Silver Outperforms, Gold Flat as Safe-Haven Demand Rises (07 - 11 October)

Next week, we will face producer and consumer inflation data in the U.S. Additionally, we will review the minutes from the last FOMC meeting to gather insights into the Fed's interest rate cut policy. 

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Gold and Silver

This week, silver recorded a positive close, while gold finished flat to slightly negative, despite the rise in the dollar index. Escalating tensions in the Middle East have enhanced the appeal of these safe haven assets. Iran's ballistic missile attack on Israel and Biden's reluctance to explicitly condemn Israel's actions against Iran have heightened geopolitical risks and uncertainties.

The Dollar Index

The dollar index concluded the past week with a significant rally, influenced by both geopolitical and economic developments, testing its highest levels in five weeks. In the Middle East, tensions between Israel and Iran escalated throughout the week, particularly following Iran's ballistic missile attack on Israel and expectations of an Israeli retaliation, which heightened geopolitical risks and strengthened the dollar as a safe haven. In the U.S., election uncertainties increased the number of investors seeking to hold dollars, positively contributing to the dollar index. Additionally, according to ISM data, the services PMI showed the fastest growth in a year, excited by positive indicators in business activity, new orders, and inventories. Furthermore, the ADP, the NFP, and JOLTS reports exceeded expectations, indicating that the Federal Reserve does not need to rush into rate cuts, aligning with Fed Chair Powell’s statements. Despite these positive developments, ISM data also indicated a contraction in the manufacturing sector for the sixth consecutive month. While there were increases in new orders and production compared to August figures, they remained in contraction territory, signaling a decrease in demand. Additionally, the price index entered contraction territory for the first time this year. With such developments, market expectations for a rate cut in November shifted by 23% compared to the previous week, with a 67% probability of a 25 basis point cut now being priced in. This contributed to the dollar index closing the week approximately 1.5% higher.

Forex Market

Following Germany's CPI dropping to its lowest level since February 2021, expectations for interest rate cuts have strengthened, especially as the Harmonized Index of Consumer Prices also fell below the ECB's 2% target. The market is currently giving a 95% probability of a 25 basis point rate cut in November, which has caused the EUR/USD parity to close the week with a deep pullback of about 1.5%.

We experienced a significant pullback in GBP/USD this past week. Bailey's statement that the BoE may adopt a more aggressive stance on interest rate cuts if the inflation trend continues as it has increased expectations for 25 basis point cuts in November and December. While Megan Green noted that a consumption-focused recovery could bring about a new wave of inflation, she acknowledged that rate cuts could be likely if price trends persist. These developments led to a roughly 1.5% decline in GBP/USD this week.

The Japanese yen closed the past week lower, influenced by statements from Ishiba and Akazawa. Akazawa noted that the current economic conditions do not necessitate a new rate hike while urging the central bank to proceed cautiously before making any decisions on interest rates. Also, considering that consumer confidence increased in September, this explains why USD/JPY closed the week with a 3 percent rally.

The inflation figures released, falling below expectations, have made the dovish sentiment on the Swiss franc stronger. With the increasing expectations of a 50 basis point rate cut at the upcoming December meeting, the USD/CHF parity has ended the week with nearly a 1.3% uptick.

The AUD/USD closed the week lower, while the dollar index had a strong performance. Although there is an expectation that the RBA could cut rates at the December meeting, the consensus is that the first rate cut will occur in 2025, provided core inflation remains stable at current levels.

The New Zealand dollar closed the week with nearly a 2% decline as the market anticipated a significant interest rate cut from the Reserve Bank of New Zealand, driven by concerns over the country’s economic growth outlook. The RBNZ began its monetary easing cycle in August with a 25-basis point cut and is widely expected to implement further reductions. Markets are now fully pricing in a 50-basis point cut at the central bank’s meeting next week.

Stock Market

In the U.S., with the strengthening dollar index, the markets exhibited a mixed performance. The Nasdaq and S&P 500 finished the week flat to slightly higher, while the Dow Jones experienced a flat to negative trend. Key factors pressuring the indices included the recovery in the labor market, PMI data surpassing expectations, and Powell signaling a 25 basis point rate cut.

Sectors such as finance, transportation, healthcare, industrials, insurance, and technology closed the week negatively, with many individual stocks also posting losses. In the technology sector, Apple and Microsoft ended the week in the red, while Amazon, Tesla, and PayPal saw declines in other sectors. Conversely, shares of Google, Meta, and Bank of America provided gains for investors this week.

In European indices, expectations of a 25 basis point rate cut deepened. The GER40 closed down 2%, CAC40 down 2.5%, ESP35 down 2.65%, and IT40 down 3%.