Hello traders
I hope you had a good week!
Risk assets had enjoyed gains until news of a new Covid-19 variant broke and roiled markets in Asia overnight. Reports are that this new mutation of the virus, which was first identified in South Africa this week, shows signs that it has the potential to be even more infectious than the previous delta variant. There apparently have also been a few cases identified in Hong Kong, raising the risk of global contagion. The U.K. government has responded quickly to shut down its borders to air passengers arriving from South Africa as well as a number of other countries in the African continent.
Given the developing nature of this story, and acknowledgement that I am no expert in epidemiology, we should perhaps take our cues from the reaction in European equities this morning. At the time of writing, the EuroStoxx 50 is down almost 3%, with the CAC40 of France fairing slightly worse, and German DAX slightly better. Most notably the interest rate sensitive ‘value’ and ‘reflation’ trades are getting hammered, with the US 10 Year treasury yield plummeting by 10 basis points on a flight to safety. Recent darlings like Barclays, Glencore and Daimler are trading between 4-5% lower, with even higher quality industrials and consumer names taking a beating. Indeed, the market apparently sees this as a very real threat…
As I am in the midst of digesting the news and managing my own portfolio through the unfolding situation, today’s post will be briefer than usual. We have of course been tracking the performance of gold in recent weeks, which shows a score of +0.5 on our Checklist this month. Whilst it presented a positive bias, it did suggest that the market overall could still be rangebound and that taking profits following a rally may be no bad idea – despite the recent frenzy around rising inflation.
Here’s the daily chart which I shared last Friday showing support and resistance in the range between $1700-1900 highlighted in orange.
Around 1863, it looked like an area to potentially take profit given how far gold has come since we first identified the setup at the beginning of the month.
Here’s how things looks currently. As you can see, the market sold off by around $80 in quick succession, towards the lower-end of the range. The key thing to note is how the price has reached an oversold level on the hourly RSI and also shows some bullish divergence before the flight to safety overnight lit the blue touchpaper.
I wish you all a safe and enjoyable weekend, with special wishes to those of you celebrating Thanksgiving this weekend. The US markets will be closed earlier than usual today for the holidays, but given the volatility it could prove to be rather stressful for traders.
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Have a great weekend,
James
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