There has been no shortage of news that could potentially have a significant impact on financial markets. Another rate hike from the Federal Reserve, the ongoing Supreme Court nominee saga and the global geopolitical landscape all have the potential to affect market action this week.
Last week, the U.S. Federal Reserve elected to hike interest rates again by an additional 25 basis points. The move from the central bank was not at all unsuspected and investors were likely far more concerned with the Fed’s outlook going forward. Although some changes were made to the central bank’s “dot-plot,” the Fed still sees another rate hike before the end of year and has penciled in another three rate hikes for next year.
The Fed’s commentary is always subject to interpretation, but some suggested that the past week’s comments did not reflect the type of hawkish tone that was anticipated. Of note were the central bank’s projections, which suggest economic growth will slow to sub-2% levels in the years ahead. This could be indicative of a fading away of recent stimulus measures including tax cuts and government spending.
In addition to the Fed, the ongoing state of U.S. politics could also start to weigh heavily on stocks and risk assets. The November midterm elections are quickly approaching, and the Trump administration is currently battling to get its Supreme Court nominee Brett Kavanaugh through the Senate and onto the highest court in the land. Numerous allegations of improper sexual behavior have forced the Senate to open another FBI background investigation into the nominee, and the week ahead is likely to be filled with increasing controversy and political discord.
Some have suggested that if the republicans are unable to confirm Kavanaugh to the Supreme Court, they will likely be looking at defeat in the midterm elections. If the democrats do take power, things could get very dicey as it would become extremely difficult for President Trump to continue to implement his agenda. Such a scenario could fuel a rapid spike in market volatility, and the stock market could take a very serious turn south.
In the meantime, the gold market seems to be content biding its time. The market has thus far shown little reaction to another hike from the Fed and the likelihood of another hike in the months ahead. Gold has continued to try to maintain price action at or near the $1200 per ounce level, and thus far the bears have been unable to force another significant leg lower.
The recent sideways action in gold could be the beginnings of the next great bull market. The longer the market trades sideways, the more explosive an eventual upside breakout could be. Such a move could be exacerbated by investors scrambling to put capital to work in alternative asset classes if or when stocks begin to really crack.
The long-term bullish fundamentals for gold, including weaker fiat currency values, geopolitical risks, recessions and overall risk aversion remain very much intact. Given these risks, it is likely only a matter of time before the yellow metal starts moving higher once again.