Gold hits 8-month high on fragile sentiment

Risk appetite remains fragile as investors wait to see whether a final diplomatic push can help avoid an invasion by Russia. UK jobs data and US PPI are also in focus.

• UK jobs markets remains robust despite Omicron spreading 
• USD eases ahead of PPI, which could indicate inflation has peaked?
• Gold jumps to an 8-month high on geopolitical fears, high inflation

European markets had a tough time yesterday. Risk off trade amid fears that Russia would invade Ukraine imminently, sent the DAX 2% lower to an 8-month nadir, whilst the FTSE dropped 1.7% recording its worst daily loss this year.

Wall Street fared slightly better, recouping earlier losses, as Putin indicated that talks with US and NATO would continue. The final push for diplomacy appears to have calmed market nerves, with the Dow closing just 0.5% lower and the Nasdaq ending the session flat.

Today, risk sentiment is still fragile but is improving. European bourses are attempting to start in positive territory as investors continue to monitor Russia-Ukraine developments amid hopes of a diplomatic solution. 

UK jobs data

The UK labour market remained buoyant in December, despite Omicron spreading rapidly, helping to lift the FTSE and GBP/USD. The unemployment rate held steady at 4.1%, in line with expectations and employers added jobs for the 14th month running in January, in a bid to fill the record number of vacancies (1.298 million) that remain empty. The scarcity of staff compared to the huge demand, has driven up wages, which grew at 3.9% YoY in January, down from 4.2% in December. Yet with inflation over 5.1% and on track to reach 7% by spring, households are seeing the biggest hit to their disposable income in 3 decades, which is helping to keep gains in the pound muted.

USD

The US dollar rallied 0.45% in the previous session, boosted by a combination of safe haven flows and following hawkish commentary from St Louis Fed President James Bullard, who re-iterated his comments from last week, that the Fed should hike rates by 50 basis points in March and that the interest rate should be up 100 basis points by July 1. The hawkish remarks boosted the USD yesterday. However, the rise was short lived, with treasury yields and the USD falling today. Bullard has yet to convince the other policy makers such as hawkish approach is appropriate.

Attention will now turn to the US producer price index, which measures inflation at the wholesale level. Expectations are for PPI to tick lower to 9.1% YoY in January, down from 9.7%. Given that PPI is often considered a lead indicator for CPI, a lower print today could suggest that inflation has peaked, which could pull treasury yields and the USD lower.

Gold

Gold has rallied just shy of 1% in two days, taking the precious metal to an 8-month high. The safe haven rose to $1880 per oz, supported by the uncertainty over potential military conflict in eastern Europe and as inflation remains elevated. However, over the medium term, non-yielding Gold could struggle to push much higher, given the aggressive pace of rate hikes that is expected from the Fed over the coming months.