LAWRIE WILLIAMS: CPI and Midterms boost gold, equities and bitcoin
The combination of the initial midterm U.S. election projections, which showed that the anticipated big surge to the Republican Party had not materialised, closely followed by the October Consumer Price Index (CPI) data which suggested that inflation levels may have peaked, generated some huge swings for U.S. markets – and not least for gold and silver. Gold which had been managing to hold on to the plus $1,700 figure it had attained a couple of days earlier shot up by over $40, at one time breaching the $1,750 level, before, at the time of writing, seemingly consolidating in the mid to high $1,740s. Silver was doing even better in percentage terms peaking at over $21.80, before settling back in the $21.50s. The pgms were trending around 5% higher too.
In other asset classes, bitcoin, which had been having a couple of horrendous days with BTC falling at one time below $16,000, was also making a very strong recovery and there has also been a decisively more than positive showing from U.S. equities once markets opened. This is despite a still pretty uncertain short to medium term future for the U.S. economy which should ultimately put something of a dampener on equity and bitcoin prices going forwards, but probably not on safe haven counters like gold and silver.
The change in investor sentiment has primarily come from today’s CPI readings which are taken as suggesting that the Fed may bring its promised less aggressive approach to interest rate rises forward to the December FOMC meeting. This has become immediately apparent in the Chicago Mercantile Exchange’s Fedwatch projection of the odds for the likely interest rate rise which will be announced then. This has now moved to 80.6% in favour of only a 50 basis point rise as against 19.4% for the originally favoured 75 basis point rise. It should be remembered that the Fed has imposed 75 basis point rate rises at each of the last four FOMC meetings.
To put this in context though, only a few months ago 50 basis point interest rate rises might have been considered excessive and rocked the markets. Now such an increase is seen as a relief and markets which, in our opinion, should be much more focused on the tough economic conditions that undoubtedly lie ahead, seem to benefiting. Once saner heads look at the true state of the U.S. economy, which is almost certainly heading for troubled waters for the foreseeable future, these market gains may well be sharply reversed again.
As we have pointed out here before, as the U.S. leads, so the rest of the world tends to follow. Thus we expect stock markets elsewhere to show some substantial gains heading into the weekend, but probably there will be corresponding falls beginning right from the start of next week.
The U.S. midterm elections may not have seen the big Republican surge that had been anticipated, but at the moment it looks like the Democrats will lose their control of the House of Representatives, while the Senate remains touch-and-go with the final oucome perhaps not becoming known until next month. Even losing control of the lower House will adversely affect the Biden Administration’s legislative power which will likely weaken the U.S. dollar, a factor which will be positive for gold.
Inflation may be peaking, but still remains at a disturbingly high level in the U.S. and globally which is bound to affect world economies in a negative manner for some time to come. The war in Ukraine seems to be developing into something of an impasse with both sides seemingly intransigent in their ultimate aims, despite what appears to be a significant Ukrainian gain in Kherson. This will continue to negatively impact Eurozone economies in particular and perhaps give the U.S. one a boost in terms of continuing natural gas export sales, as well as supplementing the earnings of its military industrial complex through continuing arms sales.
We are rapidly approaching 2023 without any real end in sight to any of the major geopolitical or geo-economic difficulties that 2022 has brought us. The prospects for a better year ahead do not look particularly bright at the moment. But for the time being at least, life goes on. The world has a propensity for muddling through crises of our own making. Let us hope that 2023 at least brings an end to some of these current problems and doesn’t come up with too many new ones to replace them.