LAWRIE WILLIAMS: Overtaken by events. Gold crashes along with equities and bitcoin.
Well we had anticipated a major crash in the equity markets and bitcoin as inflation continues to rise, killing the likelihood of any Fed easing of its tightening and interest rate raising programmes at this week’s FOMC meeting. But perhaps we had not anticipated Monday’s and Tuesday’s take-downs in the gold market too, probably on consideration of further strength in the dollar index and an increase in U.S. Treasury bond yields, both of which tend to compete with gold for investment dollars under such circumstances. Indeed gold fell over 2%, as against a somewhat similar sized decline in the Dow and the S&P, while the NASDAQ was down over 3%, bitcoin (BTC) over 12% and Ethereum (ETH) over 15%. Wednesday did see something of a recovery in gold and the other precious metals ahead of the FOMC meeting outcome, although not initially in equities or bitcoin.
In the event. The FOMC raised rates by 75 basis points after Friday’s high CPI data release which had hugely raised the possibility of this higher rate increase being imposed. There is increased realisation, however, that whatever the Fed does with interest rate impositions it may well have little or no short term effect on the principal causes of the current high inflation rate rises. The initial market reaction was perhaps a little surprising and the principal U.S. stock indexes rose and gold fell back initially, before a small recovery later, but we suspect the equity situation may quickly reverse once the market has time to digest the reality behind the figures.
Today European stocks and bitcoin fell, along with further weakness in gold as the markets further digested the Fed’s latest moves and projections. We think there’s a good chance of U.S. equities taking the same downwards path once the markets open there, while we anticipate that gold will make a recovery over the next few days. But again we would not be too surprised to be proved wrong in these continuingly volatile markets.
We stated in an earlier article that we thought the Dow might hit 30,000 or below, the S&P 500 3,750 and the NASDAQ 10,000, and at the recent rate of decline these figures could even be reached in the next couple of days. A U.S. recession is certainly in the air! We are already in one in the UK, under the definition of two successive quarters of negative GDP growth, and we suspect there are several other major European and global nations already in the same boat.
In his post FOMC meeting statement. Fed chair Jerome Powell did raise the prospect of a more aggressive approach at future meetings, and while this did not seem to unduly worry the markets at the time, we suspect that once the nuances of that statement are fully digested we may well see another downwards leg in equities and bitcoin.
Certainly the likelihood now is that the Fed is aiming at a year-end interest rate level of 3-3.5% and maybe 4% next year, but whether this is enough to tame inflation is still far from certain. The high year-on-year headline increases may start to fall away from October (inflation began to take off from October last year), but the overall inflation level will remain elevated regardless. Powell warns that a softish landing is going to be harder to achieve, but he is not renowned for the accuracy of his inflation-related forecasts in the past so he may well be understating the case yet again. Expect, and prepare for, a more negative outcome.