Global markets were higher on Friday on the back of strong monthly US employment figures, while a rise in the price of iron ore offset weakness in oil across the Resource’s sector.
Sentiment was positive in the US market last week as payrolls data showed the US economy added 222,000 jobs last month, which was higher than consensus forecasts. At the same time, the unemployment rate ticked up to 4.4% from 4.3%, which was a 16-year low. The data reinforces our view that the US Federal Reserve will continue on its path towards higher interest rates this year.
As we have discussed in the past, we see 2 major implications stemming from higher US interest rates. Firstly, higher interest rates should support the US Dollar. Secondly, higher US interest rates should translate into a lower price of Gold, in our view.
Still Avoiding Gold
The price of gold has been on a 5-week slide, which is its biggest losing streak since last year. The price of gold had previously spiked on the back of rising geopolitical jitters from the situation with North Korea and ahead of the uncertain UK elections.
Gold Price USD/Ounce
While gold does appeal to investors as a hedge against uncertainty, as we have highlighted in the past, we believe the next leg will be lower for gold as US interest rates move higher. Higher US interest rates lift the opportunity cost of holding non-yielding gold bullion, while boosting the US dollar, in which gold is priced – making it more “costly” for investors to hold gold.
We have been negative on the outlook for gold for some time now, and continue to avoid buying gold/gold mining stocks.
Australia & New Zealand Market Movers
The Australian share market sold off on Friday (ASX 200 index -0.96%) with losses being broad-based, as the Mining sector outperformed the rest of the market. Troubled infant milk formula maker Bellamy’s, is in another trading halt after news its recently-acquired Victorian canning facility has had its crucial Chinese licence suspended. Bellamy's paid A$28.5m for the Camperdown facility last month, in an attempt to comply with Chinese regulation, after failing to crack the market in a series of missteps.
The New Zealand market retraced on Friday (NZX 50 index -0.1%) in relatively light trading, led by Xero and as Steel & Tube Holdings dropped on a profit warning. Steel & Tube said that a challenging second half and increased competition in the market. The company previously expected operating earnings in 2017 would be consistent with 2016, but earnings are now expected to fall short of last year’s $36.7m by between 10-and-15%.
3 Things Markets Will be Watching this Week
1. How the US Technology sector trades following recent volatility.
2. Fed Chair Janet Yellen will give her testimony to the House of Representatives late in the week
3. Chinese trade data is released on Thursday.
Have a Great Day,
Team