Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Jessica Amir
Market Strategist
Summary: In our video we explore what investors need to consider, if the US Fed stops rising rates and what it means for how gold, equities, and gold stocks could perform. Will they relive the 2019 scenario after the Fed paused and cut rates?
Friday January 20 2023
Despite bond yields rising slightly on Thursday in the US to 3.4%, bond yields are now considerably from their October peak down about 0.8%. Interestingly the US 10-year Treasury yield broke below key support two days ago. And our head of technical analysis pointed out the closely watched yield could drop to 3.22%. As you may recall, our view at Saxo is that ‘peak hawkishness’ would come in Q4 2022, which supported the retreat in bond yields since November last year. And the fact that we have seen ‘peak hawkishness’ could also mean bond yields could continue to retreat.
Inversely, at the same time, the gold price has risen 19%, as it tends to have an inverse relationship to bond yields which have fallen. Also companies involved in gold are also looking interesting. US gold giant Barrick Gold has rallied about 30% from its September low. De Grey Mining in Australia is up 90% from its July low, while Australia’s biggest gold producer Newcrest Mining is up 34% from its October low. But also what’s really interesting is this; If we see the US Fed Funds rate peak or the Fed cut rates (which is what consensus thinks), as Ole Hansen pointed out on yesterday’s podcast, then gold price could rally further, taking gold equities up higher too.
Ole reflects on when the Fed Funds peaked over the last 20 years and after it peaked, about a month later, gold strongly rallied. The last peak in the Fed funds rate was in 2019, and Ole mentions that lead to a 61% rally in gold. So if this repeats again, our outrageous prediction of gold hitting $3,000 could come true.
Thinking about equities now with the same scenario. If you look at a chart and see what happened after the US Fed funds rate peaked in 2019, after the Fed cut rates, equities strongly rallied. If you looked at a chart, from early 2020, the S&P500 rallied 24% over the course of about 21 months and Australia’s ASX200 rallied 48% over about 17 months. So if we do see the Fed cut rates, and these scenarios play out, we could potentially see the S&P500 potentially trade at over 4,800 points and the ASX200 could rally to over 11,000 in two years. So these scenarios are worth keeping an eye on.
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