to sustained labour market strength that should underpin the economy.
  • The pullback in risk aversion lifted treasury yields. The rise in yields underpinned the U.S. dollar.

Stronger dollar makes gold more expensive for holders of non-U.S. currency.

Meanwhile, Thursday’s fall in gold prices has worsened the technical picture for the metal. Gold is on its third negative trading day as it seesaws near $1276.50 ahead of the European open on Monday. Bullion traders were happy initially as reports concerning the geopolitical tensions between the US and Iran, coupled with the US-China trade pessimism was released.

Investors couldn’t take much leverage of the gains as markets alter shifted focus on Australia’s surprise election results and optimism surrounding the trade relationship between the US, Canada, and Mexico.

Continuing on last week’s sentiments, , Gold fell to a more than two-week low on Monday as investors preferred the safety of the dollar, with the currency underpinned by robust economic reports out of the United States, even as geopolitical risks and trade tensions persist.

Spot gold was steady at $1,277.86 an ounce during Monday’s trading session, having touched $1,273.22 for its lowest since May 3.

Some believe that the bullish trends have started hovering around gold. People have started diversifying their finance into equities and dollars. They are currently proving to be attractive modes of investments.

A strengthening dollar is creating pressure on gold, the dollar held strong over the following news-

  • After strong U.S. housing data and a report pointing to lower unemployment helped the U.S. currency to mark its biggest weekly rise last week since early March.
  • Renewed U.S.-China trade fears have also helped the dollar to mimic its trajectory from last year, when it was preferred to gold as a perceived safe-haven asset.
  • Investment demand for gold failed to pick up. Even with geopolitical tensions, no safe-haven demand

Gold will be an attractive safe-haven asset as rising trade tensions weaken the U.S. economy and drag down the U.S. dollar, according to a recent report from Morgan Stanley. U.S. President Donald Trump has until May 18 to decide whether he will impose a 25% tariff on car imports from the European Union. The deadline comes 90 days after the U.S. Commerce Department said in a study that auto imports pose a threat to American national security.

Apart from the current trade war there are some other factors that attract attention-

  • Risk airing from the European Union economy
  • Voting in the next crop of MEP’s
  • OECD will probably downgrade its global economic outlook.
  • The Fed might unnerve investors further by reiterating that hopes for a lifeline from monetary policy are almost certainly misplaced in the near term
  • A speech from Chair Powell and minutes from May’s FOMC meeting will probably hammer home officials’ preference for a “wait-and-see” approach

Amongst all this, the trade war definitely acts as a wild card. Prices have proven to be responsive to the running commentary on negotiations from media outlets linked to the government in Beijing as well as US President Donald Trump’s Twitter account. Nonetheless any statement released from any side will run volatility waves into the market.

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