Global Market Quick Take: Europe
Key points in this note
- Risk sentiment improves after Fed Chair Powell sent a strong hint that the Federal Reserve is done hiking rates
- Gold could be short-term challenged by an improved sentiment and after rallying 200 dollars in a short space of time
- Central bank demand heading for another record year with focus on ETF investors and when they may return as buyers
Global markets felt relieved last night after the Fed Chair Powell sent a strong hint to the market that the Federal reserve is done hiking rates. Following on from a weaker than expected ISM manufacturing print earlier in the day, Powell’s message helped boost sentiment across markets that recently have been plagued by geopolitical concerns, sharply rising Treasury yields driving the risk of economic weakness and a mixed earnings season. Precious metals, however, responded relatively subdued to the prospect of a peak in rates which would normally be seen as supportive for investment metals.
The Fed left rates unchanged at 5.25-5.50%, in line with expectations and market pricing while there were only slight changes to the FOMC statement and the door for further rate hikes was left open. Growth expectation was changed from ‘solid’ to ‘strong’ and there was some acknowledgement of higher longer-end yields, with tighter financial conditions mentioned alongside tighter credit conditions. However, Powell was clear that the Fed was not thinking about rate cuts yet.
The reason gold did not shoot back above $2k on the news was the fact bullion had already travelled a long distance within the past few weeks. And while the rally initially was triggered by the unrest in the Middle East and wrong-footed short sellers in the futures market, we believe the bulk of the near 200-dollar rally was fueled by the continued surge in US bond yields with traders and investors growing increasingly concerned about US fiscal policy, and especially whether the recent jump in both real and nominal yields would end up ‘breaking something’. That focus triggered an unusual situation where rising bond yields, and with that also dollar strength ended up supporting gold.