EUR/USD - 0.9976 Despite extending erratic rise from last Tuesday's 20-year bottom at 0.9865 to a 3-week high of 1.0197 on Monday, Tuesday's selloff on hot US CPI to 0.9956 (AUS) yesterday suggests correction over, as 1.0023 has capped recovery, weakness to 0.9930/32 is envisaged but 0.9865 should hold. On the upside, only a daily close above 1.0033/43 would risk stronger gain to 1.0071/76. Data to be released on Thursday New Zealand GDP, Japan exports, imports, trade balance, tertiary industry activities, Australia employment change, unemployment rate. Germany wholesale price index, France CPI, EU trade balance, labor costs. Canada housing starts, U.S. NY Fed manufacturing, import prices, export prices, initial jobless claims, continuing jobless claims, Philly Fed manufacturing index, retail sales, industrial production, capacity utilization, manufacturing output and business inventories.

Europe Up until this afternoon’s US CPI number it had all been going so well, with European markets initially picking up where they left off yesterday, trading at two-week highs, despite another sharp deterioration in the latest German and EU ZEW expectations survey for September, with both indicators falling further below their pandemic lows of March 2020. The pessimism around German business is being driven by concerns over the possibility of energy shortages, which is driving a decline in orders production and exports. This week’s initial US dollar weakness was being fed by a belief that perhaps the peak for inflation is now behind us. That may well be true, and today’s US CPI numbers do nothing to change that narrative, because we have still seen a modest fall to 8.3%, but the rise in core prices means inflation is likely to be a lot stickier than perhaps markets had been pricing. It also helps explain this afternoon's sharp reversal, with the DAX and FTSE100 both falling back sharply. This means that while the narrative of peak inflation may well be still valid, getting it down from these levels is likely to be a much tougher battle, requiring a continuation of more aggressive rate hikes in the months ahead, starting with 75bps next week. It’s been another poor day for consumer discretionary, after the strong gains of the past few days, we’ve seen further weakness today after the latest Kantor grocery numbers showed food inflation rise by 12.4% in August, adding as much as £571 to the annual food bill. With Ocado also warning that its Q4 numbers were likely to be hit by higher energy and dry ice costs, food retail shares have given back some of yesterday’s gains, sending Ocado shares down over 10% on the day, while Tesco, Sainsbury and Marks & Spencer have also slipped back.  UK drinks company Fevertree has seen its shares jump sharply higher after the company reported a 14% increase in H1 revenues to £160.9m, although gross margins fell to 37.4%, reducing gross profits by 4%. In July, the company warned that rising glass costs were likely to impact in its gross margins to the extent of 670bps. Despite this the shares have rallied strongly with the company maintaining its guidance for full year revenue of £355m to £365m and EBITDA of £37.5m to £45m.  US US markets had been looking to open higher until the release of the latest CPI inflation numbers showed that while inflation slowed in August to 8.3% from 8.5%, we saw an unexpectedly bigger than expected rise in core CPI, from 5.9% to 6.3%, which saw any potential of a positive open wiped out at a stroke. The big rise in core prices would appear to suggest that inflation is likely to be much stickier over the next few months that markets had originally been hoping, thus adding to the risk we could see the Federal Reserve, not only be much more aggressive on rate hikes, but keep those rates higher for longer. It’s certainly not a number that Fed officials are going to be happy with and will merely serves to reinforce Powell’s message that the Fed will keep at it until there is clear evidence that inflation is on a sustainable downward path. This number doesn’t do that and helps to explain the outsized reaction today in stocks, yields and the US dollar. The resulting spike in US 2-year yields has seen the Nasdaq 100 lead the way lower, led by the likes of Meta Platforms which is amongst the worst performers on both the Nasdaq 100 and S&P500. Bitcoin exposed stocks are also getting crushed as the crypto currency slips back towards the $20k level, having hit a 3-week high earlier today. Coinbase is lower, as is Riot Blockchain and MicroStrategy.  FX The pound got off to a decent start to the day moving well above the 1.1700 area after the latest wages numbers, saw average earnings including bonuses rise by 5.5% in July, while the unemployment rate fell to its lowest level since 1974 at 3.6%. More disappointingly, the fall in unemployment also coincided with a rise in the number of people who are long term sick, which rose to 21.7% and a 6 year high. Vacancy rates nonetheless remained high, despite falling by a modest 34k to 1.3m. All so far so good, however the hotter than expected US CPI reading saw these sterling gains unravel quickly, as the US dollar rebounded in anticipation of an almost nailed on 75bps rate hike next week, and then it’s a question of what comes after that? The euro also slid back sharply in the wake of this afternoon’s US inflation numbers as markets priced in the near certainty of 75bps next week, with the...

The US equities ended last week on quite a high note, and the latest market optimism could be explained by hope to see a second month of softening inflation in the US at this week’s CPI release. Due Tuesday, the US will reveal its latest CPI figure which is expected to have eased to 8.1% in August, from 8.5% printed a month earlier, and from the 9.1% peak printed the month before that. If the data is soft enough, or ideally softer than expected, the equities will likely continue pushing higher this week as well. If, however, the data is not as soft as expected, or worse, if we see a higher figure than last month’s read, then last week’s gains in equities will likely be quickly given back. In the FX markets, we saw a decent pullback in the US dollar index last Friday, following the 75bp hike from the European Central Bank (ECB), and news that Japanese are increasingly uncomfy regarding the abnormally stronger USD. The EURUSD tests the important 50-DMA to the upside, gold benefits from a broad-based pullback in US dollar, meanwhile crude oil is softish as high energy prices hit the prospects of economic growth, and global demand. Bitcoin traded at $22K during the weekend on overall positive sentiment, while the much expected Ethereum upgrade will happen around the 15th of September.

Equity markets end the week higher as risk appetites are back. Bitcoin bounces sharply to drag in more trend followers. Tuesdays CPI data point the highlight of the week ahead. Equity markets bucked a three-week losing run when they closed higher on Friday and completed a positive week for all the leading indices. Talk of 75 basis points failed to dent enthusiasm as investors flocked to all sectors including oil. Oil prices had taken a severe downturn last week as fears grew for the health of the global economy. But some further words of encouragement about supply cuts from OPEC+ and in-line economic data convinced oil bulls to return. The US SPR being drained even further was taken as a further bullish sign for oil as traders see it as needing replenishing sooner rather than later. Even Europe's energy woes could not dent the bullish enthusiasm and at least German electricity prices collapsed somewhat but are still sky high compared to this time last year. The ECB stepped up to the plate and swung for the bleachers when announcing its biggest rate hike ever, 75 bps, which seems to be the favorite number from central bankers these days. So is this rally the bottom or yet another bear market rally? Well, the last squeeze moved lower but failed to set a new low (so far). So the potential is definitely there for a bottom. But historically things don't really bottom in this type of environment.

In this week’s Live from the Vault, Andrew Maguire examines the unprecedented scale of the physical silver shortage that is draining COMEX inventories and causing havoc in the oversold, futures-driven silver market. The London wholesaler analyses the glaring disconnection between the physical and paper silver markets, evidencing investors capitalising on massive, risk-free arbitrage profit opportunity. Timestamps 00:00 - Start 01:10 - What is happening in these crazy silver markets? 07:55 - The similarities between the nickel and the silver markets. 12:45 - How does the situation in silver affect the gold price? 18:20 - The wholesale market - Andrew’s update. 27:30 - The short-term effects of the arbitrage process.

Economic contraction is unfolding – but how painful will it be? The deeper the recession, the better for gold. Let’s make it clear: an economic downturn is coming. We are already in a technical recession (GDP contracted in the first two quarters of this year), despite the White House’s attempts to change its definition. A full-blown recession is just around the corner and will likely come out next year. At this point, another question is more interesting: how long will the pain last? Or, how deep will the contraction be? Will it be a short and shallow recession like in 1990-91 or in 2001, or a long and severe one like the Great Recession? Or maybe a short but deep one like the pandemic recession of 2020? I don’t know . I forgot to take my crystal ball. However, I would exclude the last possibility, as the latest recession was mainly caused by the Great Lockdown – this is why it was so deep and short. This recession will be more normal – as long as recessions have anything to do with normality. Actually, this won’t be a normal recession, as it will be accompanied by high inflation, which implies that we will experience stagflation. This is a strong argument for a deep recession. Why? Well, the Fed is already engineering a recession (although Powell prefers talking about bringing demand and supply into balance) to slow inflation. Given how high inflation remains and how long the U.S. central bank has been in denial and inaction, it will have to continue its unprecedentedly large interest rate hikes. Such an aggressive tightening cycle could lead to a serious economic decline. This is also what history suggests. There was no period of such high inflation that didn’t lead to a severe recession. There was a long recession in 1973-1975 and later a double-dip recession in the early 1980s. The recession of 1990-91 was milder, but inflation was lower, while the Fed’s reaction to it was faster. Another argument that strengthens the pessimistic view is the size of monetary stimulus during the boom phase of this business cycle. The broad money supply increased by more than one fourth in 2020 in a response to the pandemic (see the chart below), as the central and commercial banks created trillions of dollars to tranquilize the population into accepting lockdowns. However, the higher the flight, the more painful the fall will be. Last but not least, there is a lot of debt accumulated in the economy. The public debt is $30.6 trillion, or 124.7% of GDP, and there is also the private debt, which is actually larger than the public. Thanks to recent declines, asset valuations are less stretched, but the financial system remains fragile. It’s true that banks are now in better shape than before the financial crisis of 2007-2009 and that they were rather unaffected by the pandemic. Hence, the replay of the Great Recession – when banks were severely hit, which resulted in a credit crunch – doesn’t have to occur. However, there is so much debt that hikes in interest rates and withdrawal of liquidity in the form of quantitative tightening – not to mention any sudden events – could trigger a financial crash or an economic crisis. What does it all mean for the gold market? Well, the mild recession, not to mention a soft landing, would be a relatively negative scenario for the yellow metal. It could still gain somewhat, but markets are forward-looking and when a recession is shallow, they would anticipate a quick recovery (which would rather support equities and other risky assets). The mild recession would also allow the Fed to stay relatively calm and to not fire all the monetary ammunition – while gold would prefer the U.S. central bank to go fully dovish. On the other hand, a deep recession would be much better for gold. During severe economic downturns, moods are really pessimistic, and risk aversion is high. Hence, investors shift into safe-haven assets such as gold. What’s more, the Fed would then break out all available weapons to avoid a full economic catastrophe, even in the face of high inflation. This would create excellent conditions for gold to rally. If a deep recession is accompanied by a financial crisis or sovereign-debt crisis, when confidence in a financial system and fiat money is ultra low, it would be a really perfect scenario for the yellow metal. Which scenario is most likely? Given how high inflation is and how (relatively) aggressive the Fed’s tightening cycle is in response to price instability – the federal funds rate is historically still low, but the increase from 0-0.25 to 2.25- 2.50% is huge in percentage terms (1800%) – I bet on a deep recession. It’s true that the boom...