Gold Continuous Contract (GC.F) & BMO China Equity Index ETF (ZCH.TO)

It has been another volatile week for world markets with large intraday swings in both directions as investors worked through inflation and interest announcements. Worse than expected producer price inflation and better than expected consumer price inflation reports sparked significant knee jerk reactions which were quickly reversed, suggesting that neither bulls nor bears have been able to maintain control for very long.

Tomorrow is Quadruple Witching Day with numerous futures and options contracts expiring which may be adding to the volatility. Tax loss selling may also be a significant factor for the first time since 2018 as investors consider the impact of this year’s market performance on their portfolios.

Yesterday afternoon, US indices, which had been up over the last week, turned southward after the Fed slowed the pace of interest rate hikes to 0.50% to 4.50% as expected, but issued hawkish comments on the need to continue fighting inflation. Fed member forecasts for the Fed Funds rate for the end of 2023 increased by 0.50% to 5.1%, with 17 of 19 respondents looking at a terminal rate between 5.00% and 5.75%. Fed members also cut their 2023 GDP forecast while raising their inflation forecast, a sign of continuing stagflation.

The US Dollar has continued to drift downward which has eased pressure on some commodity prices. Energy markets have been particularly active with Crude Oil benefitting from China making steps toward reopening its economy while Natural Gas has been particularly volatile with the arrival of big winter storms. Currencies including the Euro, Canadian Dollar and Gold have also benefitted from an easing US Dollar headwind.

Central bank decisions and statements continue to roll out over the next few days with the focus on Europe today with the European Central Bank, Bank of England and Swiss National Bank holding meetings. On Tuesday the spotlight shifts to Asia Pacific banks with the Bank of Japan and the Peoples Bank of China holding meetings. These meetings should provide additional insight into which and how much central banks remain committed to tightening monetary policy and fighting inflation heading into 2023.

The next ten days also appear to be cleanup time for business news ahead of the holidays with a number of announcements that usually come out right at month end scheduled for later in the week. On the earnings side, Nike and FedEx report on Tuesday. Highlights of the economic calendar include Flash PMI reports from around the world tomorrow, Canada retail sales Tuesday, housing numbers through the week, and US core PCE inflation and consumer inflation estimates next Friday.

In this edition of the Equity Leaders Weekly, we look at the impact of the weakening US Dollar on Gold and at a rebound in Chinese equity markets as the country’s COVID policy changes.

In the November 10th edition of the Equity Leaders Weekly, we discussed how Gold and the Canadian Dollar, have been outperforming most other currencies this year but that this outperformance had been masked by the relentless rally of the US Dollar, the currency they are most commonly compared against.

Since then, the US Dollar has peaked and has started to come back down, easing a big headwind in currency and commodity markets and enabling Gold’s relative strength to shine through. Between September and November, Gold established and retested a base of support above $1,620. In recent weeks, the Gold price has started to climb once again, completing a bullish Double Top breakout, extending the rally into a bullish High Pole, and regaining $1,800 for the first time since July.

Based on previous column highs and lows, potential upside resistance may appear near $1,880 and $1,960, the latter of which aligns with a horizontal count. Resistance may also appear near $1,900 where a round number and a downtrend line converge. Initial support appears near $1,735 based on a 3-box reversal.

Most of the time when considering China’s multiple and ongoing waves of COVID lockdowns this year, we have looked at the impact mainly through the lens of resource demand, commodity prices, and global supply chains. It also has had a significant impact on domestic equities, represented here by the BMO China Equity Index ETF (ZCH.TO).Coming out of winter lockdowns, ZCH.TO stabilized in the spring and was just starting to break out to the upside in July, when the latest wave of lockdowns sent Chinese stocks downward to new 52-week lows before they bottomed out in an October bear trap. In recent weeks, signs that China’s government could ease its “Zero COVID” policy, ease restrictions and reopen its economy has ignited and underpinned a rebound in Chinese equities.

ZCH.TO has completed three bullish Double Top breakouts in the last three months all of which have extended into bullish high poles, on their way back to levels last seen in August. Previous column highs and lows suggest potential upside resistance tests on trend near $16.25, $17.40, $17.75, and $19.05. Initial support appears near $14.40 based on a 3-box reversal.