Forex and Crypto news from Libertex

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Fed decision helps to buoy US stocks as positive data abounds

Ever since the post-pandemic boom in the US stock market came to an abrupt end in late 2021, it's been an arduous slog for many companies to try and regain some of the ground lost during the slow grind lower of 2022. The start of this new year seemed to offer an olive branch to the battered stock market as major indices gained over 10% in January 2023 alone. However, by the end of July, the wheels had already begun to come off the recovery.

Since then, the country's two biggest indices — the S&P 500 and Nasdaq 100 — have both lost close to 10%, dropping from $4,576 and $15,826 to $4,193 and $14,409, respectively, in the space of just three months. But movements this week would seem to suggest there could be light at the end of the tunnel for tortured stock market investors.

The release of the latest Consumer Confidence numbers saw the S&P 500 rise 0.7% on 31 October, while the Nasdaq managed to move up 0.5%. These gains were then built upon further the next day as the Fed's decision to hold rates steady saw respective jumps of 1.1% and 1.6% for these major indices. The gains might not look like much on the face of it, but they're a sign that equity prices are responding positively to key economic data despite the ongoing (and worsening) geopolitical instability. As the world begins to interpret the Fed's latest decision and post-meeting comments, traders and investors everywhere are wondering what the implications for the stock market will be up to the end of this year and beyond.

Positive data releases surprise market

With the increasing geopolitical instability that has now spread to the Middle East, persistent inflation, and higher costs of borrowing, many would expect key economic indicators to be suffering. However, in the US, at least, the muted impact of these multiple factors has left analysts scratching their heads. While the recent Consumer Confidence figures released this week by the Conference Board were indeed down from a month ago, the decline to 102.6 from 103 in September was much less than the full three-point decline predicted by a Reuters poll of economists.

Meanwhile, the US job market appears completely unfazed by the pervasive uncertainty as it continues to defy all the odds. After adding 336,000 jobs in September, unemployment remains steady at a very healthy 3.8%. The US Labor Department's Job Openings and Labor Turnover Survey (JOLTS) also showed layoffs dropping to a nine-month low, while job openings — a key yardstick of labour demand — were up 56,000 to 9.553 million on the last day of September. Overall, the survey reported that there were 1.5 open jobs for every unemployed person in the US, which is a stark contrast to the pre-pandemic average of 1.2.

While it's not entirely clear why the labour market is performing so well at present, there's no doubt that this is a positive factor for equities that could lead to sustained growth in the near-to-medium term.

Fed feeds confidence in risk assets

In a move welcomed by investors, the US Federal Reserve decided to hold rates steady for a second consecutive month at its meeting on 1 November, similarly opting to maintain the federal funds target rate at 5.25% to 5.5%. This has been interpreted by many to mean that the US regulator is finally finished with its rate hike cycle, which is why the stock market responded so favourably to the news.

However, as is always the case with these FOMC meetings, it's the closing press commentary where we can find some of the biggest pearls of wisdom. In his post-meeting comments, for instance, Powell upgraded his assessment of the economy, saying that "economic activity expanded at a strong pace in the third quarter" compared to the "solid pace" he referred to back in September.

Ironically, it appears that the Fed policymakers think that it is precisely the strong labour market and higher-than-expected GDP growth that is keeping inflation high, with Powell stating that "we will need to see some slower growth and some softening in the labour market to fully restore price stability". Despite the latest hold on interest rates, policymakers don't seem worried about making further rate hikes if needed, even if they elect to keep rates steady for a third time in December. This all but amounts to a tacit commitment by the central bank to a more dovish policy, which is good news for stock market investors. Once the market accepts that the rate-raising cycle is truly over, money will begin to flow freely back into risk assets.

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[Libertex]

Has gold lost its glisten?

There's been talk of a commodities super cycle for years now, and yet hard assets continue to disappoint. With the pandemic and then post-COVID hyperinflation, many had reasonably expected an explosion in safe-haven assets, of which gold is perhaps the quintessential. Sadly for gold bugs, it never seemed to come. Following the initial 25% gain in the first half of 2020, the yellow metal has been decidedly flat, and with inflation hitting double digits for much of last year, this actually represents a decline in real terms. Barring natural swings and corrections, gold has been steady in and around its current price of $1976 since September 2020. And now, as the global geopolitical situation grows increasingly tense month after month, precious metals investors are wondering what it will take to finally see some sizable moves to the upside for gold and silver.

The current illogical lull in precious metals is yet another reminder that old models and theories don't always hold true in today's MMT world. The world's biggest economy, the US, is full of contradictions, and a more certain model doesn't appear to be forthcoming just yet. Despite all the conventional wisdom suggesting that haven assets should be booming, metals continue to slide lower, with gold dropping another 0.7% on 7 November. So, what are the causes of the seemingly unstoppable rot in gold and silver, and what can we expect over the coming months and years as the global community faces more and more instability and uncertainty?

Strong dollar overshadows gold's shine

As a dollar-denominated asset, there's no way that gold can escape the influence of the US national currency. Assuming all other factors remain equal, if the dollar loses value, then gold must axiomatically gain in value. It's worth remembering the historic achievement of EUR/USD parity from September to November 2022 and how that left gold prices looking artificially stagnant.

In reality, what had happened was that gold's real-world gains had merely moved in lock step with the greenback's and were thus invisible to the untrained eye. Now, the Fibre did eventually return to a more familiar 1.12 this June but then edged slowly back down to 1.05. Now that we've seen some more encouraging movement to the upside for EUR/USD throughout October, the yellow metal actually managed to gain more than 6% in October, outperforming euro gold by more than one whole percentage point. And though it has now declined by 0.75% since the start of November, this is less than half the drop seen in the euro price per Troy ounce (-1.9%). Silver managed about 75% of the net gains of its more valuable counterpart, recording a 3.26% rise over the last 30 days. With a strong labour market and inflation close to under control, however, we might be wise to expect the dollar's strength to grow given the ECB's more dovish monetary policy compared to the Fed. This could then negatively impact dollar-denominated precious metals' prices.

A lack of interest

The next major factor affecting the prices of precious metals is also connected to central bank policy: rising interest rates. As we've already touched upon, the Fed has been much more hawkish in its rate-rising cycle, and this has finally paid dividends in the form of a return to the semi-normal inflation rate of 3.7% this month. It's still not quite at the 2% target rate, but Fed Governor Lisa Cook believes the central bank's current interest rate of 5.25-5.50% is adequate to get price pressure down to where they want it.

The problem gold and silver have with this is that they are non-yielding assets. This means that their holders do not receive any interest for holding them. On the other hand, corporate and even Treasury bonds pay their holders a return in addition to the principle, and these increase as central bank interest rates rise. The US 2-year Treasury note now pays a handsome 4.934%, and many AA/AAA corporate bonds are paying well above 5%. In fact, even vanilla high-yield savings accounts are offering 4.5-5.5% interest at the moment.

This easy availability of above-inflation, highly liquid investment options will make it very hard for gold to remain attractive to its target market of risk-off investors looking for stable returns and protection against inflation. For this reason, gold bugs might be disappointed over the coming months, save for a drastic change in the macroeconomic situation worldwide.

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[Libertex]

Crypto rally “overdone” or just getting started?

A horrible couple of years for crypto left HODLers covering their eyes and counting their losses. Over a protracted thirteen-month decline, the flagship digital currency, Bitcoin, plummeted almost 75%, and it seemed as if there was no bottom in sight. Thankfully, from the start of this year, things have been looking up. In fact, BTC has managed to post gains of 118% since January, and it would now appear that the bulls could be back on the run at last.

As always, the factors behind this growth are numerous, but an undoubtable driver over recent months has been the buzz surrounding the potential impending approval of a raft of spot Bitcoin ETFs by the US Securities and Exchange Commission. After kicking the can down the road for almost the entirety of its permitted 240-day comment period, the SEC is finally expected to greenlight the first of the 10 ETF applications currently under review by 17 November or, at the very latest, in January 2024.

And while the excitement around spot ETFs has played a huge role in BTC's fortunes this year, the effect of similar products on altcoins has been much more muted. It's worth remembering that ETH has already had its own spot ETF approved, and yet this coin has barely managed half the YTD gains of BTC. This is because altcoin investors are typically more savvy and are led more by functionality than transient positive news factors.

That said, the week starting 13 November did see XRP go through a sharp rise (+10%) and similarly steep correction (-9%) following the circulation of a fake Ripple spot ETF filing purportedly by Blackrock, which was subsequently later outed as a forgery. However, as we head into the final few weeks of 2023, investors and traders everywhere are wondering whether a fresh crypto boom is on the cards.

Slow and steady

The first thing to note about this latest bull market is that it's much more controlled this time around. Instead of an over 500% increase in price over six months like the one seen in 2020/21, this cycle has taken almost double the time to record a 118% gain. And while many love huge returns, the volatility and uncertainty that came with Bitcoin's previous booms and subsequent busts made it a very tricky space to invest in for the long term. The hope is that this more reasonable pace will allow the uptrend to persist much longer, especially in the wider positive market context.

Spot Bitcoin ETFs, for example, are just on the horizon, with approval of up to 10 such products expected in Q1 2024. It's hard to imagine a scenario where this doesn't result in an increase in BTC's price, as the investment firms offering such ETFs will be required to purchase large amounts of Bitcoin to back these instruments. This effect will then be amplified by the subsequent influx of institutional investment via these new, easy-to-use vehicles. If this wasn't enough, we then also have the next BTC halving to look forward to in April next year.

Historically, Bitcoin prices have rallied following previous halvings. Six months after the first halving in 2012, BTC's price shot up to $126 from $12. Then, after the second halving in 2016, it rose from $654 to $1000 within seven months. And following the last one in 2020, Bitcoin's price more than doubled to reach $18,040 from $8,570. With only 2 million coins out of a possible total of 21 million remaining, it's surely going to be a bloodbath on the mining market once the rewards drop their next 50% to 3.125 BTC per block, but this is only good news for the long-term price.

Maybe it's all priced in?

With an asset class like crypto, anchoring is always an issue. It's hard to see Bitcoin's current YTD gains as anything less than the tip of the next bullish iceberg, given the history of price dynamics in this notoriously volatile space. However, despite BTC's fairly recent highs, a gain of almost 120% in less than a year is pretty good going in any situation.

In a research report last week, JPMorgan gave its reasoned rebuttal of the two arguments suggesting significant growth ahead, namely the SEC's spot ETF approvals and impending halving. Firstly, the investment bank's analysts believe that capital will likely just be moved into the newly approved spot ETFs from existing BTC products such as the Grayscale Bitcoin Trust (GBTC), futures ETFs, and listed mining companies, thus not having any meaningful impact on real BTC demand. In short, it believes the crypto rally is "overdone". The lead author of the JPMorgan report, Nikolaos Panigirtzoglou, similarly noted that such ETFs already exist in Canada and Europe and have gained "little interest from investors since their inception".

Another argument is that this decision, coupled with Ripple and Grayscale's recent court victories, will force lawmakers to change their stance. However, Panigirtzoglou deemed this unlikely, given the freshness of the memory of the FTX scandal. He also believes that the halving is already priced in for the most part, citing this as the main reason for the recent upward motion and suggesting that any further growth will require new, organic drivers.

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[Libertex]

Stocks look to end 2023 on a high amid global insecurity

As we head into the final month of 2023, it’s worth noting that this has been a much-improved year for US stocks after two torrid years of ever-lower lows from 2021–2022. Despite huge geopolitical uncertainty across Europe, the Middle East and Asia, above-target inflation, and energy shortfalls, equities have somehow managed to avoid the typical declines associated with global instability. Since January, the US’s Big Three indices – the Nasdaq 100, S&P 500 and Dow Jones Industrial Average have managed to gain 47.54%, 18.9% and 6.08% respectively as at the time of writing (22/11/2023). And this doesn’t even tell the full story since some individual stocks such as Microsoft, Tesla and Nvidia have risen by as much as 57.5%, 118% and 252.2% respectively.

And while these YTD numbers are of course useful, momentum is what investors are interested in for the most part. Well, the good news is that a large bulk of these gains have been made in the last 3–4 months, with little to suggest a slowdown on the horizon. As usual, the main factors remain US monetary policy, the labour market and consumer confidence – all of which are looking fairly conducive to stock market returns at present. With the end of the year in sight, we’ll be looking at how these key fundamentals are likely to evolve in the coming months and the expected effect on US equities.

Right said FED

The impact of monetary policy on stocks is well known and the US regulator is without a doubt the most influential of all central banks. Amid runaway inflation back in 2021–2022, the US Federal Reserve acted decisively to raise interest rates while its counterparts in Europe and the rest of the world were hesitant – though it did take nearly a year of “transitional” hyperinflation to convince them. Despite the initial pain, the Fed’s strategy has proven to be the correct one as price pressure in the US sits at a much healthier 3.24%, while much of the eurozone remains above 5% and some EU nations continue to battle double-digit inflation. There has been much speculation as to whether the US regulator is done with its current rate hike cycle, with Fed Governor Lisa Cook stating that the central bank's current 5.25–5.50% rate is sufficient to bring inflation back to the 2% target. CitiBank analysts stated in a report earlier this week that it believes “Fed officials are most likely done raising rates this cycle”, while the CME Group's FedWatch Tool actually assesses the odds of a rate cut after Q1 at about 57%. Needless to say, stocks' strong performance over the past three months have been driven at least in part by the rapid drops in inflation and anticipation of an end to the Fed’s hawkish policy. If we get confirmation of this, then it can only be good for equities well into 2024.

Lucky numbers

The other major positive factor affecting risk assets like stocks is unsurprisingly the wider macroeconomic context – and this is typically measured by key economic indicators like the labour market, consumer sentiment, and various PMIs. In spite of high inflation and general uncertainty, the US labour market has counterintuitively been at its strongest in years. According to the latest non-farms payrolls reports, unemployment is at a very healthy 3.9%, with 297,000 new jobs added in September and 150,000 in October. What’s more, seasonal employment around the holidays is expected to see even more positions created before the end of the year. And while The University of Michigan consumer sentiment for the US is lowish at 60.4 for November, this is expected to improve as global tensions ease and the market’s strong performance becomes apparent. After all, consumer sentiment is based on the subjective opinions of ordinary people, which often tend to lag behind the market. For a services-based economy like the US, the non-manufacturing PMI is a huge indicator of general economic health and, despite not pulling up any trees, it has stayed solid above 50 for over six months now and is only likely to rise further as the Christmas and New Year celebrations boost demand for both goods and services. Let’s not forget that the market can often trail somewhat behind the key data – that’s why they call them leading indicators. With this in mind, these favourable numbers combined with a more dovish Fed policy could see the equities’ bull market continue into next year.

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