Signs of easing tensions in the Middle East, where energy facilities were targeted in mutual attacks, have emerged. International oil prices retreated from near four-year highs, temporarily alleviating market anxiety over inflation. However, signals of a hawkish shift from global central banks are triggering significant adjustments in the precious metals market.
Recent statements from the United States and Israel have alleviated concerns about a further escalation of the Middle East conflict. According to reports, Israeli Prime Minister Benjamin Netanyahu pledged to halt attacks on Iranian energy facilities, stating, "I believe this war will end much sooner than people think." Concurrently, the US administration indicated it would not deploy ground troops. Influenced by these developments, Brent crude prices retreated from their highest closing level since July 2022 to around $107 per barrel.
The pullback in oil prices provided some support to emerging market assets. After plunging 2.7% on Thursday due to the oil price surge, the MSCI Emerging Markets index showed signs of stabilizing with volatility on Friday. A key index for developing-nation currencies edged up 0.2%, with both indices on track for weekly gains. Nevertheless, inflation concerns stemming from high energy prices have profoundly altered global monetary policy expectations. Bond markets are no longer betting on interest rate cuts from the Federal Reserve this year, while the European Central Bank even faces pressure to hike rates.
Yesterday, under the dual pressures of dashed hopes for rate cuts and liquidity shocks, precious metals like gold faced heavy selling. The gold price has since stabilized with a slight increase.
Key asset performances are as follows:
**Equity Markets:**
The MSCI Asia Pacific index dipped 0.2% on Friday. Japanese markets were closed for a holiday. South Korea's Kospi index rose over 1% at one point during the day before paring gains to 0.3%. Samsung Electronics led the advance. US stock index futures were virtually flat. European stock index futures mostly saw modest gains, with Euro Stoxx 50 futures up 0.6%.
**Commodities:**
WTI crude oil fell over 1% to $94.49 per barrel, while Brent crude also experienced a slight decline. Spot gold, after a significant drop, held steady near the $4,660 level. Silver fell nearly 2% at one point.
**Foreign Exchange:**
The Thai baht led gains among currencies, while offshore Chinese yuan performed relatively weakly.
**Emerging Market Assets Stabilize**
As oil prices retreated, emerging market assets demonstrated resilience heading into the weekend. Mitul Kotecha, Head of Asia FX and Emerging Markets Macro Strategy at Barclays, noted, "Comments from Israeli and US officials have helped inject a note of calm into markets today, aiding a recovery in emerging market assets."
Despite geopolitical conflicts adding uncertainty, overall investor sentiment towards emerging markets remains positive. A survey from HSBC revealed that the proportion of investors bullish on emerging market assets has climbed to its highest level since January 2021. Vincent Mortier, Chief Investment Officer at Amundi, pointed out that factors such as improved government finances and resilient growth expectations are supporting emerging market economies. He added that emerging market stocks currently represent only about 5% of global assets under management, below the long-term average of 7% to 8%, suggesting potential for gradual increase.
In the Asia-Pacific region, South Korea's Kospi index initially rose over 1% on Friday before settling with a 0.3% gain, led by Samsung Electronics and Samsung C&T. The Thai baht led currency gains, while the offshore yuan was relatively soft. However, weighed down by heavyweight stocks like Alibaba, the MSCI Asia Pacific index edged down 0.2% for the day.
US stock index futures were nearly unchanged. European stock index futures mostly registered small gains, with Euro Stoxx 50 futures advancing 0.6%.
**Inflation Concerns Reshape Rate Expectations**
Despite the short-term pullback in oil prices, the profound impact on energy supply chains persists, causing global inflation risks to spike sharply. This is forcing central banks worldwide to reassess their monetary policy paths.
According to reports, institutions including J.P. Morgan, Morgan Stanley, and Barclays have significantly adjusted their interest rate forecasts for the European Central Bank. Barclays and J.P. Morgan now anticipate the ECB will hike rates at its April policy meeting, followed by further increases in June and July. Morgan Stanley expects 25-basis-point hikes in June and September. This shift stems from the upside risks to inflation posed by the Middle East conflict.
It is not just the ECB; major central banks globally have conveyed hawkish signals this week. The Federal Reserve held rates steady but maintained a hawkish tone. The Bank of England explicitly stated it stands ready to "take action" to counter inflation. Australia's benchmark bond yield climbed to its highest level in nearly 15 years. Garfield Reynolds, Head of Bloomberg's MLIV Asia team, observed, "The signal from bond markets is that any drop in oil prices is likely to be fleeting, and supply shocks in oil and gas will continue to fuel inflationary pressures."
**Fading Rate Cut Hopes Trigger Precious Metals Sell-off**
The reversal in interest rate expectations has become the core driver behind the sharp decline in precious metals. Since gold does not generate interest income, the scaling back of rate cut expectations directly diminishes its relative appeal.
Aakash Doshi, Global Head of Gold and Metals Strategy at State Street Global Advisors, commented, "Before the conflict erupted, money markets were pricing in two Fed rate cuts this year. Current market pricing reflects no easing at all for the year."
Spot gold plummeted 3.5% on Thursday, briefly touching the $4,500 mark and hitting a six-week low. On Friday, the gold price remained near these recent relative lows. Silver fell nearly 2%.
Simultaneously, both retail and professional investors are reducing their exposure to precious metals. Data from VandaTrack indicated that the world's largest gold ETF, SPDR Gold Shares, has experienced net outflows from retail investors for six consecutive trading days. Tom Wrobel, Director of Capital Advisory at Société Générale's Commodities Brokerage unit, noted that trend-following hedge funds (CTAs) are actively reducing gold positions amid the current volatility.
Suki Cooper, Head of Global Commodities Research at Standard Chartered, added that given the substantial price increases for gold and silver over the past two years, some investors are choosing to realize profits to cover losses in other assets. Furthermore, a stronger US dollar is diverting some capital flows. This selling pressure is not confined to gold and silver; platinum, palladium, and industrial metals like copper and aluminum have also declined, reflecting a systemic downward revision of global growth expectations by the market.
