Gold Surges as Recession Fears and Geopolitical Tensions Rattle Global Markets
August 2024
Category: Invest
By
Checked by ,
Updated
It has been a volatile few weeks for investment markets, with revised market expectations manifesting from geo-politics and new economic data feeding through into asset prices.
Last week, the USD gold price spiked through the $2,400 level on news of increased aggression in the Middle East. The momentum carried through into Friday as US non-farm payrolls showed a weakening labour market with hiring numbers coming in well below expectations, raising fears of recession. The gold price peaked at an all-time high at around $2,484 by early Friday afternoon, before a flight to US Dollar safety took control and brought the gold price to 2% lower on the day – the gold price tends to move inversely to the Dollar.
Fast forward to markets opening on Monday, beginning in Asia, and the fear of a US recession and its effect on global markets began to take hold. The Japanese stock market was worst hit, with a selloff in equities precipitated by the unwinding of trades in Western markets causing a flow of cash back into the Japanese Yen, which quickly appreciated the value of the Yen versus its trading partners’ currencies. This swift Yen appreciation had the knock-on effect of quickly wiping off Japanese equity market valuations, as the nation’s companies are heavily export dependent and a strong currency means they are less competitive in the global marketplace. What’s more, Japanese tech stocks had been reporting mixed earnings and this, coupled with the Bank of Japan raising interest rates last week, had already created an uncertain outlook for Japanese companies.
Shockwaves rippled across global equity markets, with tech stocks baring the brunt owing to already stretched valuations and were the subject of profit-taking amid the uncertainty. The benchmark US equity index, the S&P 500, fell 3% whilst over the pond, stock markets fell to a slightly lesser magnitude owing to a smaller weighting to technology stocks.
As the week has progressed, the talk has turned to the US Federal Reserve potentially being ‘behind the curve’ on US interest rate policy and that rates will ‘almost certainly’ be lowered at the next policy meeting in September. Similarly, the Bank of Japan, who are responsible for setting Japanese interest rates are likely to tread more cautiously with any future planned interest rates hikes. This narrative has led to a rebound in equity markets, and the US Dollar to Yen exchange rate has also sprung back to trade roughly where it had been prior to Monday’s market turmoil.
Confidence and calm is returning to equity markets and the flight to safety in gold has abated; the gold price has settled back around the $2,400 (£1,900) level, broadly speaking.
With the US Presidential election fast approaching, and geopolitics on a fragile footing, we could see more risk aversion in the market, particularly if fears of recession continue to be stoked.
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Sources
Gold slips from all-time peak on profit taking, firmer dollar | Reuters
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