Posted on July 27, 2015
Gold prices are seeing a bit of a bounce this morning as stock markets sell off and crude oil continues to move lower. A weaker U.S. dollar index today is also likely fueling buying in gold.
A degree of risk aversion has set into global markets today as Chinese stocks fell significantly today, with the Shanghai Composite Index tumbling 8.5 percent. This drop was was the largest seen in eight years, and will likely fuel speculation of a further meltdown in Chinese equities.
Worries have intensified that recent measures taken by Beijing, including limits on selling and additional margin financing, will fail to stop the recent volatility seen in Chinese stocks. While it was thought that authorities may see if markets can once again stand on their own, some now believe that further intervention is likely.
Being the world’s second largest economy, and one of the largest consumers of commodities, weakness in China can have a significant contagion effect on global markets. Should selling pressures in China continue, or intensify, commodities such as crude oil may see additional downside pressure, and stocks may also see further selling as investors take to the sidelines.
A bounce in gold does not come as a big surprise. The market had become oversold on a short-term basis, and today’s buying may be a mix of bargain hunting and short covering. The market has thus far held the five year low around the $1080 level, but remains vulnerable to further downside pressure.
In addition to China, markets will have plenty to ponder this week. Markets will be getting the latest readings on durable goods orders, Dallas Fed Manufacturing, consumer confidence, PMI Services Flash, the Case-Shiller Housing Index, GDP, weekly jobless claims, consumer sentiment and Chicago PMI.
The data highlight of the week, however, will likely be the FOMC meeting beginning tomorrow and concluding on Wednesday. Investors will likely be looking for any additional clarity surrounding the Fed’s plans with regards to interest rate hikes. The Fed has reiterated that a hike will come this year, and should the Fed continue to sound hawkish, it could potentially add to pressure being seen in stocks today.
While a hawkish-sounding Fed may be considered bearish for gold, if the central bank’s comments rattle equity markets gold could still potentially stand to benefit as risk aversion takes further hold.
The gold market will likely continue to move based on any further developments in China, as well as any further guidance on interest rates.