Swissquote: Hard assets, harder questions
By Ipek Ozkardeskaya, Senior Analyst, Swissquote
Despite a retreat in oil prices, global equities made a timid start to the week. Interestingly, the FTSE 100 gained, despite pressure on oil companies, while the tech-heavy US peers were hit by another wave of chip selling.
VanEck’s Semiconductor ETF fell another 2.43%. This ETF is now down by more than 18% since its June peak. Sentiment in Asia is better this morning, but geopolitical and trade-war headlines are popping up everywhere, suggesting that the US relationship with the rest of the world may be just about to get worse.
Bessent yesterday announced heavy sanctions against Iran, but also warned of secondary sanctions for those who do business with the country. The US didn’t mention China specifically, but China is one of Iran’s biggest clients, and it had already made clear that US sanctions – if they don’t make sense to the Chinese under its own laws – wouldn’t be taken into account. Now everyone is waiting to see the collateral damage of a war that the US reportedly has limited means left to fight.
Speaking of means, Bessent made another important announcement yesterday. CNBC reported that the US Treasury could potentially tap its roughly $935bn Treasury General Account at the Federal Reserve (Fed) to fund expanded bond buybacks.
That’s not too bad: it means that the US Treasury could buy more longer-dated bonds using its cash account rather than relying on new, shorter-term debt issuance to finance the purchases. And nearly $1 trillion gives the US Treasury notable firepower – although obviously not all of that cash can be deployed – to ease pressure on longer-term borrowing costs. US 10-year and 30-year yields reacted by falling yesterday, before reversing course in Asia.
In the short run, this financial support from the US Treasury is positive for bond prices, hence has the potential to pull yields lower and support equity valuations. But keeping borrowing costs under pressure would also mean that financial conditions could be looser than what the Fed would like as it tries to tame inflation and bring it back toward its 2% policy goal.
Therefore, if US yields remain subdued due to intervention rather than improving fundamentals, it could prove costly both for the Treasury – through a lower TGA balance – and for households, through potentially higher inflation.
The best option is still to end the war in the Middle East to bring energy prices lower, and rein in the growing budget deficit... actions that have not yet made their way into the US administration’s playbook.
As such, the US Treasury throwing its full support behind the US bond market will continue to bring liquidity to the market and support valuations of risky assets. There are echoes of the market impact of Fed QE over the past two decades, although Treasury buybacks are fundamentally different from QE as they do not create central-bank reserves.
But the post-GFC period was marked by very low inflation. Today, US inflation is running persistently above target, as inflation hits everyday goods and services – not only asset prices.
As such, all eyes turn to the Fed, to see how it responds to the latest actions from the US Treasury Department, which only make the inflation outlook more complicated. Kevin Warsh will speak on Friday at the Jackson Hole Symposium, after the US reveals its latest PCE figures on Wednesday – the Fed’s favourite gauge of inflation.
Hard commodities rally on US uncertainty
That complexity is reflected in the bullish price action in gold and other hard commodities.
Renewed appetite for gold despite elevated long-term US yields is striking and sends a clear message: investors are moving back to the precious metal as:
- A hedge against unclear US fiscal plans and the lack of conviction in the US administration’s capacity to rein in exploding debt when military expenses are adding to already heavy bills.
- A hedge against inflation, amid questions over the Fed’s willingness, or ability (!), to fight inflation independently.
- A hedge against a potential rout across global risk assets on worries about high valuations, massive AI spending and the growing financing web around the companies involved in building the AI ecosystem – the circularity.
Last Friday, gold cleared an important technical resistance: the $4530-per-ounce level, which is both the 200-DMA and the major 38.2% Fibonacci retracement of the January-to-July retreat. It flirted with the $4700 offers this morning in Asia before giving back part of the gains.
The question is: will gold gather enough momentum to return sustainably above the $5000 mark?
Possibly, yes. The broad de-dollarization trade that’s quietly building in the background, justified by global institutions’ efforts to diversify away from USTs and toward gold, remains supportive of gold in the longer run. In the shorter run, overbought conditions could lead to downside corrections, giving dip-buying opportunities to long-term bulls.
And zooming out, the present macroeconomic setup – with rising inflation expectations – increases appetite for hard commodities, and alternative assets and hard commodities are also having a moment.
Among them, Bitcoin has rallied strongly since last week, while copper – one of my favourite industrial metals in the AI age – is also pushing higher, with the positive momentum backed by strong backwardation – meaning the spot price is higher than futures prices – which in turn is backed by strong fundamentals: copper supply and inventories struggle to keep pace with strong demand growth driven by electrification and the AI buildout, and the widening demand/supply gap makes traders willing to pay a large premium for copper now, rather than copper delivered later.