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The dust is beginning to settle after a busy few days of central bank jostling. Markets have now had an extra day to digest the implications of the latest Fed meeting and in the absence of much else going on, attentions are focused on fundamentals. The Dollar reacted positively to Jerome Powell’s statements on Wednesday and the bullish momentum carried over to Thursday’s session. The DXY briefly rose back above 104 yesterday before a minor pullback and is once again on the front foot this morning in Asia. The Euro, which makes up the bulk of the Dollar Currency Index, failed in its attempt to reclaim $1.10, at least for the time being. Cable was likewise unable to hold onto $1.30 despite the Bank of England’s warnings that rate cuts were unlikely over the next few meetings. Central banks around the world are all reading from the same script, from the Bank of Japan to the ECB, the dominant theme is one of uncertainty caused by the ongoing tariff antics. Until such fears are addressed, financial markets are in wait-and-see mode. The US Treasury Department issued new sanctions against Iran on Thursday, this time by targeting a specific Chinese oil refinery responsible for processing Iranian crude oil. Such ventures are known as “teapot” refineries and are a way for regimes to bypass international sanctions. Crude oil is carried via shadow fleets, the purpose of which is to conceal the origin of the sanctioned oil, before being processed in a private foreign refinery and sold on. The move is interesting because it marks the first time such sanctions have targeted a specific company. Coupled with worrying developments in the Middle East, crude oil prices finally had grounds to rise this week, to $72 a barrel for Brent and to $68 for West Texas Intermediate.
In a widely expected move, the Federal Reserve elected to maintain rates on the Dollar within the current 4.25 - 4.5% range during yesterday’s FOMC gathering. The chances of any kind of rate cut were essentially zero, allowing attentions to shift instead towards the wording behind the decision. A characteristically level-headed Jerome Powell once again reiterated the Fed’s wait-and-see approach to monetary policy, saying that there was no rush to cut interest rates given the uncertainty enveloping the US economy. Economic predictions were tempered slightly, with board members expecting marginally higher inflation and unemployment figures by the end of the year and slightly lowering growth forecasts. Nothing unusual so far, but a few comments gave grounds for optimism. As in previous addresses, Jerome Powell cited the strength of the US economy despite the growing uncertainty surrounding trade tariffs. The Fed Chair told reporters that tariffs are indeed causing some degree of inflationary pressure, but that their effects would ultimately be transitory. Powell also seemed somewhat dismissive of recent survey data, claiming that the relationship between said data and actual economic activity had not been very tight. The real gift to markets however was the signal that the board is still expecting two rate cuts this year. US stocks were clearly overjoyed by the prospect, leading to decent gains in the major indices. The Nasdaq Composite rose 1.4% following the meeting, the S&P 500 climbed 1.1% and the not so volatile Dow finished the day 0.9% in the green. In an environment mired by fear, markets were all too grateful for Powell’s serene statements. When it comes to economic forecasts, there is a widening gap between commenters on either side of the debate. On the one hand are those convinced the world economy is on the brink of collapse. On the other, those demanding an immediate loosening of fiscal policy. Such debates will have to endure until the next FOMC meeting on the 7th of May.
Gold refuses to rest on its laurels. Discontent with last week’s accolades, yesterday the precious metal made yet another leg up to $3,038 an ounce. There are many factors tipping the scales in gold’s favour: tariff uncertainty, potential escalation in the Middle East between Israel and Gaza, but also the distant but ever-present possibility of an interest rate cut on the Dollar. The latter point is not expected to materialise during the Fed’s meeting later today, nor even on the following meeting in May. By June however, rate traders are expecting some form of action to bring down rates on the Greenback. Of course, the scales could rapidly tip the other way should trade and military conflicts simmer down over the coming weeks. For the vast majority of markets participants, the Federal Reserve maintaining rates at current levels is a foregone conclusion, which makes the actual wording and justification of the decision all the more important. Recent stats relating to the US economy have been a mixed bag. Employment and growth are a concern, but inflation prints continue to fall towards the Fed’s targets, giving the central bank marginally more breathing room. What the various board members make of all this will become clearer over the hours and days to come. In a widely anticipated move, this morning the Bank of Japan opted to maintain rates on the Yen at current levels, prompting very little reaction in USDJPY. Tomorrow’s rate decisions on the Pound Sterling and Swiss Franc are not expected to caused much of a stir either. The ambiguity concerning tariffs has not been kind to the Dollar, but financial markets are nothing if not fickle. Should the fog clear with regards to trade, currency flows may rapidly change course.
US stock traders finally wore out the sell button last Friday and instead switched to a not-so-subtle round of dip buying. Much as they were on the way down, tech stocks were the largest movers on the way back up, raising the Nasdaq Comp and S&P 500 by 2.6% and 2.1% respectively. The Dow, which avoided slipping into correction by the skin of its teeth, managed a more modest 1.65% gain on the day. The bullish sentiment carried over to Asian markets this morning, prompting a sizeable gap up in the Nikkei 225 and a number of other stock markets in the region. That said, US futures were down again on Sunday night, so how long the jubilation lasts is anyone’s guess. Trade concerns have not been kind to the Dollar, manifesting in simply awful price action for the world’s reserve currency since mid-January. The Greenback finally dug its heels in last week however and for now appears to be reassessing its trajectory. No less than four central banks have scheduled interest rate decisions this week, so currency traders had better keep their wits about them. The Bank of Japan kicks things off in the early hours of Wednesday morning, followed by the Fed later in the day. Thursday cedes the stage to the Swiss National Bank and the Bank of England. Of the four, only the Swiss Franc is expected to undergo a rate change, to 0.25% from 0.5% currently. Despite there being almost zero chance of the Fed cutting rates this week, the accompanying statements will be painstakingly scrutinised for any possible change in sentiment among board members. As enthralling as central bank manoeuvrings are, attentions are firmly turned towards precious metals. Last Friday, gold achieved the historic milestone of $3,000 per ounce. A staggering feat considering the price was only $2,000 in February last year and just $2,600 at the start of January. Should uncertainties surrounding tariffs dissipate and trade agreements solidify, it will be interesting to see whether safe-haven flows continue to pour into precious metals. Another interesting point is the fact that Bitcoin – so-called digital gold – has utterly failed to capture these same flows. Central bank decisions aside, there are a number of events on the economic calendar to look out for over the coming week. US retail sales are the first item on the menu later today, followed by a slew of data relating to the American housing market on Tuesday. UK and Australian employment data may cause a minor stir on Thursday, before Japanese inflation and Canadian retail sales conclude the week’s proceedings on Friday.
Gold has snatched the crown out of the gutter, reclaiming its birthright as the safe-haven king. Tariff qualms are still the talk of the town and precious metals began to capture that fear in earnest yesterday. Gold added $55 to its tally on Thursday, cruising past its previous record high to reach $2,989 an ounce. Early trading in the Asian session edged that figure ever so slightly higher still to $2,990. Trade fears are certainly one of the factors behind the rise in bullion prices, but there are a couple of other narratives currently being floated. The first is the accumulation of precious metals by central banks around the world, as China, the US and many others shore up their reserves. The second is the simmering question of just how disconnected the paper contracts are from their physical counterparts. The huge outflows from the London vaults seen in recent months rattled some investors, to the point where some are beginning to question whether there are deeper structural woes under the surface. Too early to celebrate just yet, but the Greenback finally appeared to find some strength over the past couple of days. Last week was a miserable experience for USD bulls, but Wednesday and Thursday saw back-to-back gains for the Dollar, albeit modest ones. The Asian open has maintained the momentum, pushing the DXY back up to 104. The latest round of US inflation data revealed lower than expected figures across the board; a surprise which temporarily lifted US indices on Wednesday. Celebrations were sadly cut short, as the following session saw all three majors resume their descent into the void. The S&P 500 joined the Nasdaq Composite in correction territory yesterday, as both are now down over 10% from recent highs. The Dow is not far off. The lower inflation print has provoked murmurings that the Fed could be moved to cut rates on the Dollar, something which has long been on President Trump’s wish list. The week is almost over, with the Michigan Consumer Sentiment the only major event left on the economic calendar. That said, politics and unexpected announcements could disrupt the peace at any time.
Markets are caught in the iron grip of fear. The narrative being spread around the watercooler is that the United States is facing a possible recession. US indices have suffered greatly over the past few weeks, pushing the Nasdaq Composite into correction and the S&P 500 to within a hair’s breadth of one yesterday. In comparison, the Dow is down a modest 8% from recent highs. To add insult to injury, the Dollar has been on a one-way path to oblivion since the start of the year, falling almost 5% year-to-date. The week is once again off to a bad start for US markets. Stocks have already made significant steps down over the last two sessions and while the Greenback managed to close flat on Monday, the fall continued yesterday, resulting in another 0.5% loss in the Dollar currency index. Gold capitalised on the weakness in the Dollar, climbing 0.9% to $2,915 an ounce by yesterday’s close. Silver also made a decent move, reaching up to within touching of distance of $33. Crude oil prices are still facing the grim reality of poor economic growth forecasts and as such, remain heavily subdued. Try as it might, Brent Crude cannot seem to hold onto $70, while WTI languishes around $66 a barrel. An interesting event occurred in the crypto markets yesterday. The recent financial rout has been particularly scathing for Bitcoin, pushing digital gold from highs of $109k in January down to just $76,600 on Tuesday. The noteworthy point about yesterday’s dump is that it fills the CME futures gap left behind in early November. The significance of this is up for debate, but such occurrences are indeed meaningful for many traders out there. Bitcoin went on to reach $83k following the move. The latest round of US inflation data is set to hit markets a few hours from now. The month-on-month rate is expected to come in at 0.3% and the yearly at 2.9%. Strong deviations from the above may set a cat among the pigeons with regards to trading conditions. The Bank of Canada will announce the latest interest rate decision shortly after, with a 25-bps cut thoroughly priced in.
