European update – Gold higher as markets tumble

Risks pile up to derail investor sentiment

There’s a sea of red in equity markets on Tuesday, as risk appetite is quickly dissolved and safe havens come back into favour.

The sell-off came following a reversal in fortune in the US on Monday, where early gains fizzled out and some additional selling late in the session appeared to rattle the markets. This apparent lack of confidence even in the US – which has shown more resilience than its Asian and European counterparts in recent months – has spread anxiety throughout the markets and got people talking about the prospect of a greater downturn.

This is coming back to the number of underlying risk factors in the markets right now, be it US interest rates, Brexit, Italian debt, trade wars or emerging markets. These are all destabilising factors and sentiment may finally be caving under the weight of it all. Trump’s tax cuts ensured that the US is the last to fall, with companies reporting stunning earnings growth in the first two quarters and the third shaping up the same way, but this can only last so long and its finally taking its toll.

DAX slips over Italy debt, trade war tensions

The question now is how bad it gets and what is done to reassure investors. Instability in the markets could encourage the Fed to take its foot off the gas when it comes to interest rate hikes which may ease some of the tension in the markets, given that the sell-off appeared to start with Powell’s claim that the central bank is a long way from neutral. This came in the same week that we got some solid economic figures that did little to change people’s views that rate hikes could be too aggressive.

Gold safe haven demand returns

Appetite for Gold is certainly picking up in these very unsettled markets, with the yellow metal scaling levels not seen in three months despite the fact that stock markets in that time have performed quite poorly, particularly in Europe and Asia. Gold’s role as a traditional safe haven was called into question at times this year when it sunk around 15% between April and August, even during times of apparent risk aversion in markets.

Gold Daily Chart

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This may well have something to do with the fact that US Treasuries were seeing increased interest as Trump ramped up trade tensions with various countries. The fact that US stock markets also continued to perform well during this period which will have offered further support for the dollar won’t have helped matters either. A stronger dollar is typically negative for Gold and will have weighed on price. Even US markets though have been vulnerable to the latest moves which likely explains the sudden appetite for Gold again.

Bullying up on safe havens

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.