The gold market is moving slightly lower to kick off what will likely be a very busy trading week. Global financial markets are likely to take their cues this week from any fresh geopolitical developments. Investors will also pay close attention to this week’s Federal Reserve monetary policy meeting.
Although no action is expected from the central bank this week, markets may be interested in the Fed’s commentary following the meeting as rate hike expectations have seen some changes. The Fed will almost certainly follow through with its plans for another rate hike before the end of the year, but some analysts have now begun to question the central bank’s plans for another three rate hikes next year. Amid criticism from President Trump and some soft pockets being seen in some key pieces of data, it is plausible that the Fed could take a bit of a softer stance towards policy next year.
All eyes will be on Tuesday’s U.S. midterm elections. The importance of these elections cannot be overstated, and some have suggested that the election is really a referendum on the Trump administration’s performance. Numerous key issues could be impacted by the election results, including health care, taxes, trade and more. A democratic victory in the House could set the stage for ongoing investigations into the Trump administration, and lawmakers could even demand the release of President Trump’s tax returns.
A democratic victory in the House could potentially be bearish for stocks. Regardless of what side of the aisle you may lean towards, it is undeniable that the market has performed extremely well over the last two years. A democratic House with a republican Senate and a republican President has the potential to fuel government “gridlock” as key issues could be voted on party lines. The notion of ongoing rate hikes and the potential for added market regulation could also weigh on equities and risk assets. In addition, the idea of further tax cuts would likely lose steam under such a scenario and investors may begin to view the market has having considerably more downside risk.
In other geopolitical news, U.S. sanctions against Iran go into effect today. Although there are some concerns over the potential effects these sanctions could have on the global oil market, several countries have been granted six month waivers to allow for a smoother transition away from Iranian oil imports.
There was some optimism late last week about a potential deal on trade being reached with China. That optimism has faded quickly, however, as Trump’s Chief Economic Advisor Larry Kudlow has said that the two countries do not have an imminent deal.
Financial markets could be at a key inflection point. The weight of rising bond yields, geopolitical uncertainty and an ongoing war over trade with China are just a few of the factors that could prove to be too much for the stock market bulls to handle. Stocks have already shown a significant increase in volatility in recent weeks, and the recent selling in equities could prove to be just the tip of the iceberg.
The gold market appears to be on solid footing at this point. The current economic and geopolitical backdrop along with an improving technical posture may fuel buying on any dips. The market is currently still consolidating recent gains, and could make a move towards key resistance in the $1245 area in the days and weeks ahead.