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FinanceWorld Markets Review: 6th November 2023 – Oil, Gold, S&P500, Dollar

Oil has been excluded from the global risk rally

The US economy has seen a cooling trend, with lower-than-expected nonfarm payrolls, weaker-than-expected wages growth, and an almost two-year high unemployment rate. This has led to optimism in the Federal Reserve's decision to end hiking interest rates. A 100'000 downside revision to August and September numbers indicates that job creation in late summer wasn't as strong as previously revealed. All key metrics now suggest that the US jobs market is cooling, and the Fed's aggressive tightening campaign is finally giving the expected, loosening result. This should help keep inflation on track for further easing to the Fed's 2% policy goal without pushing the US economy into recession.

The US equities have roared after three months of struggle, with the jumping almost 6% last week and the VIX index dropping below the 15 mark. The euro/USD flirted with 1.0750, while the British economy saw inflation fall to a 2-year low. Cable rallied to 1.2390, but the Bank of England's projections weren't positive for the British economy. The USD/JPY fell below the 150 mark, and the AUD/USD jumped to its 100-DMA.

However, crude oil remains under pressure, testing the $80pb to the downside. Rising tensions in Gaza, Israel's encirclement of Gaza city, and headlines that Saudi and Russia will stick to their planned oil cuts despite Middle East tensions haven't helped bring oil bulls back to the market this Monday.

Gold price is approaching 1,990, while the Euro continues to rise

Gold (XAU) gained 0.17% on Thursday due to the softening dollar and declining Treasury yields, as expectations increase that the U.S. Federal Reserve may have concluded its interest rate increases. The Fed kept its interest rate unchanged on Wednesday but suggested an additional hike could be possible due to enduring high inflation and a robust jobs market. However, the consensus in financial markets leans towards no further rate hikes, anticipating the delayed effects of prior increases to manifest in the economy. Gold has pulled back from its recent highs, poised for a weekly decline of approximately 1%, as tensions in the Middle East have also begun to diminish.

Gold is supported as there are signs of cracks in the U.S. labor market, which probably signals the Fed is backing off completely from rate hikes. Yesterday's jobless claims data showed a weekly increase of 217K, which was higher than the market expected and the most considerable rise in almost two months. XAU/USD was essentially flat during the Asian and early European sessions. Market participants are now focusing on the upcoming monthly U.S. Nonfarm Payrolls (NFP) report to assess the labor market's vigor and inform their expectations for future interest rate movements. Lower-than-expected figures will impact XAU/USD positively, potentially pushing the price to $2,000.

The S&P 500 is predicting that bulls may be able to surpass 4,375

The S&P 500 reached a significant level of resistance at 4,375 last week, which has been a support and resistance level since mid-August. The index's structure since mid-July is evident in its 61.8% retracement level dating back to the September 1 to October 27 lows. The Treasury's restraint in cutting offerings led to rates falling, as they were expected to issue $776 billion over three months instead of the original projection of $816 billion. The Treasury announced the size of its refunding auctions for the 10-year and 30-year this week on $40 billion and $24 billion, compared to $41 billion and $25 billion estimates. This took $1 billion off the offering size.

Last month's 30-year auction was a disaster, with the issue tailing by almost four bps above the when-issued rate and the bid-to-cover ratio falling to 2.35 from 2.46 the previous month. The 3-year auction coming this week will be larger than last month's at $48 billion of $46 billion. The 10-year auction will see a $40 billion auction this week, up from $35 billion in the last two auctions.

The market's betting on a refunding size of greater than $114 billion caused short-covering and caused rates to fall. The 30-year plunged from 4.79% to 4.67% to close at 4.77%, with wages in the employment report rising by 4.1% versus estimates of 4.0%. Last month was revised higher both month-over-month and year-over-year.

A similar showing in the 10-year rate bounced off its 50-day moving average and an uptrend since mid-July. It wouldn't surprise traders to see rates rise into these auctions as traders bet on them not going well.

The dollar continues to drop and remains vulnerable following a Fed steering

The U.S. dollar continued its decline on Monday, falling by the most since July last week after the Federal Reserve dialed down its hawkish rhetoric and U.S. data showed signs of moderation. The dollar index eased 0.2% to 104.85, its lowest level in 6-1/2 weeks, after falling 1.4% last week. The euro gained 0.2% to a 7-1/2 week high of $1.0756. World stocks had their strongest week in a year last week as expectations the Fed was done raising rates gathered steam. Other indicators such as weakness in U.S. jobs data, softer manufacturing numbers, and a decline in longer-dated Treasury yields also hurt the dollar, while stoking rallies in sterling and the Aussie dollar and causing the yen to bounce from the weaker side of 150 per dollar.

JPMorgan analysts say a sustained dollar selloff would need signs of improvement in the euro zone, China, and other regions which it says are “still tenuous.” The latest manufacturing surveys from China and Europe's GDP and inflation data bear that out. Treasury yields slumped last week after the softer U.S. data and with Fed Chair Jerome Powell speaking of ‘balanced' risks. Future markets implied a 90% chance the Fed was done hiking, and an 86% chance the first policy easing would come as soon as June.

The European Central Bank will likely be cutting rates by April, while the Bank of England is seen easing in August. The Japanese yen slipped 0.1% to 149.47 per dollar, and the yen hit 151.74 per dollar last week, edging close to last October's lows that spurred several rounds of dollar-selling intervention by the Bank of Japan.

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