Stocks have steadied this morning after the unilateral declaration by President Trump that stimulus talks were over was partially walked back later. As usual with President Trump, the market is viewing this as some part of a negotiation tactic, and this is limiting how much risk can move aversely. That is together with the ‘Fed put’ and its trillions in policy stimulus!
However, that Fed Chair Powell had spoken yesterday warning of ‘prolonged’ economic pain without more fiscal support risks leaving the White House holding the can in the event of further negative economic news, all within a matter of weeks until election day. How will any sizeable laying off of workers sit with the electorate now Federal support is once more in doubt?
We said yesterday that Biden’s strong lead in the polls was being maintained, and even widening, so perhaps it is the reduction in risk of a contested outcome which is also helping markets. The dollar is little changed on the day with the FOMC Minutes this evening unlikely to move the needle as we have heard from a host of Fed members since the September meeting. Any colour on the conditions under which the Fed might tighten policy and the future of QE will be of interest, but we won’t be holding our breath.
Gold awaiting stimulus and election news
The yellow metal sold off sharply yesterday as dollar buying picked up but has managed to claw back some of those losses in today’s session. Bulls have struggled to push prices beyond $1900 and also the downward sloping trendline from the August all-time highs on the daily chart. The 100-day Moving Average has offered support on the downside and currently resides around $1858.
If the reflation trade gets more attention once again in the coming weeks, then long bond yields will continue to push higher and lay the backdrop for a bullish gold outlook. Rising inflation primed by a multi-trillion dollar stimulus package, while the Fed policy rate is still pegged to zero could push gold much higher.
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