The S&P 500 index got pumped and dumped after strong retail earnings and robust housing data could not overcome persisting concerns over the stimulus stalemate and escalating tensions between the US and China. Wall Street keeps expecting a conciliatory tone to be reached between the world’s two largest economies as the November election nears, but right now that seems unlikely to happen anytime soon. The S&P 500 index enjoyed record high territory for only a moment as investors fear the economic recovery will not be as robust for the rest of the year. US stocks might pullback a little, but no one wants to become a bear and bet against the mammoth fiscal stimulus that will unleashed globally.
After rising to a 27-month high, the euro has come back down to earth as the overly crowded trade has exhausted itself. Treasury yields are falling again as expectations grow that the Fed policy review framework will signal a relaxed view on inflation, taking some of the air out of the steepening of the curve and dragging the dollar along with it.
The dollar fundamentals still warrant further weakness, but this trade has become a bit overcrowded and is ripe some short-term dollar momentum.
Crude prices fell sharply as the demand outlook was dealt a blow after German Chancellor Merkel indicated she will not loosen coronavirus restrictions as COVID-19 grows. WTI crude was ripe for some weakness after consolidating near the upper end of its tight trading range. As OPEC+ slowly revives some production, the latest virus trends are deteriorating the outlook for a steady improvement with crude demand. Oil prices should remain heavy in the short-term since too much uncertainty persists with how the virus is trending now and what it will do in the winter.
Gold prices seem to have gotten its mojo back after both fresh tensions between Washington and Beijing spurred safe-haven demand and acting CEA chair Goodspeed said President Trump would pursue a narrower stimulus bill. As US stocks hit fresh record highs, a laundry list of uncertainties to the outlook for the rest of year should help gold continue the climb to uncharted territory. Presidential election uncertainty is not just with the outcome for the Oval Office and the Senate, but on when will we get the final results. The current stimulus stalemate persists, but a deal will get done before the end of next month because that is when federal funding runs out.
The coronavirus remains the primary driver for the economic outlook and markets will remain on edge until treatment/vaccine trials deliver strong enough results and on how bad will the Winter wave be.
Gold’s recapturing of the $2000 level was short-lived as investors quickly abandoned this morning’s risk-on trades after the S&P 500 index finally made a record high. Gold volatility will remain elevated and if the dollar has a couple days of strength, gold could consolidate tentatively before making a climb back to uncharted territory.
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