Gold gains on dollar weakness, dovish Fed; palladium sets new record

10 January, 2019, 14:56 | Author: Brooke Harris
  • U.S. President Donald Trump walks before speaking to the media as he returns from Camp David to the White House in Washington

Chinese stocks firmed after the country's central bank announced an easing in policy on Friday, with 100 basis points of cuts to bank reserve requirements freeing up around $116 billion for new lending.

The dollar index stood near 2-1/2-month lows as investors grew increasingly convinced that the Federal Reserve will not raise interest rates this year amid uncertainties over the USA economy.

Market participants were also awaiting developments from two days of trade negotiations between the USA and China, which were set to begin Monday.

Notwithstanding strong monthly U.S.jobs data for December last week, market watchers believe the world's biggest economy is losing momentum with Federal Reserve chair Jerome Powell's comments adding to expectations the central bank may adopt a more cautious outlook.

Spot gold was little changed at $1,287.70 by 0148 GMT. MSCI's broadest index of Asia-Pacific shares outside Japan put on 1.3 percent. The pan-European STOXX 600 .STOXX finished down 0.15 percent. The U.S. dollar lost 0.7 percent against the Swiss franc on Monday.

Powell on Friday said the USA central bank would be more sensitive to downside risks in the market, adding that it was "prepared to shift the stance of policy" if needed.

The decline in dollar comes after Powell, on Friday, told the American Economic Association that the Fed is not on a preset path of interest rate hikes and that it will be sensitive to the downside risks the markets are pricing in. The boost to stock markets saw them recapture all the year's losses and push into positive territory for 2019 so far, with Wall St's main indices closing up more than 3 percent by the close on Friday.

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Yet, Fed fund futures still implied a rate of 2.33 percent by December, compared to the current effective rate of 2.40 percent.

Palladium, meanwhile, slipped 0.1 per cent to $1,298.49 an ounce, but was still in the vicinity of the record high of $1,313.24 touched in the previous session.

Powell has another speech on Thursday to expand on his thinking, while there are at least eight other Fed officials scheduled to speak this week.

The news was music to the ears of traders, who have been fretting that the Fed would press on with its rate hike cycle, making it more expensive to borrow for investment.

"Our Bull & Bear Indicator has fallen to an "extreme bear" reading, triggering the first "buy" signal for risk assets since June 2016", they wrote in a note. Lower Treasury yields can translate into less demand for the dollar since the currency is used to buy bonds, a traditional safe haven. South Korea's Kospi climbed 1.3%, Australia's S&P/ASX 200 benchmark rose 1.1% and Hong Kong's Hang Seng Index rose 0.8%. The Aussie was up at $0.7124 on Monday, having briefly dived as deep as $0.6715 last Thursday.

"If, as we expect, global economies slow down in 2019 but avoid recession, and USA interest rates peak, there is likely to be a risk rally", they said in a note.

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