16:10 GMT Wednesday 15 December 2021
Gold under pressure ahead of Fed
By David Madden (Market Analyst at Equiti Capital)
Stocks are mixed today following on from two days of losses. Concerns about the omicron variant of Covid-19 as well as jitters ahead of the Federal Reserve meeting are hanging over the markets. Last week, the S&P 500 enjoyed a major rally and it pulled back most of the ground that it lost in the late November sell-off, but it has fallen for three consecutive days, which underlines the sharp change in sentiment. This evening’s Fed meeting is probably why US equities are underperforming versus European markets. There is chatter the Fed will announce that it will taper its bond buying scheme by $20 billion. Part of the reason why equity markets have enjoyed such a huge rally in the last 18 months is due to the ultra-loose monetary policy from the Fed, and if the bank further winds down its stimulus package, that could weigh on equities. In recent weeks, we have seen a jolt higher in the US 10-year yield from time to time, and if the Fed do go ahead with a $20 billion taper, that might drive up bond yields. The activity in the bond market is often seen a forecast for possible interest rate changes, so a spike in yields could trigger a wave of selling in US stocks. Broadly speaking, tech companies have relatively large debt levels and in turn the NASDAQ 100 could be in for a high level of volatility later, depending on the moves in yields.
UK CPI hit 5.1%, its highest level in 10 years. Last month, the Bank of England (BoE) kept rates on hold as only two of the nine members of the monetary policy committee voted to lift rates. Central bankers around the globe are under pressure to tackle inflation, and as we saw with the UK, the cost of living continues to rise. Earlier today, the interest rate futures market was pricing in a 74% chance of a 0.15% rate increase from the BoE tomorrow. Sterling is mixed today so that suggests that currency traders are not over hopeful the UK central bank will pull the trigger with respect to lifting rates.
Gold is lower again as traders are existing their long positions in the metal ahead of the update from the Fed, for fear the bank presses ahead with speeding up tapering. The US dollar is a little higher this afternoon, and that is hurting gold also because lately there has been a strong inverse relationship between the two assets. Since mid-November, gold has been trending lower, and currently it is trading at $1,766, and should it break below the $1,758 region, that could pave the way for further losses. Keep in mind the low of the August flash crash was $1,667.