LAWRIE WILLIAMS: Markets finding it tough to find their feet
We are in a bit of no-man’s land as far as global markets are concerned. After a decent rise the dollar index is falling again and gold is up quite sharply. Equity markets don’t seem to know which way to turn after confidence was shattered by some massive falls a couple of weeks ago although seem to be resuming their prior upward path, as is bitcoin which is again knocking on the $10,000 level – but still nearly 50% below its peak.
We suspect U.S. equities, which may be the key, are receiving some gentle support from the powers-that-be, who do not want to see the massive falls in the Dow and the S&P repeated as this suggests lack of confidence in U.S growth. The Trump Administration has been keen to take credit for the massive rises in U.S. stock prices – even though these have, in reality, been a continuation of the big upturn presided over by his Presidential predecessor. The fall in the dollar index may, or may not, be due to Fed intervention, but there has been enough comment from the Administration that a weaker dollar is helpful to U.S. growth for it to smack of behind-the-scenes policy with the recent dollar recovery fairly rapidly curtailed.
After seemingly years of continuing rises with the S&P 500 breaking record after record, on an almost daily basis, a degree of high volatility has returned to the equities markets. They thus could move either way quite rapidly. If the now Jerome Powell-led Fed raises interest rates again at next month’s FOMC meeting (due March 20-21),as had been widely expected, that could lead to a further equities market downturn, particularly if the subsequent statement on the state of the U.S. economy and likely Fed path suggests a continuation of interest rate rises through the year. Gold may be impacted initially if the dollar index rises on interest rate hike news, but this will largely have been taken into account by the markets, and any gold price fall is likely to be shortlived.
Meanwhile U.S. inflation fears have pushed the gold price back up to its recent peaks –indeed it breached $1,360 overnight and headed through this level in this morning’s trading before pulling back a little. This puts the gold price in something of a dichotomy. U.S. inflation suggests rising interest rates – seen as bad for gold – but people also see gold as an inflation protector which is somewhat positive. With the dollar seemingly set on a resumed downwards path again, despite the prospect of interest rate rises ahead, gold is seeing the benefits – in U.S. dollar terms at least but it is vulnerable to the occasional sharp decline – or further rises – as positive or negative U.S. economic data is released.
How about silver? This has remained stubbornly below $17 an ounce with the Gold:Silver Ratio currently sitting at above 80. We suspect silver will have its day, but not yet perhaps. It remains securely under the control of the futures markets and the big banks – notably JP Morgan – which reportedly holds an enormous silver inventory for its clients and on its own account while having the biggest silver short position on COMEX at the same time. Ultimately it will no doubt allow the silver price to rise and see huge gains, but the timing of such a move remains obscure.
But meanwhile beware the bounce in equities and bitcoin. Indreased volatility could see them turn down again equally sharply. History shows that major market collapses are usually accompanied by temporaru upwards recoveries sucking in the unwary investor who thinks the worst may be over. It usually isn't!
16 Feb 2018
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