Inflation fears and weaker USD…should one bet on gold?

Omicron has captured much of the news over the Christmas and New Year holidays but has limited effect on the stock markets. Investors expect this to pass quickly. It is a reasonable projection, given that the number of people infected by Omnicron began to decline in South Africa as early as December 18, 2021.

Worse is the case with high inflation, which points to a need to increase interest rate levels. The release announced at the last Fed meeting on December 14-15, 2021 revealed that members remain concerned about the current high inflation rate. While the majority believe that inflation rates will moderate in 2022, they have also revised their inflation forecasts substantially for 2022 and some for 2023.

Nonfarm payrolls in the US rose by 199,000 in December, about half the analysts’ average forecast of 400,000 new jobs. However, the unemployment rate of 3.9 percent was slightly lower than the 4.1 percent expected. Meanwhile, employment rose by a revised 141,000 jobs in October and November. Adjusting the numbers, it was 15% lower over the period (340,000 versus 400,000 jobs). The road to recovery to pre-Covid employment levels in March 2020 in the US may have become a little too patient even for the Fed.

Source: www.di.se, www.marketwatch.com

On interest rate fears, stock markets generally rebounded on Friday, January 7, 2022. Add to that news of a couple of minor Chinese property bankruptcies, and you also receive a credit risk issue. The Nasdaq and Shanghai have been particularly weak over the past month. The correlation from companies with low to high exposure to interest rates on the US indices is also evident, from stable Dow Jones, through S&P500 to more extreme Nasdaq. But European stock markets have performed relatively well over the past month, after all.

Source: Refinitiv Eikon

The US 10-year Treasury yield has broken up in earnest this time, above the old limit of around 1.7 percent. On Friday, it closed at 1.77 percent. At the same time, there is a risk of a further rise in 10-year yields if the Fed’s repurchase of government bonds should decline.

Source: Refinitiv Eikon

As seen in the HYG (the US junk bond index) chart above, rising interest rates have significantly reduced investors’ risk appetite.

Source: Refinitiv Eikon

The economy (in the form of the US Manufacturing Purchasing Managers’ Index for the last two years) continues to perform well. However, there has been a slowdown in expectations compared to the peak recorded on July 31, 2021. It is worth noting that the inflation rate has not fallen back correspondingly, lending support to Fed members’ concerns about inflation.

S&P 500 closed Friday’s trading on a rising MA50 below MA20 and a falling EMA9. The increasing trendline followed by MA100 makes up the next level on the downside. Also, note the negative divergence between the index and MACD. MA100 is also where the index rebounded after the two relatively short and steep falls in November/December 2021.

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, EMA9 and MA20 are still intact and rising.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Nasdaq is trading around strong support made up by MA100 and Fibonacci 50. Around these levels, the index also bounced twice in December 2021. 

Source: Refinitiv Eikon and Carlsquare

The weekly chart shows how the index has been consolidating, currently testing rising MA20. Momentum is positive but falling.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

A double top seems to have been created in Apple. The support level at 167 USD needs to be broken for the trend reversal pattern to be completed. Again, momentum is positive but falling as visualized by MACD.

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, the share is still trading above rising EMA9 and MA20.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

OMXS30 had some catching up to do on Friday. It resulted in a gap and closed below EMA9 but at the psychologically important 2400-level. A first and relatively weak support level lies around 2 385. In case of a break, the next level on the downside is MA20, currently trading at 2 360.

Source: Refinitiv Eikon and Carlsquare

The weekly chart shows how the index attempted to break away from the consolidation phase but failed.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

Banks are typically gaining from rising interest rates. The graph below shows that Swedish Swedbank is also trading above EMA9 and MA20. MACD is negative but rising. The previous local top from October and November may be tested, given a break above MA50.

Source: Refinitiv Eikon and Carlsquare

Rising EMA9 and MA20 support the share in the weekly chart:

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX closed Friday’s trading below EMA9. Is MA50 currently just below 15 800 next?

Source: Refinitiv Eikon and Carlsquare

A scary-looking bearish Doji has been created in the weekly chart:

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The EUR/USD has been consolidating for some time. However, note how MACD is close to generating a solid buy signal. A stronger euro against the USD is good news for German companies selling in USD, and reporting in euro as the currency effect will boost profits.

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, one can see how MACD is close to generating a weak buy signal.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The gold price fell during last week. It tested MA100 that held. A weaker USD and continued inflation fears should be two essential ingredients for rising gold prices.

Source: Refinitiv Eikon and Carlsquare

In the weekly chart, gold is trading in a neutral wedge formation. Note how momentum is rising visualized by MACD.

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MACD: Moving average convergence divergence