What’s next? – GOLD, OIL 16.05.18

GOLD

Gold futures were slightly higher in Asian trading hours on Wednesday, recovering from their lowest level in 2018 reached on the back of rising US treasury yields and a stronger greenback.

On the Comex division of the New York Mercantile Exchange, gold futures were up 0.23 percent at $1.293.30 a troy ounce as of 5:00 GMT.

The dollar-denominated metal is sensitive to moves in the US dollar. A stronger greenback makes gold less attractive for holders of foreign currency, damping demand for safe-havens.

The US dollar index, which measures the greenback’s strength against a basket of six major competitors, was up 0.06 percent at 93.15 by the time of this writing.

Overnight the dollar hit 93.32, its highest level this year in reaction to easing concerns over a potential trade war between the United States and China.

Investors closely monitored the 10-year Treasury yield, which was about 3.089% this morning, remaining close to a 7-year peak. The increase of yields widens the differential between Federal Reserve interest rates and the ones of other central banks, which is good for the dollar.

On Tuesday, Federal Reserve Bank of Dallas President Robert Kaplan warned about the risks of speeding up the pace of interest-rate hikes by the Federal Reserve.

The “yield curve is one of the considerations on my mind, which is why I’m not jumping away from three as a base case,” Kaplan said. “I don’t want to knowingly invert the yield curve, but I think it’s too soon to say how much operating flexibility we are going to have."

The Federal Reserve is looking at least three interest rate hikes for 2018. However, recent data from the labor market and inflation supported the possibility of a fourth increase this year.

Fed funds tracked by CME Group’s FedWatch tool show that market participants are currently weighing in a 95 percent probability of a rate hike in the June monetary policy meeting.

On the data front, retail sales rose 0.3 percent in April, falling short from an estimated 0.4 percent. Business inventories for March were unchanged and the New York Empire State manufacturing index for May surpassed its forecast with a 20.10 reading.

OIL

Oil prices eased from multi-year highs on Wednesday in Asian hours, as an industry organization reported an unexpected build in crude inventories last week in the US.

The US West Texas Intermediate crude contracts dropped 0.22 percent to $71.15 per barrel as of 05:50 GMT. Meanwhile, Brent futures were down 0.24 percent at $78.24 a barrel.

The American Petroleum Institute (API) said crude supplies jumped by nearly 5 million barrels, against expectations a 763,000-barrel reduction.

Increasing US drilling activity has been keeping oil prices in check for the past few month. According to Baker Hughes’ oil rig count, 10 oil rigs were added in the week ended May 11, leaving the total count at 844 units, the highest level since March 2015.

Also contributing to the downturn in oil prices was a continuous strengthening of the US dollar, which makes greenback-denominated oil more expensive for investors.

In the last year, oil benchmarks have grown more than 70 percent as demand has increased sharply while output levels remained limited by the Organization of the Petroleum Exporting Countries (OPEC) and other external producers such as Russia.

Ahead in the day, traders will be looking at official inventory data by the US Energy Information Administration as of 14:30 GMT.