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Global market to see “tough summer”, gold price and fear index surge

Xinhua Financein
2017-04-17 15:04

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The Volatility Index (VIX), known as the “Fear Index”, has surged nearly 30 percent in the past half month, breaking the tranquil financial market in the world. It can be seen that the international gold price has been speeding up in surging while the U.S. stocks ended their strong momentum and has been increasingly sluggish. 

Analysts indicated that the world will see a “rough summer”. There are still high uncertainties in the policies of President Trump’s administration, which result in the lingering of market risks. On the other hand, geopolitical risks in the Middle East and the Korean Peninsula are intensified. In the second quarter, there are more risks in the European political situation, including the president election in France. The hedge sentiment has been increasing. If “black swan” events break out, investors can increase the investment in gold to tide over the crisis. Statistics show that as at April 14, the COMEX gold futures under the Chicago Mercantile Exchange (CME) reached 1,290.1 U.S. dollars, representing a total increase of nearly 12 percent since the beginning of this year.

Fear Index leaves “tranquil range”

The Volatility Index (VIX), known as the “Fear Index” and a gauge measuring the fear sentiment in the international market, has been declining in the first quarter. It reached a bottom of 9.97 points on Feb. 1, which is close to the lowest level in nearly ten years.

The Futures Weekly of the China Securities Journal published an article on March 13, 2017, pointing out that the global financial market, including the Chinese and U.S. stock markets, is “terribly quiet”. The market is concerned with the calm “Fear Index” and investors prefer risk assets, which may bring significant changes to gold assets. The storm on the gold market may approach at any time.

Originated from the options price of the S&P 500 Index, the VIX Index is the “barometer” measuring the expectation on the fluctuation of the stock market. The VIX Index and the S&P 500 Index generally has a negative correlation. When the stock market hikes, the VIX Index generally declines. After the president election in the U.S. in November, the VIX Index surged significantly, but it did not last long.

The “Trump conditions” on the U.S. stocks have come to an end since March. The S&P 500 Index has plunged over 2 percent since March 1 and it fell below the 50-day average for the first time after the election. Currently, as a result of surging political and economic risks in the world, the panic market sentiment is further intensified. The Credit Suisse Fear Barometer, which measures the stability of the S&P Index, surged 46 percent to 45.74 points, which is close to the peak at the Brexit last year.

The index hiked last week, but the biggest change is from the buyers of stocks, Mandy Xu, an analyst at Credit Suisse, indicated in a report. The decline in the quantity quotation shows that investors believe that there are few potential in the surging of the market. They might have realized the increasing economic and political resistance. Besides the surging Credit Suisse Fear Barometer, the VIX Index closed at 15.96 points on April 14, representing a total increase of nearly 30 percent in the month.

Some domestic analysts pointed out that the fear sentiment of investors is mainly from the concerns about political risks and the economic prospects of the U.S. The U.S. conducted missile strikes against Syria after Syria adopted chemical weapons. It also sent carriers to waters near the Korean Peninsula and the situation becomes serious. In Europe, the result of the present election in France is still uncertain and the first round of voting will be conducted on April 23. In addition, the market also worried about the shocks of the negotiation on Brexit. In the U.S., the healthcare reform proposed by Trump failed last month. Investors are uncertain about whether the plans on infrastructure and taxation reform can be smoothly implemented.

The worries on the U.S. stock market should not be overlooked. In addition, the European VIX Index also hit a new high. The quantity of VStoxx futures hit a record high. Compared with the VIX Index, Vstoxx is a protection on buy rather than sell. Investors increased hedge before the president election in France and the financial market saw more fluctuations. The first round of the president election in France will be conducted in about one week and the market calls for investors to pay attention to relevant risks on euro.

“Black swan” events likely to break out in Q2

Based on the VIX Index in the first quarter, all “black swans” in the global financial market have flown off. Europe will see a “rough summer”. Political risks accumulated previously may break out in the second quarter. If accidents, even “black swan” events, happen, it will further intensify the fluctuation of the financial market, which may greatly shock the precious metal market. 

Analysts indicated that the uncertainties in the political situation in Europe will be the market focus in the second quarter. As the elections in European countries have not completed, the changes in such political situation may intensify hedge sentiment in short and medium terms, which will benefit the precious metal market.

On March 9, 2017, Britain announced that it will officially initiate the Brexit procedures. It means that Britain has made active progresses in Brexit. Despite fewer political risks in Britain, it still faces challenges in Brexit.

An analyst from ITG Futures estimated that it is more likely that Britain and the EU will reach an agreement on Brexit to prevent a free-fall Brexit. Although the initiation of Brexit procedures means a further step in Brexit, it still faces challenges in the process. The negotiation between the UK government and other parties may intensify the market fluctuation.

In the second quarter, the president election in France will see biggest risks as it will run through the whole second quarter. It will conduct two rounds of president election on April 23 and May 7. The parliamentary election will fall on June 11 and 18.

Insiders indicated that Europe has entered a “rough summer”. Under the tight political situations, the European Central Bank and the Bank of England will have no significant moves. They are more likely to take no actions.

Besides, for the Trump administration, it is currently not likely that the implementation of Trump policies will affect the economy, the interest rate hike by the Fed and the performance of U.S. dollars, the uncertainties of Trump policies will catch more attention. The market still has worries over the implementation of fiscal policies as scheduled.

Investors increased investment in gold amid fears

Investors are conducting more transactions on gold, Japanese yen and other hedge instruments. The gold price nearly hit 1,300 U.S. dollars per ounce last week for the first time since Trump was elected as the president.

It is noted that the Fed. will be more firmly in interest rate hike this year. The Fed. further raised the interest rate in December 2016 and announced that it will conduct three rate hikes in 2017. It has sped up in interest rate hike in 2017. The hike in March shows that the Fed. is returning to the normal road of rate hike. It will be more flexible in rate hike in the future.

As a matter of fact, the February meeting of the Fed. gave no hints on rate hike. However, during the less than two weeks from end-February to early-March, the voices of hawkish Fed. officials reversed the estimation on rate hike in March. It means that the Fed. is transforming the statements of meetings into voices of officials. It will significantly shorten the “preparation” for rate hike and will make the Fed. more flexible in releasing signals on rate hike through officials. It will be more difficult to estimate rate hikes in the future.

Despite such measures, the central bank and investors still place inspection on the gold market. Statistics show that the global central banks have recorded net purchase of capitals for 24 consecutive quarters. The global central banks bought 114.4 tons of gold in the fourth quarter of 2016, representing an increase of 32.7 tons from the previous quarter. The election of Trump as the U.S. president and other political events promoted the demands of central banks to purchase gold.

In addition, based on the weekly report released by the Commodity Futures Trading Commission (CFTC) on April 7, hedge fund managers have increased the net long positions in COMEX gold for three consecutive weeks as at the week of April 4. They also increased the net long positions in silver.

Statistics show that the net long positions in COMEX gold has increased from 16,455 lots to 115,605 lots, the highest level since end-February.

Insiders indicated that as the core inflation remains mild and the surging oil price is unlikely to maintain, the U.S. inflation is unlikely to surge for long time. It is still uncertain whether the Fed. will hike the interest rate in June. The market also doubts if the Trump policies can be implemented. As a result, the U.S. dollar is unlikely to further strengthen. On the whole, the U.S. dollar index will maintain around 100 points in the second quarter and the gold price will also fluctuate. Investors are advised to pay close attention to Trump policies and the changes on interest rate hike in June, which will have certain effects on the performance of the U.S. dollar and the precious metal market. 

Translated by Star Zhang
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