Continued banking woes are giving financial markets the blues, as evidenced by the pullback in equities, the slump in oil, and the rise of the VIX (volatility index).
The fact that we have seen a stream of banks having credit-related headlines is testing the nerves of traders, which has resulted in a reduction of exposure to higher-risk assets.
For the time being, investors are abandoning the search for high yield and are instead favouring safe-haven assets until we get a better sense of whether broader, systemic banking issues are in play.
The risk-averse environment is providing ripe conditions for the gold price. The asset is benefitting from the combination of a sliding greenback and rising trading anxiety. With investors more concerned about protecting capital rather than seeking high yield, gold is fitting the bill as the asset of choice. This is why the precious metal is again within sight of historic highs.
Any hints that the banking sector troubles are not isolated would see US interest rate expectations wound back even further, which could give gold the impetus for a look at the US$2100 level. But it depends on how long the current banking sector nervousness sticks around for.
Oil falls off the chart
While the gold price is sitting pretty, the same cannot be said for oil. The oil price has nearly been falling off the chart this week such has been the wave of selling due to broader economic concerns.
The oil price has stabilised somewhat after the sharp sell-off on Thursday, however the volatile price action this week will surely have caught the attention of OPEC+.
Financial markets have a gloomy outlook for growth in the second half of the year and it seems like the oil price is bearing the brunt due to pessimism over demand levels.
Aussie dollar rises
In FX, the AUD rose courtesy of the RBA statement (released on Friday) which served as a reminder to the market that the central bank is ready to take rates even higher. Slightly softer than expected Chinese data (Caixin Services PMI data) continued the theme of Chinese macro indicators undershooting expectations.
Elsewhere, the Euro came off the boil after the ECB took the less aggressive approach of hiking by 25bp rather than 50bp, but nonetheless the euro remains poised for further gains on expectations of a tightening yield differential against its US counterpart in the second half of the year.
At this point, the ECB (much like the RBA) are taking a more aggressive posture on monetary policy than the Fed, which hints that further USD weakness could be in the pipeline.
Attention now turns to the US NFP due for release on Friday. Any upside surprise in the jobs numbers likely won’t please markets, as sustained labour market strength could delay any chance of the FOMC making a pivot on its interest rate intentions.
Market commentary and analysis from Tim Waterer, chief market analyst at KCM Trade
