Weekly Musings – Macro Quartet for the week ending December 01, 2023

3 Dec 2023 , 09:37 AM

OIL WEAKENS, GOLD CONTINUES TO SHINE

This week, once again, was about oil prices and gold prices as gold continued to shine. Gold prices have now rallied for 3 weeks in a row from $1936/oz to $2,071/oz. The rally is coming from two fronts. Firstly, the demand for gold from central banks increased in the last few weeks and that gave a boost to gold prices. Globally, investors are inclined to increase their exposure to gold, even as a hedge. After all, gold is the only safe haven asset that has helped to hedge risk and boost returns. The rally in gold is also a signal that rate hikes may finally be done and dusted; and lower interest rates should help to reduce the opportunity cost of holding gold. That has been a key factor driving the price of gold higher.

The other story was about oil, which fell this week, despite OPEC+ agreeing to supply cuts of 1 million barrels per day. It is not about the US, Russia, or Saudi Arabia. The story of oil today is the non-OPEC non-leader oil economies. If you add the output and exports of the 7 key producers viz., Canada, Brazil, China, Norway, Mexico, Kazakhstan, and Azerbaijan; they account for 22% of global output and about 25% of exports. It is these 7 producers who are actually driving alpha in oil markets and deciding the short term course of oil. For now, oil prices are capped at $80/bbl in the Brent market. There were also the US data points like PCE inflation and GDP data, but we will take that up separately in the next point.

STORY OF US BOND YIELDS AND DOLLAR INDEX THIS WEEK?

Two macro variables that set the trend for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yield movements. 

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 27, 2023	4.390	4.492	4.514	4.381
Nov 28, 2023	4.325	4.402	4.422	4.321
Nov 29, 2023	4.259	4.319	4.328	4.253
Nov 30, 2023	4.330	4.267	4.369	4.247
Dec 01, 2023	4.209	4.321	4.349	4.198

Data Source: Bloomberg

US bond yields, are now a full 79 bps below the recent peak of 5% scaled over 3 weeks back. This fall only underlines the Fed stance that the spike in bond yields had little to do with Fed hawkishness and more to do with the alignment of yields with the yield curve. In recent weeks, the Fed has maintained its hawkish tone, but the bond yields on the US benchmark 10-year bonds have now fallen back to 4.21% levels. That is because, markets don’t really expect any runaway inflation in global markets and that is only underlined by the sharp fall in PCE inflation to 3% in October 2023. Let us now turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 27, 2023	103.20	103.42	103.53	103.19
Nov 28, 2023	102.75	103.13	103.32	102.61
Nov 29, 2023	102.76	102.65	103.01	102.47
Nov 30, 2023	103.50	102.83	103.59	102.72
Dec 01, 2023	103.27	103.36	103.72	103.11

Data Source: Bloomberg

The dollar index is an index of dollar strength against a basket of global hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. What do we gather from the US Dollar Index (DXY). Despite the relatively hawkish tone of the US Fed, and the dovish signals coming from the CME Fedwatch; the dollar index (DXY) was again flat this week. The big level to watch is 107, which was recently scaled last month. This level has only been breached on 3 occasions in the last 40 years and that could be the dividing line for dollar strength. However, dollar index has already fallen sharply from the recent highs. For now, it does look range bound.

INDIA BOND YIELDS SHOW LITTLE IMPACT OF DATA FLOWS

The Indian bond yields increased 2 basis points this week from 7.27% levels to 7.29%. Despite strong India GDP data and fiscal deficit being in check, bond yields were not too impressed. It is a cautionary note ahead of elections, since markets are still apprehensive that election year could force the government to overshoot on the fiscal deficit front. 

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 06, 2023	7.305	7.301	7.307	7.294
Nov 07, 2023	7.280	7.318	7.318	7.277
Nov 08, 2023	7.266	7.273	7.281	7.255
Nov 09, 2023	7.269	7.256	7.276	7.246
Nov 10, 2023	7.300	7.293	7.305	7.288
Nov 13, 2023	7.283	7.316	7.316	7.281
Nov 14, 2023	7.283	7.316	7.316	7.281
Nov 15, 2023	7.225	7.262	7.262	7.220
Nov 16, 2023	7.232	7.236	7.236	7.220
Nov 17, 2023	7.212	7.226	7.230	7.194
Nov 20, 2023	7.252	7.230	7.257	7.224
Nov 21, 2023	7.269	7.247	7.272	7.237
Nov 22, 2023	7.247	7.277	7.277	7.245
Nov 23, 2023	7.253	7.258	7.263	7.246
Nov 24, 2023	7.272	7.278	7.291	7.266
Nov 27, 2023	7.272	7.278	7.291	7.266
Nov 28, 2023	7.273	7.258	7.277	7.253
Nov 29, 2023	7.252	7.258	7.258	7.237
Nov 30, 2023	7.279	7.250	7.287	7.248
Dec 01, 2023	7.290	7.293	7.298	7.279

Data Source: RBI

During the week, the bond yield opened at 7.272% but later stayed in the range of 7.25% to 7.29% through the entire week before closing at 7.29%. While the language of the US Fed remained hawkish, the US PCE inflation data and the US GDP data appear to rule out further rate hikes in the US. That is something that the CME Fedwatch is hinting at; although the Fed is still non-committal. RBI has already indicated it would not be too keen to hike rates aggressively from these levels since it also has a growth and solvency story to worry about in India. That is correct as India cannot afford to give up its mantle of being the fastest growing large economy in the world. Definitely, not at a time, when the Q2 GDP growth has come in at a robust 7.6%, beating most rational expectations in the market. 

RUPEE STRENGTHENS ON STRONG FPI FLOWS

For the ninth week in a row, the Indian rupee stayed beyond the 83/$ mark. This week, the rupee opened at 83.333/$ and closed the week with at 83.26/$ levels. On a week-on-week basis, the rupee strengthened by 6 basis points.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Nov 06, 2023	83.218	83.107	83.263	83.085
Nov 07, 2023	83.230	83.221	83.287	83.210
Nov 08, 2023	83.213	83.234	83.310	83.208
Nov 09, 2023	83.315	83.232	83.341	83.216
Nov 10, 2023	83.309	83.302	83.499	83.224
Nov 13, 2023	83.180	83.309	83.343	83.201
Nov 14, 2023	83.023	83.187	83.338	82.914
Nov 15, 2023	83.186	83.023	83.221	82.942
Nov 16, 2023	83.140	83.186	83.270	82.994
Nov 17, 2023	83.294	83.140	83.296	83.140
Nov 20, 2023	83.317	83.265	83.424	83.230
Nov 21, 2023	83.308	83.321	83.380	83.228
Nov 22, 2023	83.287	83.313	83.359	83.255
Nov 23, 2023	83.305	83.276	83.368	83.265
Nov 24, 2023	83.314	83.344	83.413	83.313
Nov 27, 2023	83.330	83.324	83.433	83.309
Nov 28, 2023	83.340	83.358	83.399	83.292
Nov 29, 2023	83.352	83.292	83.383	83.260
Nov 30, 2023	83.357	83.359	83.419	83.290
Dec 01, 2023	83.260	83.356	83.375	83.240

Data Source: RBI

Typically, the Indian rupee has been closely linked to the dollar index, but there are 2 more factors that impact rupee value. The first is crude oil prices. That has tapered in recent weeks to below $78/bbl and that has been instrumental in the USDINR equation slightly favouring the rupee. But the big story in the week was about FPI flows as the FPIs infused $2.2 billion into equities in the week; most of it coming in the last 2 days after the GDP data was known. One fundamental factor to watch out for is the level of trade deficit as that will be the long term fundamental driver of current account deficit (CAD).

BRENT CRUDE FALLS AS NON-OPEC PLAYERS CALL THE SHOTS

In the previous 3 weeks, the price of Brent crude had fallen from $90.15/bbl to $80.58/bbl. This week, oil fell further to $78.88/bbl despite the OPEC agreeing to cut supplies by 1 million bpd. However, 96% of OPEC targets are never met and it is the non-OPEC nations that are not calling the shots. After all, Outside the OPEC Plus and the US; there are 7 key oil producing countries that account for 20% of the global oil output and 25% of the oil exports. They are now calling the shots on oil supplies and oil prices. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Nov 06, 2023	85.18	85.55	86.46	84.88
Nov 07, 2023	81.61	85.15	85.19	81.40
Nov 08, 2023	79.54	81.40	81.96	79.20
Nov 09, 2023	80.01	79.70	81.48	79.44
Nov 10, 2023	81.43	79.85	82.06	79.79
Nov 13, 2023	82.52	81.43	82.84	80.41
Nov 14, 2023	82.47	82.71	83.97	82.06
Nov 15, 2023	81.18	82.39	83.04	80.79
Nov 16, 2023	77.42	80.98	81.17	76.60
Nov 17, 2023	80.60	77.60	80.81	77.28
Nov 20, 2023	82.32	80.30	82.94	79.58
Nov 21, 2023	82.45	82.13	82.54	81.43
Nov 22, 2023	81.96	82.47	82.65	78.41
Nov 23, 2023	81.42	81.60	81.63	80.19
Nov 24, 2023	80.58	81.40	82.20	80.13
Nov 27, 2023	79.87	80.16	81.14	79.07
Nov 28, 2023	81.47	80.17	81.97	79.70
Nov 29, 2023	82.88	81.64	82.99	80.72
Nov 30, 2023	80.86	82.62	84.61	80.01
Dec 01, 2023	78.88	80.67	81.54	78.75

Data Source: Bloomberg

Even as the OPEC uncertainty ended leading to the meeting on November 30, 2023, there is the rising risk of non-OPEC players getting a more pivotal role in the supply equations. For a long time, strength in oil came from reserves. With fossils likely to be phased out in 50 years, oil reserves do not hold that much importance. That is where much of the Middle East nations are losing their importance in oil pricing equations. Despite supply cuts, oil remained under pressure and that situation is likely to continue. 

GOLD PRICES SPIKE FOR THIRD WEEK IN A ROW

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Nov 06, 2023	1,977.68	1,992.30	1,993.30	1,977.52
Nov 07, 2023	1,968.40	1,978.19	1,978.75	1,956.20
Nov 08, 2023	1,949.79	1,968.84	1,971.12	1,947.48
Nov 09, 2023	1,958.19	1,950.09	1,965.69	1,944.30
Nov 10, 2023	1,936.79	1,958.40	1,960.93	1,933.18
Nov 13, 2023	1,945.89	1,937.05	1,949.27	1,931.73
Nov 14, 2023	1,962.54	1,946.61	1,970.91	1,943.83
Nov 15, 2023	1,960.46	1,962.59	1,975.24	1,955.47
Nov 16, 2023	1,982.70	1,960.40	1,988.04	1,956.51
Nov 17, 2023	1,980.87	1,982.62	1,993.49	1,978.65
Nov 20, 2023	1,977.19	1,980.39	1,985.26	1,965.20
Nov 21, 2023	1,998.37	1,977.49	2,007.52	1,977.34
Nov 22, 2023	1,989.72	1,998.69	2,006.90	1,986.89
Nov 23, 2023	1,991.79	1,990.15	1,999.19	1,989.01
Nov 24, 2023	2,002.85	1,994.20	2,003.68	1,991.51
Nov 27, 2023	2,013.64	2,002.78	2,018.14	2,000.67
Nov 28, 2023	2,040.89	2,013.94	2,043.00	2,011.60
Nov 29, 2023	2,044.59	2,041.24	2,052.09	2,035.05
Nov 30, 2023	2,035.75	2,044.80	2,047.59	2,031.84
Dec 01, 2023	2,070.90	2,034.49	2,075.34	2,033.75

Data Source: Bloomberg

Gold has rallied for the third week in a row. Effectively, gold has rallied from $1,936/oz to $2,071/oz this week; a huge gain of 6.97% in the last 3 weeks. That makes it one of the best asset classes. The surge in gold demand is also being triggered by a number of central banks preferring to hold their reserves in gold. Overall, it looks like the glitter is back in gold.

Gold rallies are ultimately a function of low interest rates as it reduces the opportunity cost of holding gold. That was the one factor that drove gold rallies in the past. It is not clear, how much more legs gold has, but the technical undertone of gold is still strong.