Silver surrenders gain as US Fed Chief remains cautious on rate cuts

Performance:

Spot silver was buoyant on Tuesday as the metal rallied from the day’s low of $29.20 to $29.82 on softer US yields, the highest level since June 21.

The US yields, after a sharp rise in the last two days, corrected lower ahead of the Fed Chair Powell’s speech. However, Powell reiterating his cautious views on the US Fed’s monetary policy and a slightly better than expected US JOLTs openings data sent the metal sharply down from its day’s high.

COMEX silver, at the time of the MCX closing, was trading at $29.39, down 0.15 per cent on the day, whereas the MCX September Silver contract at Rs 89,939 was up 0.21per cent.

 

The US Dollar Index and the US yields:

The ten-year US yields at 4.44per cent, were down 0.78per cent on the day when the MCX closed. The yields recovered nearly 3 bps from the day’s low of 4.41per cent. The twos were down 2 bps. The US Dollar Index at 105.77 was down 0.07per cent on the day.

Central Bankers at European Central Forum on Central Banking:

The US Fed Chair Powell, at the ECB forum in Sintra, Portugal, said that the latest US economic data show that disinflation trend continues, but the Fed officials need more evidence on inflation data before they can start cutting interest rates.

He acknowledged that both the US economy and the labour market are strong; however, he added that unexpected loosening in the labour market would warrant a pivot in the Fed's monetary policy. He warned that the US fiscal deficit is on an unsustainable path.

The ECB President Ms. Lagarde was dovish in her take on the ECB's monetary policy, though she did not drop any clear hints regarding a July rate cut.

She said that the ECB does not need service inflation to slow to its 2per cent target for deciding on cutting benchmark rates as manufacturing inflation is already below 2per cent. It is to be noted that the as per the latest data, services inflation held at 4.1per cent as the Euro-zone inflation moderated to 2.50per cent.

Brazil's central bank Chief said that the Brazil's central bank is not yet considering rate hikes. The Central Bank stopped the year-long easing cycle last week.

Data round up:

The US data released Monday turned out to be weaker than expected as construction spending (May) fell 0.10per cent m-o-m Vs the forecast of plus 0.2per cent. ISM manufacturing (June) came in 48.50 Vs the expectation of 49.10 as manufacturing sector contracted for the third month in a row. ISM prices paid trailed the forecast, while ISM new employment fell to 49.30 (forecast 50) from 51.10 in May.

The US JOLTs job openings (May) came in at 8140K Vs the forecast of 7946K, the prior data was revised lower from 8059K to 7919K though.

Upcoming data: Focus on ISM services and FOMC minutes

Today's major US data on tap include ADP employment change (June), trade balance (May), weekly job, S&P global US services and composite PMIs (June final), factory orders (May), durable goods orders (May final) and ISM services Index (June). FOMC minutes of June 12 meeting will also be released tonight.

Silver ETF holdings:

Total known global silver ETF fell for the fourth straight day to 684.913MOz on July 1, the lowest level since June 10. The COMEX silver inventory was noted at 297.663MOz as of July 1, which is the highest level since June 4.

Outlook:

Silver is vulnerable as concerns about Chinese economy grow. The ten-year China yields fell to a record low, reflecting growth worry, which has forced the Chinese central bank to sell bonds. The US manufacturing contracted for the third straight month. In addition, the US yield curve is showing a bear steepening as long-term yields rise faster than the short-term yields, reflecting a late cycle strength.

MSCI Inc.’s key gauge for Chinese stocks has entered a technical correction despite numerous policy measures. China’s third Plenum government meetings will be held on July 15-18. It is widely expected that Chinese leaders will be announcing more stimulus to allay growth concerns and restore market’s confidence. 

In the near-term, silver is expected to trade with a bearish bias as the upcoming US ISM services and nonfarm data are likely to reflect that the US economy is still going strong.

Support is at $29 (Rs 88,700) /$28.50 (Rs 87,200). Resistance is at $30 (Rs 91,800)/$31 (Rs 94,800). 

(Praveen Singh is an associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own)