Finding fundamental support from trade tensions between the US and China as well as slowing global economy, gold prices kept its upside momentum on Tuesday as risk sentiment faded due to geopolitical tensions in Hong Kong and rising uncertainty following primary election result in Argentina. Geopolitical tensions increased in Hong Kong yesterday as protestors managed to close Hong Kong airport as a part of protests against the government, risks for a possible Chinese military intervention increased. In Argentina, as market-friendly government lost significant power in primary elections, Argentine stock market fell sharply and Argentina’s peso lost 25% of its value against US dollar. Following the shock, emerging economies’ currencies started the week on the back foot and remained weak on Tuesday.
Gaining strength amid ongoing trade tensions between the US and China, gold prices continued to increase on Tuesday and hit $1,535 an ounce as investors avoided risky assets and rushed into safe havens following recent developments in Hong Kong and Argentina.
As of 13:20 GMT+3, spot gold was trading at $1,532.75 an ounce while dollar index was up to 97.44. US 10-year Treasury yield was down to 1.627.
DailyFX senior currency strategist Ilya Spivak said on Reuters that risk sentiment faded due to crisis in Argentina and worsening political situation in Hong Kong alongside with global slowdown while adding central banks with already record low interests have limited ammunition to prevent global economic slowdown.
As central banks go for expansionary monetary policies one by one all around the world, it remains uncertain whether Fed will go for another rate cut following the statement that going for a 25 basis point rate cut for the first time since the global financial crisis in 2008 was not a beginning of a rate cut cycle. However, CME Group’s FedWatch tool currently indicates 74.2% chance of another 25 basis point rate cut in September.
In its 10th week, protests against the government in Hong Kong escalated as protestors managed to close Hong Kong airport yesterday which led to fading risk sentiment and declining global markets after Chinese government named the protests as “terrorism” which increased risks of military intervention. Since Hong Kong is one of the most important financial hubs in the world, any kind of intervention by Chinese government will likely cause quick sell-offs not only in Asian markets but also in Europe and the US while it will also significantly weigh on already slowing regional and global economy. Protests started following extradition bill introduced in April which clears the path for Chinese government to detain and trial Hong Kong citizens suspected of crimes against China.
Meantime in Argentina, stock market sharply declined and Argentina’s peso lost 25% of its value against US dollar as the government lost its power in primary elections. While results showed people reacted against government’s austerity policy and IMF program, markets reaction was mostly due to possibility that the left party winning the elections in October and reversing IMF program alongside with austerity policy followed by current government. The market reaction is expected to put further pressure on emerging economies that have been already weighed on due to global economic slowdown and weakening yuan while weakness in emerging economies’ currencies including Turkish lira remains after they started the week on the back foot.