Gold prices tick up on recession fears, trade uncertainty

On Wednesday, the bullion ended lower but remained around its over six-year peak of $1,554.56 hit on Monday.

 

Gold prices eked out gains on Thursday against the backdrop of recession fears, with traders tracking signs of progress on the US-China trade talks and global central banks for direction on interest rates.

Spot gold rose 0.2% to $1,542.06 per ounce, as of 0331 GMT.

On Wednesday, the bullion ended lower but remained around its over six-year peak of $1,554.56 hit on Monday.

US gold futures were up 0.1% at $1,550.80 an ounce.

Bull markets (for gold) are on hold as we wait for further news on the trade dispute, which seems to be the major driver, said Michael McCarthy, chief market strategist at CMC Markets.

"Global growth in the balance here and a resolution (in the trade conflict) would be good for growth and bad for gold," McCarthy added.

On the trade front, the Trump administration on Wednesday made official its extra 5% tariff on $300 billion in Chinese imports, and set collection dates of Sept. 1 and Dec. 15.

While Trump in recent days has toned down his aggressive China trade rhetoric, it has not translated to a retreat from the planned tariff hikes. It remains unclear whether U.S. and Chinese negotiators will resume in-person talks in September as previously suggested by U.S. officials.

Adding to the uncertainty was British Prime Minister Boris Johnson's decision to suspend parliament for more than a month before Brexit.

Underscoring the gloomy global sentiment, yields on 30-year U.S. Treasuries and 10-year German bunds hit record lows on Wednesday.

The U.S. Treasury yield curve remains inverted, which is commonly considered a sign of an impending recession.

The U.S. Federal Reserve and the European Central bank are expected to cut rates next month, while many investors believe the Bank of Japan could also join the fray if market sentiment weakens further.

Gold tends to appreciate on expectations of lower interest rates, which reduce the opportunity cost of holding non-yielding bullion.

Markets are fully priced in for a quarter-point cut in interest rates by the U.S. Fed next month, and over 100 basis points of easing by the end of next year.

Indicative of market sentiment, holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have increased by 6.6% this month.

The dollar index, which measures the greenback against a basket of six major currencies, was little changed after rising 0.2% in the previous session.

Elsewhere, spot silver rose 0.3% to $18.38 per ounce, while platinum inched up 0.1% to $900.66.

Palladium was up 0.3% to $1,473.56 per ounce.

MORE WILL UPDATE SOON!!

Stock picks of the day: Nifty to end August expiry between 10,800 and 11,200

A breakout on either side of the band will give a clear indication of the further trend.

  

The Nifty witnessed a V-shaped reversal rally but the gains were capped at 11,150 levels on August 28. On the lower side, as per the change of polarity principle, the short-term moving average -- 20-day EMA -- for the index is currently working as a key reversal point.

Last hour buying on August 28 pushed the price above its important physiological mark of 11,000, which has squeezed the body of the candle with a slightly longer wick on its lower side.

The level of 11,150 is further supported by the Fibonacci ratio on the daily interval for the benchmark index. Currently, the Nifty pack is trading between its 50 (11,200) and 100-EMA (10,800) band on the weekly timeline.

On the Options front, maximum Put open interest (OI) is placed at 11,000 strike. The maximum change in Call OI is seen at 11,100, followed by 11,200 strikes.

The next immediate support for the Nifty is placed at 10,800 levels, while resistance is observed at 11,200 levels. Now, a breakout on either side of the band will give a clear indication of the further trend.

Here is a list of top three stocks that could return 6-7% in the next 3-4 weeks:

ICICI Lombard General Insurance: Buy| CMP: Rs.1,249.85 | Target: Rs 1,343 |Stop Loss: Rs 1,200| Upside 7.5%

After a prolonged consolidation, the recent price action in ICICI General has pushed the price above its trendline resistance on the daily interval which is a positive sign.

The said breakout is supported with sizeable volumes and strong bullish candle. The stock is sailing above its major exponential moving averages on the daily time frame.

Momentum Oscillator RSI (14) is reading above 50 levels with positive crossover. Currently, MACD indicator is reading above the line of polarity with positive crossover.

Traders can accumulate the stock in the range of Rs 1,245-1,255 for the target of Rs 1,343 with a stop loss below Rs 1,200.

Bata India: Buy| CMP: Rs.1,507.70 | Target: Rs 1,620 |Stop Loss: Rs.1,445 | Upside 7.5%

Prices on the weekly charts have witnessed a breakout of a Rectangle pattern on the weekly interval charts is placed at Rs 1,481 levels.

Recent price action has forced prices to surpass its horizontal trend line resistance which has helped the price of the stock to move in uncharted territory.

A price pattern breakout has supported with an above-average volume on the weekly interval chart.

The momentum oscillator RSI (14) is hovering between a 55 - 65 ranges which hint for the continuation of ongoing momentum.

Traders can accumulate the stock in the range of Rs 1,360-1,370 for the target of Rs 1,460 with a stop loss below Rs 1,310.

Jubilant Foodworks: Sell|CMP: Rs 1,185.25 | Target: Rs 1,115 |Stop Loss: Rs 1,230| Upside 6%

The stock price has completed its pullback on the weekly chart of its recent breakdown of the rising wedge pattern.

The Wednesday’s upside has got capped at Rs 1,223 levels which is supported by the resistance of 50-EMA on the weekly interval.

The dark cloud cover bearish candle stick pattern is formed on a daily scale.

The 50-days EMA resistances is also supported with a 50% Fibonacci retracement levels on the weekly time line.The lower high lower low formation is intact in the daily chart which adds for further weakness in the near term.

The stock may be sold in the range of Rs 1,183 -1,188 for a target of Rs 1,115, and keep a stop loss above Rs 1,230.

MORE WILL UPDATE SOON!!

Are bond markets exaggerating the risk of recession?

To give due credit to prognosis of the bond markets, it is important to note that US yield curve over the several decades has inverted on most of the occasions ahead of a US recession.

  

There has been an unprecedented dash for safe-haven assets given the widespread global concern of growing protectionism, low inflation and slowing economic growth. The recent developments in global bond markets foretell a risk of recession, with the US spread between the widely watched its 10-year and 2-year sovereign bonds inverting briefly, while the spread between three-month bill rates and 10-year yields has been inverted since May this year. Needless to mention, the increasing market value of negative yielding bonds, which has soared to $16.5 trillion, quite a humongous number in a $56 trillion global bond market. Literally, 50 percent of the sovereign bonds are now fetching sub-zero yields. Interestingly, the entire German yield curve is under water.

With investors flocking to inflated bonds, fetching deep negative yields, the situation begets an important debate whether the rally in sovereign bond prices has gone too ahead of itself. Although there is evident slowdown in global economic activity, an outright risk of recession has not yet materialized. There a growing rhetoric regarding an impending slowdown in US, but the fact remains that private consumption remains resilient in the world’s largest economy. Most importantly, governments in Europe and Asia are gearing for unleashing fiscal stimulus, which can counter the deceleration seen in manufacturing and trade. A likely fiscal stimulus across the global can provide the much-needed impetus to the global economic engine, which can eventually foster uptick in inflation and unwinding of the long only bond trade.

The moot point remains whether such a degree of buoyancy is justified in the bond markets. Though the global economy has slowed down, there is no outright risk of a global recession materializing yet. The IMF sees the global GDP expanding 3.2 percent in 2019 and then growth rebounding to 3.5 percent next year. Despite the yield curve inverting in US, consumer spending (which is the lynchpin of economy) remains strong. Indisputably, growth across the globe is slowing down, but the situation is not tantamount to a recession. To wit, the estimated dividend on global equities is much better than average bond yields in the developed world. Estimates state that that dividend yield on the global stock benchmark is expected to rise to 2.5-2.75 percent this year. The astonishing fact remains that German bond yields are much negative than Japanese despite relatively higher inflation in Germany.

Nations on the brink of bankruptcy enjoying ultra-low yields

An extraordinary rise in global sovereign debt across the world has coerced yields to the proximity of 0 percent even in nations which were on the verge of turning bankrupt seven years ago. With the preponderance of negative yields in Europe, investors are scrambling for marginally positive yields even in riskier debt markets of Spain and Portugal. This seems to be nothing short of a bubble. Expectations of further quantitative easing by ECB is also driving sovereign yields of peripheral economies like Greece lower which had to undergo debt crisis and financial rescue packages from EU.

Fiscal Stimulus will be an inflection point

There is an argument that whether recession fears are overblown. Governments across the world acknowledge that Central Banks have exhausted their arsenal in terms of driving inflation and growth through interest rates. With interest rates running well below the historical trends and balance sheets being bloated, there is very less scope for the central banks to step on the gas. There is a growing sense that governments will turn on the fiscal faucet to provide the much needed impetus to the economic engine.

Coordinated fiscal stimulus by the major economies is expected to counter the deceleration in global economic growth. US President Trump is running from post to post for the infrastructure spending bill, while Germany, South Korea and Australia are contemplating at loosening their purse strings. It is imperative for economies with twin surplus (budgetary and trade) to make their fiscal policies more accommodative. The fact that Central Banks have been pre-dominant owners of sovereign debt makes it much easier for the government for fiscal expansion. In fact, Eurozone economies also have the luxury of borrowing at negative real interest rates. In Asia, Beijing has already stepped on the pedal by allowing provincial governments to borrow more through the issuance of bonds to fund infrastructure projects.

Shortcoming of Yield Curve

To give due credit to the prognosis of  bond markets, it is important to note that US yield curve over the several decades has inverted on most of the occasions ahead of a US recession. However, there can be distortions in the bond markets, where long term rates are artificially suppressed below the short-term bonds. As a case in point, US Federal Reserve’s quantitative easing in 2011-2012 entailed selling of short-term Treasury bills and buying the long-term instruments. This was done to augment credit creation within the economy by lowering the long-term interest rates.

The other criticism to the yield curve is that it cannot accurately predict when the recession will set in. There have been wide variations in the historical data, which shows that the US10-2yr yield curve has inverted several quarters (ranging from 3 quarters to 2 years) before the economic contraction takes place. So, the moot point remains that if the US10-2yr yield curve inverts again, nobody has the clairvoyance on when the US economy ventures into recession. The so called impending recession can remain elusive for several quarters or even a year or two.

In this respect, Bloomberg Recession probability indicator convey only 1/3rd probability of a US recession in next 12 months.

Free Money Syndrome

There is a reinforced new belief within the global financial markets that low interest rates should remain as low as possible to stimulate growth in future. Loss of faith in the existing financial system has given birth to the Free Money Syndrome. In fact, inflow of capital is channelized into firms which are burning cash. If this is not enough, a Danish bank is offering home loan at a negative interest rate, implying people get paid to borrow. The sense that individual borrowers benefit from ultracheap or negative rates is fallacious given that such gratification in the form of free money impairs the banking system. It also kills the saver in the economic system, depriving his/her ability to earn interest on existing money over time. The wider question remains how the banks can turn profitable by losing interest income. This is a flawed allocation of capital into loss-making and often disruptive enterprises, eventually resulting into lower financial returns.

MORE WILL UPDATE SOON!!

Govt relaxes FDI norms: 100% FDI in coal mining, contract manufacturing; 26% in digital media

The government has also relaxed FDI rules for single brand retail and expanded definition of 30 percent domestic sourcing.

 

The government on August 28 announced that it has approved 100 percent Foreign Direct Investment (FDI) through the automatic route in coal mining, its sale and all its associated infrastructure.

The government has also approved 100 percent FDI through the direct route in contract manufacturing, said Commerce Minister Piyush Goyal at the Cabinet briefing.

Goyal also announced that the Cabinet has also expanded the definition of local sourcing for single brand retail. These outlets should now locally source 30 percent of their procurements, irrespective of whether their product is marked for export or domestic sale, and will be reviewed for a block of five years, and not a year-on-year basis.

Single brand retail outlets can now start the online trading, provided that they meet the 30 percent local sourcing laws, with subsequent rollout of brick and mortar stores. Currently, the online sale by a single-brand retail player is allowed only after the opening of physical outlets.

Goyal also announced 26 percent FDI with government approval in digital media. Currently, in the print media sector, 26 percent FDI is allowed through government approval route. Similarly, 49 percent is permitted in broadcasting content services through government approval route.

Information and Broadcasting Minister Prakash Javadekar said that sugarcane farmers will be granted an export subsidy to export 60 lakh metric tonne, which will cost Rs 6268 crore to Exchequer, and will be directly transferred to the accounts of the sugarcane farmers.

He also said that 75 new medical colleges will be opened by the government with an investment of Rs 24,375 crore, which will create 15,700 seats over the next three years. These colleges will be set up in the unserved districts and hope to alleviate India’s current doctor to patient ratio.

Javadekar also said that an international coalition for disaster resilient infrastructure has been set up, which will be launched by the Prime Minister in his address to the United Nations this year. Javadekar said that this coalition will help in the sharing of best practices towards disaster management, and is geared towards reaching the United Nations Development Goals.

MORE WILL UPDATE SOON!!