On what was going to be a quiet Friday towards the end of the month, with month end data next week changed with simple words from ECB President Draghi, saying that the ECB would not sit idly by and allow the monetary union to collapse. With this, markets went ballistic risk went out the window and eco data and earning were ignored. Speculators were like horses at the gate, just waiting for the start signal.
Base metals are trading up by 0.3 to 1.1 percent at LME electronic platform supported by strong Asian equities. After retreating for consecutive 4 days, the equities have also reversed to the positive territory due to increased optimism after ECB signaled its resolve to defend Euro-zone. The early morning Asian releases of retail trade from Japan continued to contract while Chinese industrial profits have remained at tenterhook and may continue to support downside for base metals.
Further, the focus of markets has shifted from Europe to US and the GDP releases will be eyed on today’s session. During the week, the markets remained weak due to deteriorating Euro-zone, while presently the gains are witnessed on the back of support from the ECB. Hence, similar to riskier assets like equities base metals may remain strong until the European session.
However, expectation of US economy contracting may continue the downtrend by the evening. Further, the Euro may lack further rising momentum and will mainly fluctuate strongly as longs take profit booking on the back of rising German inflation. Further, ahead of the next week the Euro may remain weak as Greek budget talks stumble and may continue to support downside in today’s session. From the US, the personal consumption may contract as US citizens consume less than earnings while Michigan confidence might also deteriorate on the back of weak GDP expectations and may continue to weaken base metals. On the back of past economic releases, the US may grow at a slower pace while any deviation from the same may continue to support gains in base metals and hence caution needs to be maintained for the day.
On the back of ECB’s pledge to save the Euro, market sentiment has now turned into positive which is expected to continue support the financial market. On this background, gold is yet to set its rally for the day as the early Globex session has not seen much gain in the metal, probably due to the intensified risk appetite of investors.
The Euro is sustaining the rally as the yield spreads in Europe knocked down with Spanish yield dropped well below 6.5%. Positive sentiment is therefore likely to keep the shared currency at a stronger note which will be supportive for gold today.
Moreover, Japan’s inflation entered in a negative region, indicating at the verge of deflation the BOJ should seek for easing which would compel the Yen lower.
More importantly, today’s session is likely to be driven by the US GDP number along with one of its component, personal consumption. Alongside the positive response from ECB, an expected contraction in US GDP from 1.9% to a range of 1.4-1.7% may erase the confidence against the slew of US economic releases which have already indicated languishing economic condition. This however will be supportive for the yellow metal while an extreme print of 1.4% will certainly be persuading Fed to provide easing on its upcoming meet on July 31. Even if the number is certainly expected to come below prior estimation of 1.9-2.4%, likelihood of dollar sell-off rises which in turn should augment the anticipation of QE-3. As we have already seen the fragile housing sector along with the slowest jobs addition, we expect the fragile US economic condition will be supportive for gold.