On Wednesday (August 7th) morning trading in the Asian market, spot gold continued its overnight decline and is currently trading around $2383.43 per barrel. Due to the easing of market concerns about an imminent economic recession, the US dollar strengthened and bond yields rebounded on Tuesday, causing gold prices to fall below the 2400 mark, hitting a intraday low of $2381.50 per ounce and closing at $2389.72 per ounce. Despite expectations of a US interest rate cut in September and escalating geopolitical tensions in the Middle East, gold prices still provided some support.

The US dollar index rose 0.2% on Tuesday, and the 10-year US benchmark yield also rose on Tuesday.

Fu Xiao, head of global commodity market strategy at Bank of China International, said, "Mainly affected by the strengthening of the US dollar, gold is still somewhat weak... However, the macro environment for gold is relatively positive, so we may see some range fluctuations in gold in the short term

The Hezbollah armed group in Lebanon launched a series of drone and rocket attacks on northern Israel. But Iran has yet to take retaliatory actions against Israel, and concerns about the geopolitical situation have also eased.

Federal Reserve policymakers have refuted the view that weaker than expected employment data in July means the economy is in recession, but have also warned that interest rate cuts are needed to avoid such an outcome.

According to the Chicago Mercantile Exchange's FedWatch tool, the market believes that there is a 100% chance of a rate cut in September. But the probability of a 50 basis point interest rate cut has decreased from 83% to 71.5%, as market concerns about a US economic recession have eased.

On this trading day, investors need to pay attention to China's trade data in July, the speeches of Federal Reserve officials and the news related to geographical situation, the news related to the US election and the performance of the US stock market.

From a technical perspective, the gold price tends to fluctuate and build a peak in the short term. After falling below the 2400 level again, it tends to explore the support near the 100 day moving average of 2344.05 and pay attention to the 2400 level and the 10 day moving average of 2406 above Resistance near 48.

The Chief Investment Officer of Pinhao said that the United States may avoid a recession, but issued a warning about the severe fiscal situation

Daniel Ivascyn, chief investment officer of PIMCO, said that despite further signs of weakness, the US economy is still expected to achieve a soft landing, but the deteriorating financial situation of the US is prompting the company to increasingly increase its exposure to foreign government treasury bond bonds.

He said that the recent sell-off in the stock market and the rise in the price of US government treasury bond with high security reflected the weakness of economic data, which increased the possibility of recession in the next 12 months, but the US economy may still avoid recession.

We do believe that the market may have been a bit ahead of expectations for major central banks to cut interest rates, "Ivan Shen said in an interview on Tuesday. Unless there is a major geopolitical shock or significant issues with market operations, major central banks, especially the Federal Reserve, are likely to cut interest rates by 25 basis points in September, and future meetings may also take action

At the end of last week, the price of US treasury bond bonds rose sharply. The earlier weaker than expected economic data triggered concerns about economic recession and prompted the market to reprice the expectation of interest rate cuts in the coming months. Some people in the market even bet that the Federal Reserve would hold an emergency meeting to cut interest rates.

Ivan Shen said that this surge also reflects the intensification of geopolitical concerns. Previously, after the killing of two military commanders, Iran vowed to retaliate against Israel and the United States, sparking market concerns that a larger scale war may break out in the Middle East.

He said, "All of this is happening against the backdrop of a highly uncertain situation in the Middle East... People sometimes forget how unique this environment is, and they actually expect a response from a Middle Eastern power at any time

Ivanshen said that the recent market sell-off led to the expansion of credit spreads -- the premium required for investors to buy corporate bonds rather than safer government treasury bond -- but the valuation of corporate bonds is still unattractive, especially bonds issued by companies with lower credit ratings. He has recently increased his investment in higher rated corporate bonds.

We believe that floating interest rates, low rated credit, and especially private direct lending are currently the most complacent areas, "he said. "The prices of these assets did not change much last week, so in theory, they have become more expensive than government treasury bond bonds or listed stocks."

Ivanshen said that customers have been asking questions about the deterioration of the US financial situation, and Pinho is diversifying risks by buying more foreign government treasury bond. Pinhao is an asset management company primarily focused on bonds, with a managed asset size of $1.9 trillion.

He said, "When we talk to global clients, this is by far the hottest topic and the most frequently asked question: why did the United States have such a huge fiscal deficit in such a strong economy, and how long can this situation last?" "The answer is always: We don't know either

Ivan Shen said that the current financial situation in the United States is "very bad", but still within a controllable range. However, at some point, when the market starts demanding high premiums to hold US bonds, or when the cost of repaying public debt becomes the main political focus, people may judge the rise in government debt levels, but this is not the case now.

US dollar rebounds, US bond yields rebound

The US dollar rebounded against most major currencies on Tuesday, and US bond yields also rebounded, exerting some pressure on gold prices.

The entire stock market is also undergoing a reassessment, with the Nikkei index rising 10% on Tuesday after falling 12% the day before, and European stock markets also rebounding.

Axel Merk, President and Chief Investment Officer of Merk Investments, said, "I wouldn't be surprised if the market volatility hasn't ended yet, but it's clear that the significant volatility that occurred on Monday has been normalized to some extent

Schamotta, Chief Market Strategist of Corpay, said, "It seems that some of the movements in the past few days have been somewhat excessive. We are seeing a decline in safe haven demand, and the flow of funds in most major currency pairs is returning to normal to some extent.

The US dollar index rose 0.18% in late Tuesday trading to 102.89.

According to the CME FedWatch tool, traders currently expect the Federal Reserve to cut interest rates by 110 basis points this year, with a probability of 50 basis points in September approaching 70%, lower than Monday's 83%.

Federal Reserve policymakers on Monday refuted the view that weaker than expected employment data in July means the economy is in recession, but also warned that the Fed will need to cut interest rates to avoid such an outcome.

The yield of US treasury bond bonds rose on Tuesday, as the market believed that the fear of the US economy rapidly entering recession was excessive. At the same time, as the stock market rebounded, the demand for safe haven US treasury bond also weakened.

On Monday, the yield of US treasury bond bonds fell to a low point in more than a year. As the July employment report released on Friday showed that the US unemployment rate rose unexpectedly and the growth of jobs was lower than expected, investors repriced the rapid interest rate cut of the Federal Reserve.

Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, said, "We did experience two shocks last week. The first shock was the economic downturn, evidenced by Friday's non farm payroll report and signs of a labor market slowdown. The second shock was the position adjustment shock, which was related to policy differences between the Bank of Japan and other major central banks around the world,.

Putting these two things together will create some volatility, "LeBas added, but" the idea that there is a very high possibility of the Federal Reserve cutting interest rates between two meetings while the economy is still growing and there is no obvious crisis is very foolish“

San Francisco Fed President Daley said on Monday that many details in the employment report give people "more room for confidence that we are slowing down, but not falling off a cliff.

Chicago Fed President Goolsby also cautioned against interpreting too many signals from the global market sell-off, pointing out that this is partly due to the Bank of Japan's interest rate hike decision last week and the increasingly tense geopolitical situation in the Middle East.

The US service industry activity data released on Monday also boosted people's confidence in the economy, as US service industry activity rebounded from a four-year low in July, driven by a rebound in new orders and the first increase in employment in six months.

Despite the relatively calm market on Tuesday, there are still concerns that the Federal Reserve may be too slow in cutting interest rates.

There will be a certain lag in the effectiveness of monetary policy. "You must take action before this deterioration occurs," said Will Compernolle, macro strategist at FHN Financial. "Since the labor market itself is an indicator of economic lag, it seems that the Federal Reserve is really lagging behind the development of the situation. "

Compernolle said that given the long time left until the Federal Reserve's September meeting, Fed Chairman Powell may use the Jackson Hole Economic Policy Symposium on August 22-24 to "relax policy in a way that does not cut interest rates - using forward-looking indicators to trigger the actual effect of a rate cut before the Fed actually does.

The yield of interest rate sensitive two-year treasury bond rose 10 basis points on Tuesday to 3.983%, and fell to 3.654% on Monday, the lowest since April 2023.

The yield of 10-year treasury bond rose 10.5 basis points to 3.888% on Tuesday, hitting 3.667% on Monday, the lowest since June 2023.

Iran is facing a dilemma

The leader of Hezbollah promised on Tuesday to provide a "strong and effective" response to Israel's killing of its military commander last week, regardless of the consequences, and stated that Hezbollah will take action alone or with its regional allies.

But the United States has sent a message to Iran: do not let the situation escalate at a critical moment in the Middle East.

The spokesman of the US State Department said on Monday that at the "critical moment" in the Middle East, as Secretary of State Antony Blinken said, the US has been urging other countries through diplomatic channels to tell Iran that the escalation of the situation in the Middle East is not in their interests. Antony Blinken said that Washington is "carrying out intense diplomatic activities around the clock" to help calm tensions because of fears that Iran is preparing to retaliate against Israel. US State Department spokesperson Miller said, "One of the key focuses of our engagement is to urge countries to convey a message to Iran, urging countries to make it clear to Iran that escalating the conflict is not in their interest, and attacking Israel again is not in their interest.

Two senior Iranian sources said that Russian President Putin has also requested Iran's Supreme Leader Khamenei to respond with restraint to Israel's alleged killing of Hamas leaders and advised against attacking Israeli civilians.

Iran is facing a dilemma as it considers how to launch a meaningful strike against Israel without triggering a potential war that could sweep across the Middle East. A few days ago, what was widely seen as an imminent Iranian retaliation was postponed.

Daily chart of spot gold