Posted 4th February 2022

Positive European Data Points to Economic Recovery But Road Bumps Remain

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Macroeconomic Analysis

A slew of positive data coming out of Europe this Friday morning looks set to maintain the positive momentum built up this week, with the FTSE and major US indices set to record notable weekly gains. 

Italy, Germany and France all reported impressive construction PMI figures that pointed to the economic recovery from the coronavirus-induced decline being well underway. Add in yesterday’s Amazon results that allied some of investors’ concern about the outlook for the tech sector, as markets shift to a value from a growth phase, and it all points to an optimistic trading mood.

However, traders don’t have to look too far for potential road bumps on this economic road to recovery. After the Bank of England did exactly as was expected of it and raised interest rates to 0.5%, comments from the European Central Bank on Thursday pointed to it soon following the UK’s lead and start hiking rates too to tackle rising inflation. Indeed, Goldman Sachs brought forward its forecast to predict the ECB will raise rates in both September and December, bringing an end to a 7-year run of negative rates. 

While these interest rate rises could see growth stocks punished in the short-term, the detrimental effect of inflation on consumers’ buying power means that in the long run, central banks finally acting to tackle rising costs should see a much more positive inflationary outlook come the end of the year.

Back to today, volatility is likely to be elevated in markets today ahead of the release of unemployment and non-farm payrolls data from the US. Expectations are that the payrolls may only have increased by 150,000 in January, which would be the worst since December 2020. However, concern is mounting that the actual figures may underperform this low bar, potentially bringing this week’s optimism to an abrupt halt.

Gold Price Analysis

Gold has had a week where it has steadily ticked along in the background, with today’s gains looking likely to see the price hold above the key level of $1,800 an ounce. The fact gold has managed to achieve these gains in a week in which talk over interest rate rises have dominated market conversation, points to how weak this current optimism may be. 

kinesis gold chart exchange
Gold ($/g) Chart – 15 minutes – from Kinesis Exchange

While gold would typically come under threat in an environment where interest rates are rising due to its lack of a yield, its appeal as a haven asset at times of crisis and stock market plunges suggest that investors continue to see value in holding gold and it is premature to write the economic recovery story. 

Silver Price Analysis

Silver has found itself back in step with gold with it also set to end the week looking upwards having steadily nudged higher to now be trading at about $22.70 an ounce. While there is little reason to think silver can’t continue to regain some of the ground it lost spectacularly last week, the true test of the metal’s appeal will come as it nears $23 an ounce, where there is likely to be significant resistance to overcome.

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