Gold, XAU/USD, US Dollar, Fed, Treasury Yield Curve, FOMC, SVB – Talking Points
- Gold strengthened after the US Dollar wilted on SVB collapse
- The Fed funds rate path might be altered in light of rising financial pressures
- If Treasury yields and real yields scope lower, will that send gold higher?
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Gold has found support again today as markets were left reeling in the aftermath of the collapse of Silvergate Capital Corp. and Silicon Valley Bank (SVB) last week, followed by Signature Bank on Sunday.
Authorities have worked hard over the weekend to reassure depositors that their funds will be safe in these firms. These failed businesses largely served the crypto and technology industries. It has been made clear that bond and equity investors will not be bailed out.
The US Treasury Department said that deposits will be available to customers on Monday while the Federal Reserve created a liquidity facility for eligible financial deposit-taking institutions.
There is some speculation in the market that the Federal Open Market Committee (FOMC) will keep the Fed funds target rate unchanged on the 22nd of March meeting. The overnight index swap (OIS) market is now leaning toward a 25 basis point hike rather than a 50 bp lift last week.
US CPI due out Tuesday may have the implications for monetary policy that it would have prior to the collapse of these small banks.
The change in rate expectations saw Treasury yields go notably lower out to 5-years but were relatively unchanged beyond there. The 2-year note moved more than 70 bp lower from last week’s peak of 5.08%, which was the highest yield since July 2007.
This has seen the 2s 10s Treasury curve inversion contract more than 40 bp from last week’s nadir of -1.08%.
Similarly, the US 10-year real yield, that is the nominal yield less the market-priced inflation rate for the same period, dipped by more than 30 bp from last week’s peak of 1.72%.
Gold is a non-interest bearing-asset and can be subject to changes in nominal yields and real yields. Additionally, the yellow metal has been boosted by a deteriorating US Dollar. Not surprisingly, gold volatility (GVZ) has also ticked up in this environment.
Palladium saw almost 3% gains while silver also reached higher, as did platinum.
In currency land, the greenback has been hammered across the board with the Australian Dollar a notable beneficiary which might seem somewhat counterintuitive if risk aversion is to pick up steam. Emerging market currencies are all higher.
The decisive measure taken by authorities has seen Wall Street futures recover through early Monday trade after a sell-off on Friday. APAC equities are mixed with Australian and Japanese equity indices lower while China and Hong Kong have seen their bourses move higher.
Famed investor Bill Ackman gave the authorities his tick of approval on his Twitter account. He highlighted that prompt action was required and that taxpayer money did not bail out bond and equity investors.
Elsewhere, new Chinese Premier Li Qiang spoke for the first time and kept to the script but did say that achieving growth targets will not be easy.
In an interview on Bloomberg TV, Eisuke Sakakibara former Japanese Vice Finance Minister said that he does expect new Bank of Japan Governor Kazuo Ueda to make any significant policy changes for some time.
Crude oil is steady with the WTI futures contract near US$ 77 bbl while the Brent contract is around US$ 83 bbl. Aramco, the Saudi oil giant, posted a record profit of USD 161 billion last year on the back of surging energy prices and announced an uptick in dividend payouts.
The week ahead will be highlighted by US CPI on Tuesday and the European Central Bank (ECB) rate decision on Thursday.