Risk Rally Rolls On As Greenback Rolls Over

WHERE WE STAND – Another day, another record high for the yellow metal yesterday.

Clearly, the bull case for the yellow metal remains a solid one, and not just another play for today.

The erosion of Fed policy independence, the FOMC’s ‘run it hot’ strategy, the risk of inflation expectations un-anchoring, lingering geopolitical risk, and a continued desire among EM allocators to diversify reserves are all powerful forces which continue to propel bullion higher. Far from it being luck that leaves gold standing so tall, it’s a combination of that powerful fundamental bull case, as well as momentum strongly favouring further upside.  

Given how we are now, quite literally, in uncharted territory, there are no notable resistance levels, certainly no high prison walls, besides psychological resistance around numbers. Still, one record high tends to beget several more, meaning that the salad days for gold – and other precious metals, for that matter – likely lie ahead. $4,000/oz remains a reasonable medium-term target, with any pullbacks likely to remain buying opportunities, after the rush has gone, for the time being.

Elsewhere, yesterday, after an initially indecisive start, it was again a case of ‘more of the same’ for markets, with stocks rallying on Wall Street, and Treasuries softening across a steeper curve, though the dollar’s recent rebound did seem to run out of steam a bit. Still, there were little by way of fresh catalysts to move things along, and vol, for the most part, remains subdued – for instance, the VIX is happy hovering in the mid-teens; ICE BofAML’s MOVE index is at its lowest level since the back end of 2021; and, JPM’s FX vol index is at its lowest since last summer. Just don’t anybody go using the dreaded ‘Q’ word!!

A smattering of Fed speakers did, briefly, provide some interest, though hawkish remarks from 2025 voter Musalem, and 2027 voter Bostic, don’t really move the needle especially much. Particularly when, if history is any guide, these newfound hawks will undoubtedly magically vanish if/when we get another cycle high U-3 print next Friday.

Speaking of history, I was reminded yesterday that 20 years ago – a time when I was still in short trousers – the S&P 500 traded at 666. Today, we trade north of 6,600, with the index having 10x’d in just two decades. I’ve, frankly, no clue as to whether 10x again over the next 2 decades, but would hazard a guess that we don’t, given how rare rallies of that magnitude tend to be.

That said, the bull case in the ‘here & now’ remains intact, and the path of least resistance continues to lead higher, as the Fed embark on a ‘run it hot’ strategy, leaning in to support economic growth, at a time when the underlying economy remains resilient, and earnings growth remains robust, allowing the looser monetary backdrop to provide a strong helping hand to riskier assets. As if to prove that point, yesterday marked the first day this year that all of the ‘Magnificent Seven’ traded in the green YTD – there seems to be plenty left in the tank as far as equity bulls are concerned.

Elsewhere, my steepeners continue to work, benefitting from essentially the same bull case as gold outlined above, while I remain a longer-run dollar bear, having become marginally more confident that the buck’s recent rebound could well be coming to an end, given the DXY’s inability to move convincingly north of the 50-day moving average over the last couple of sessions.

LOOK AHEAD – A busier data docket awaits today, though in truth it will be remarks this evening from Fed Chair Powell that steal the limelight, in which Powell will, hopefully, clear up some of the confusion around having framed last week’s cut as a ‘risk management’ move.

Besides that, ‘flash’ PMIs from pretty much every DM economy will be eyed throughout the day, though the composite output metrics both here in the UK, and in the eurozone, are set to show the economy having expanded at a relatively similar pace to that seen last month. Elsewhere, regional manufacturing figures are due from the Richmond Fed, the US sells 2-year notes in an auction that should be taken down relatively well, while Micron (MU) report earnings after the close.