18th September - Metals Rally
The first full day after the Fed's rate hikes saw precious metals rally significantly, while we also saw rallies in the stock market for the tech sector. We saw two more central banks give their rate decisions, with the BoE holding and the BoJ raising rates as expected.
Geopolitically, there were not large developments; there are still concerns surrounding the Middle East, and the US/Iran conflict still shows no sign of slowing down. However, we have begun to see oil fall as we have now seen two straight days of oil price drops. Brent crude now sits at $105.49, having been as high as $111.25, while US Oil is at $96.50, having been as high as $103.00. There have been some isolated reports of some gas stations in the US running out of diesel, which is worth monitoring, but at present, these seem to be isolated incidents as opposed to a national or global trend.
The reduced oil supply coming from the Middle East still remains a concern, especially with the Houthis making ground in Yemen and beginning to whisper about threatening the Bab al-Mandab Strait. Nations are continuing to eat into their strategic reserves, and with the Northern Hemisphere winter just around the corner, this will continue to be a story worth following.
Forex
The key developments yesterday and overnight were the rate decisions coming from the UK and Japan. In the UK, the BoE held rates at 3.75%, with an identical vote split to last month of 3-0-6, with three voting to hike and six to hold. This was exactly in line with expectations, with Governor Bailey also leaving the door open for future hikes: "If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten." The comments were leaving room for hikes but were not explicitly saying they were needed and implied that risks would need to increase for a hike to become a realistic outcome. This seems to have been a more dovish tone than the market was expecting, which meant the GBP suffered across the board yesterday. The GBP has been showing a little weakness for some time; this is only now set to continue.
The BoJ raised rates overnight as anticipated, but provided forward guidance similar to that of the BoE, indicating that future decisions will be heavily reliant on data and that it will 'carefully consider the rate and timing of any future adjustments'. This less aggressive position had a comparable impact on the JPY as the BoE's stance had on the GBP, with the JPY facing challenges across the board this morning. The USD/JPY pair has now retraced over 50% of its decline from last week and is currently just below 157.000.
After the huge push on Wednesday, the USD held ground yesterday, with the DXY holding steady around the 100.300 level. The move following the Fed decision was a short-term boost; the real question is whether this can be maintained over the next few weeks. Given the guidance from the Fed was far more hawkish (in the short to medium term at least) than from the BoE or BoJ, for example, I would not at all be surprised to see some continued strength in the USD. Yields are beginning to fall away across the curve, implying there may be some confidence returning to the US economy, so unless we see a major geopolitical change over the next few weeks, the USD seems set to continue to move higher.
Indices
Indices had a comeback day yesterday after struggling following the Fed, but the markets that did the best were a very interesting thing to see. The Dow rose by 0.6%, the S&P rose by 1.1%, whilst the NAS100 was up 1.53%, so there seemed to be a direct correlation between exposure to growth stocks (mainly in the tech sector) and index strength yesterday. This was exactly the same as on Wednesday, when the Nasdaq was hit less hard than the Dow Jones. This all goes back to the point made yesterday, that the Fed was hawkish in the short term but was able to signal a ceiling for rate hikes in the medium to long term. This has helped growth stocks that promise large returns in the future - investors in these stocks do not worry as much about the 25-point move now, they worry about how many more moves there will be over the next few years. They now know that unless we see a circumstance change, there will not be a number of hikes in the future and can now be more confident in how their investment in growth stocks will stack up when it comes time to draw a return.
Precious Metals
Metals soared yesterday, with Gold up 1.92% to $4,341 and Silver up 3.63% to $65.22. Both have now recovered almost all of the losses they saw since the first inflation print on Thursday last week, having continued to move up this morning. As I had said yesterday morning, the worst that could have happened to metals has already happened (hot inflation, hot NFP, a hawkish hike, high oil prices), and the metals did not collapse to previous lows. For me, this was a sign that there is significant demand for metals, and this seems to be coming to fruition now that the market has been able to digest the Fed meeting completely.
For me, there is still significant uncertainty about the global situation, whether it is the health of the US economy going into what are sure to be confrontational and messy US midterm elections, or whether it is the expanding Middle East conflict. Investors are falling back on tried and trusted safe-haven assets, with none more tried and trusted than gold and silver. Unless something changes, I can see some strength for metals over the next few weeks.
Today's Market Drivers
Middle East Conflicts - With no data releases today, the focus will shift back to the Middle East as markets watch for any developments
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