The U.S. labor market isn’t giving any other market a break, with the dollar probably being the only exception.
Friday’s non-farm payrolls report for June again showed how badly the Federal Reserve had underestimated America’s jobs juggernaut.
While gold’s fate looks quite clear if the dollar explodes higher on bets that all remaining rate hikes for 2022 will be at least 75 basis points, what looks quite uncertain now is the direction for oil.
Citigroup says oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits.
But some say a break below $90 before the end of July might be the most realistic outcome.
The reason for the limited pessimism in oil is the dip-buying that goes on each time there’s a major selloff.
We saw it again this week. As soon as the price of a barrel broke below $100, various analysts posited that crude perhaps had been oversold.
Their misgivings were understandable. The “higher and higher” mantra has become institutionalized for oil prices, the same way as “lower and lower” was two years ago.
Back in 2020, it was demand destruction from Covid that got billions of dollars in new oil exploration works and refinery upgrades canceled. We’re paying for those investments today with higher oil prices.
Since 2022 began, the narrative in oil has largely been on three things: the impact of the West’s sanctions on Russia, the folly of clean-energy policies unfriendly to fossil fuels and OPEC’s seemingly impossible task in putting out more barrels.
Amid such mindsets, enters the R-word. The last time a recession was in our midst, it was at the height of the Covid outbreak. But it was brief, so brief that officially, it was estimated to have lasted just about two months — March through April — before demand came surging back for most goods and, eventually, oil.
The lightning recovery then was due to the Federal Reserve hosing down the fires of the pandemic with a river of easy money, while interest rates were held at almost zero — setting up the catalyst for today’s inflation headache.
This time though, there just can’t seem to be an agreement on how long and deep the recession would be and whether there’d even be one.
Oil: Market Settlements and Activity London-traded Brent crude performed a final trade of $107.15 after settling Friday’s session up $2.37, or 2.3%, at $107.02, adding to the near $4 or 4% gain in the previous session.
The rebound wasn’t enough to cover Brent’s 12% plunge between Tuesday and Wednesday, which still left the global crude benchmark nursing a 4% loss on the week.
New York-traded West Texas Intermediate, or WTI, meanwhile, did a final trade of $104.80 after settling up $2.06, or 2%, at $104.79 a barrel.
Like Brent, WTI had also tacked on some $4, or 4%, in the previous session. Despite those gains, the U.S. crude benchmark dipped 3% on the week.
Oil: WTI Technical Outlook Despite its positive close for the week, WTI needs a sustained break above $111.50, failing which it will likely resume a second bearish wave targeting $100-$95-$92, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.
While WTI’s weekly closing came above the 50-week Exponential Moving Average of $92.60, it was still below the weekly middle Bollinger Band of $108.25.
The weekly stochastic reading of 38/45 also kept WTI bearish.
“A reliable affirmation of short-term price reversal is needed,” said Dixit. “And WTI should really avoid breaking below $92, as that will trigger immediate tests of $88 and $85.”
Gold: Market Settlements and Activity Gold futures for August delivery on New York’s Comex settled up $2.60, or 0.2%, at $1,742.30 an ounce. For the week, it showed a drop of 3.3% — its fourth in a row since the week ended June 10. The current week’s loss was also the sharpest since the one for the week ended May 6.
Despite the gloomy weekly statistics, gold has shown resilience somewhat since Wednesday’s 10-month low of $1,730.70. Rebounding from that level, August gold on Comex has barely moved on either side of $1,740.
For gold, there was an additional layer of complication from the jobs data. Even before the latest employment numbers, Fed policy-makers had already appeared resolved to raise rates in July by 75 basis points, just like in June.
The question is, with runaway jobs numbers like these, would the Fed be tempted to do more? Will all rate hikes scheduled for the year now be 75 basis points or even higher? While almost all money market traders only have a max of 75 basis points on their radar now, the possibility of 100 basis points cannot be ignored altogether down the road.
Gold: Technical Outlook “A cursory look at the weekly chart of gold gives us a four-bearish candle pattern similar to the previous wave,” said skcharting.com’s Dixit, who uses the spot price of gold for his projection.
Dixit noted that gold closed below the weekly lower Bollinger Band of $1,760, with a weekly stochastic reading of 3/11 indicating the approach of oversold territory.
“This typically calls for a short term rebound, towards broken support areas of $1,780-$1,810,” he said. “If gold finds enough buying and sustains above the $1,780-$1,810 supply zone, recovery can extend to the next cluster of resistance at $1,830-$1,845-$1,880. The mid-term trend will turn bullish on a decisive break above $1,880.”
On the flip side, failure to break and sustain above the $1,780-$1,810 areas can push gold towards $1,720-$1,697, Dixit cautioned. “If selling extends, expect a further drop towards the 50-Month Exponential Moving Average of $1,668 and the 200-week Simple Moving Average of $1,650."
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.
