What the gold flash crash and Oil’s drop tell us about the state of markets

It’s been an interesting start to the week as financial markets continue to digest the fallout from the massive beat in US non-farm payrolls last week. The US 10-year Treasury yield retreated from its recent move higher after its 10-basis point jump at the end of last week, however it has stayed above 1.30% for now. The 2-year yield, which is closely correlated with interest rate expectations, has remained fairly steady at 1.2%. The next major move for Treasuries will be at the Jackson Hole meeting later this month, however, after Friday’s surprisingly strong payrolls report every piece of economic data counts including this week’s inflation report. Those who were trading earlier on Monday morning may have witnessed the flash crash in the gold price, which tumbled more than $150 earlier to $1,670. It is clawing back some of the losses, however, it is currently 1.9% lower on the day, and it seems to be comfortable around the $1730 level. If gold fails to recover all of Monday’s losses, then it would be a clear signal that the market is serious about expecting a hawkish tilt at the Federal Reserve. 

Delta, China lockdowns and issues for the global economy could derail Q3

Elsewhere, the delta variant continues to spook markets, especially as a multitude of investment bank analysts have started to downgrade their China growth forecasts for Q3. While the surging number of infections in the US and Europe are less of a concern when it comes to lockdowns etc, it is a different picture in Asia Pacific due to lower rates of vaccination and less effacious vaccines, for example in China, that may not keep the Delta variant at bay. In some areas of Asia Pacific, there is a desire to reach zero covid, for example, Australia and New Zealand. These economies may have to struggle through multiple further lockdowns if this is the strategy that they want to pursue. Eventually, politicians in these countries will find out that pursuing a zero covid policy without a concurrent rapid vaccination programme is an economic disaster. Concerns in Asia Pacific are an issue for the West due to global supply chains. If China and other centres of manufacturing are hit by lengthy economic lockdowns, then this could be a massive curveball for the reflation trade and the economic recoveries in Europe and the US in 2H 2021. This is why so many politicians and global bodies have reiterated that the world is not safe from Covid until every country has high vaccination rates. Whether or not the Fed can start raising interest rates may depend more on what happens overseas than what the latest NFP report is saying.

Why the oil price could struggle further this month 

The oil price and other commodities have fallen at the start of this week, as concerns about China’s economic outlook start to bite. The Brent crude price has dropped below $70 per barrel to $68.70, approx. 2.2% down on Monday. From a technical perspective, there wasn’t much interest to extend a recovery rally back above $69 per barrel earlier on Monday, which suggests that there could be further downside to come. $65 is a nice round number to target if we continue to get more bad news out of Asia. While millions of people in China remain under strict lockdowns at the start of this week, Beijing’s authorities have yet to announce a lockdown, although there are rumours that an announcement is imminent. If Beijing is put under lockdown, we could see a major decline in risk sentiment in the short term. 

Why VW could be in line for a recovery rally 

Overall, even with the decline in the oil price, the FTSE 100, which is energy heavy, managed to eke out a small gain. The US indices managed to recover late in Monday’s session, with tech stocks recovering some of Friday’s sell off. The FTSE 100 saw large declines for the likes of Hargreaves Lansdowne, who said the trading volumes will be significantly lower in 2021 than 2020, and IAG, which usually sells off when there is a concern about rising coronavirus cases. On the plus side, defensive utility stocks were the top performers in the FTSE 100 on Monday, with Flutter Entertainment also rising some 1.7%, as online gambling platforms have tended to act as “defensive” stocks in the age of Covid. In the US, the Nasdaq was slightly higher on Monday, led by Tesla, which surged on Monday on the back of the UN’s Climate Change report. This made for some grim reading, which could accelerate the move away from hydrocarbons and towards more sustainable forms of energy, which is good news for the likes of Tesla. Interestingly, this report did not have the same impact on Volkswagen’s share price, which fell some. 0.7% at the start of the week, even though it has a well-developed plan for electric vehicles in the coming years. However, we believe that VW could rise later this week, as it follows Tesla’s lead. 

Economic data watch 

Elsewhere, watch out for UK growth data on Thursday, Q3 GDP is expected to come in at 4.8%, which is a touch below the 5% expected by the BOE. Inflation data in the US is due on Wednesday, which is a key metric as we lead up to the Jackson Hole meeting, and the German ZEW index could struggle under the weight of rising Delta cases across the Continent.