LAWRIE WILLIAMS: Markets waiting on data and the Fed
Markets are stuck in what could be termed volatility limbo for the time being as inflation runs its disturbing course – seemingly with no end in sight. It is a dangerous time for investors. We could be poised on the precipice of a major crash in any of the major investment asset classes, but the potential vulnerabilities are much stronger in some than in others in our opinion.
The next week could well be decisive in helping to ascertain the next directional phase likely to be experienced. Equities, bitcoin and gold have all been moving up and down strongly, even intra-day, with analysts and commentators on the markets hugely divided on their likely directional paths short, medium and long term.
There is, perhaps, a continuing underlying worry that we are quite possibly entering a period of stagflation brought on by out-of-control energy price rises which could even lead to recession. It is feared that this could lead to a market collapse of perhaps unprecedented proportions – the extreme pessimists’ point of view.
Meanwhile the optimists see inflation being brought under control in a Fed-managed soft landing and a consequent recovery in equities. The more positive risk-on investment environment even sees a recovery in bitcoin to its prior record levels too, or even to much higher levels, although we are sceptical on this, as ever.
Gold, meanwhile, is somewhat left on the investment sidelines in these prognostications. This suggests it probably remains the safer bet for wealth protection, although perhaps not for major gains, under any of the above scenarios.
Our opinion differs somewhat from the mainstream, but is hugely prone to interpretation of events which will occur within the next week, from which the markets will likely take their forward guidance. The first of these will be the data announcements of the latest U.S. Consumer Price Index (CPI) and Producer Price Index (PPI )figures due to be released by the U.S. Bureau of Labor Statistics (BLS) on June 10th and 14th respectively, closely followed by a Federal Open Market Committee (FOMC) meeting on the 14th and 15th.
We expect, that neither the CPI and PPI releases will not start to show a significant downturn in the inflation rate. Thus the post-FOMC meeting statements are not likely, in our opinion, to indicate any slowing down of the Fed’s proposed tightening and interest rate raising programmes. In which case, the equities markets may well be knocked back sharply and bitcoin would likely follow suit. As we have stated before, announced Fed policy moves can only have a limited impact on inflation which is thus likely to continue at an elevated level. The same applies to othe central bank proposed solutions globally.
The dollar index could well trade stronger as a result of the Fed's interest rate policy, which might also lead to a slightly weaker gold price initially, but we wouldn’t expect that to be a lasting phenomenon. Overall gold has been trading recently in a fairly tight range between $1,840 and $1,870 but has been unable to break out in either direction. When it does breach one of these levels definitively we would anticipate it to be upwards, putting $1,900 gold in play.
The inflation rate is currently strongly driven by energy and food prices. These in turn are heavily impacted by the Russia/Ukraine war, sanctions on Russian energy exports and the huge interruptions to Ukrainian agricultural product-related exports with the Russian blockade of Ukraine’s principal Black Sea export routes.
The other precious metals have perhaps been a little more volatile than gold, particularly palladium, while platinum has shown some recent strength, currently being able to hold on to a price level of plus $1,000 but is still far from being able to regain its previous price dominance over either gold or palladium. Longer term it has the potential for so doing, but it will probably need to see a global economic recovery in place before that can come about, which could take some years.
Silver continues to disappoint its followers but at least has been able to close the gap on gold percentage-wise a little with the gold:silver ratio coming back down to between 83 and 84 – still high historically.