The U.S. Comex gold futures stabilized at $1,262.70 on Thursday after a roller-coaster ride since last Thursday. The futures are down 1.24% for the week compared to 3.44% for the S&P 500 Index, 1.74% for the Euro Stoxx 50 Index, 4.64% for the crude oil futures, and -1.30% for the Dollar Index. The U.S. 10-year government bond yield widened 18bp to 1.822% this week while the ten-year German Bund yield rose 6bp to 0.364%. The U.S. thirty-year government bond yield rallied to a trough of 2.2222% last Friday before rising to 2.4318% this Thursday.
Greece, China and oil
This week, the market has focused on the European Central Bank’s actions on Greece after the newly elected Greek Prime Minister wanted to end the austerity programme by the Troika. The ECB restricted Greece from tapping the ECB’s direct liquidity lines, forcing the Greek banks to borrow at a higher rate from the Bank of Greece under the Emergency Liquidity Assistance. China, in order to offset the effect from the biggest capital outflow last quarter since Q4 1998, cut the banks’ reserve ratio for the first time since May 2012 by 50bp to 19.5%, injecting about RMB 650 billion into the economy. The CBOE Crude Oil Volatility Index has reached a high of 62.73 on 4 February since April 2009, helped by the supply increase as well as the currency swings in the Euro Dollar.
Gold Price Implications
Uncertainty about the ECB’s funding for Greece and the country’s exit from the Euro has led to a stronger demand for gold. Despite the weak Euro, which has fallen 5% against the Dollar this year, the gold price has risen 6.64% year-to-date and has climbed as high as ten percent this year. While some profit taking is natural after the big gold price move, the continuous liquidity boost from China and Europe and the volatility in the currencies are likely to support gold prices in the medium-term.
What to Monitor
We will monitor the January U.S. non-farm payrolls and the U.S. unemployment rate on Friday. Next week, we will watch the G20 meeting on Feb. 9, China’s January inflation data and the U.K. December manufacturing output on 10 February, the Eurozone December industrial production and the U.S. January retail sales on Feb. 12 as well as the Eurozone Q4 preliminary GDP on Feb. 13.