Although markets are open on Monday, U.S. banks are closed. The day has been quiet as many celebrate the Columbus Day Holiday. Stocks were mostly mixed while gold saw some slight gains on the session.
A degree of risk aversion appears be creeping back into the marketplace to start the new trading week. The ongoing U.S./China trade negotiations continue to be a source of worry for investors. The optimism that was seen late last week on the notion of a “Phase 1” agreement with China has quickly faded. There could be a variety of details that still need to be worked out, and China has already suggested that it may want to go overt the details further before coming to an agreement. Hanging in the balance are additional tariffs on Chinese goods that could still go into effect if an agreement is not made. Any further escalation in the trade war could be a source of market volatility and selling in stocks.
The Brexit saga also continues to draw attention as more concessions are desired from British Prime Minister Boris Johnson, making an agreement this week unlikely. Lack of progress could force the Prime Minister to write a letter requesting an extension for Brexit until January 31st.
Numerous issues including the trade war, Brexit, Trump impeachment inquiry and Middle East tensions all have the potential to fuel volatility this week. The dollar saw a slight bump on Monday from a three-week low reached late last week. As economic and geopolitical tensions mount, the dollar could potentially catch a larger bid and compete with gold for safe haven inflows.
U.S. politics could play an increasing role in market behavior in the weeks and months ahead. If the Trump impeachment gathers steam, it could send investors running for the exits. As the 2020 election approaches, a legitimate democratic challenger to Trump could also shake things up.
Another rate cut is expected from the Fed this month. The central bank has thus far avoided taking a more aggressive easing stance and has continued to suggest that any decisions on rates will depend on the data. Any positive data ahead of the next FOMC meeting has the potential to give the Fed reason for pause. Although the central bank will likely still cut rates by another 25-basis points, a lack of dovish commentary could leave markets with the impression that the Fed could be done. If the Fed signals it is on hold, the gold market could see more selling pressure without any fresh bullish catalyst.
The gold market continues to try to hold onto the $1500 level. Thus far, the market has not been able to mount a significant challenge of recent highs, and it could become increasingly vulnerable to a larger sell-off in the absence of a rally. A downtrend has been in place for several weeks now on the daily chart, and rallies could be sold into until proven otherwise.