There was mixed action in the precious metals markets this morning as investors seem to be responding to the positive reviews of President Trump's first speech before Congress last night. Stocks were higher in the U.S. on Wednesday morning, joining most of the global exchanges abroad. Hawkish rhetoric from the Federal Reserve about its plans for raising interest rates are also being taken seriously, dampening some of the appeal of holding gold.
On Wednesday morning, spot gold was down 0.3% to $1,244 per ounce, still unable to push through resistance at the $1,260/oz level. However, silver prices actually added 0.4% to continue trading near $18.40/oz. Platinum and palladium were likewise mixed.
Trump Impresses Critics
President Trump's anxiously anticipated address to the U.S. Congress was lauded by most observers as a success for the new president. After his predictably self-congratulatory introduction, Trump balanced his hard-line campaign promises to curb immigration and rebuild the country with a more uplifting message about resurrecting the American Dream. Short on specifics but highly aspirational, the speech was generally seen as striking a more polished, "presidential" tone.
This feel-good sentiment helped drive U.S. stock markets more than 1% into the green on Wednesday morning. Consequently, the Dow Jones yet again notched a new all-time intraday high, crossing above 21,000 for the first time ever. Treasurys were down, meanwhile, pushing yields on the government bonds slightly higher, especially for the shorter-term two-year (1.21%) and five-year (1.88%) notes. The dollar rose by the most in six weeks, advancing two-thirds of a percentage point to 101.8 on the DXY index.
FOMC Eyes March
Aside from Trump, the other major factor that's been driving markets is the Fed.
Various officials from the Federal Reserve Board have been ramping up their hawkish tone toward what action the central bank will take going forward this year. Monetary policy is beginning to receive considerable focus as investors (both domestic and international) watch closely for signals about where interest rates are going. The target federal funds rate set by the FOMC has a wide-ranging impact on the global rate environment.
Yesterday, following a speech in which San Francisco Fed President John Williams (among others) warned against delaying a normalization of rates, the market-implied odds of a rate hike in March skyrocketed. Traders are now pricing in a 70% chance of a move in March, a huge jump from 30% earlier this week. New York Fed President Bill Dudley likewise expressed his support for imminently higher interest rates.
However, this may well be another case of the Fed using its platform to influence the markets one direction or another. In the weeks between its policy meetings, the FOMC has been engaging in a good deal of chatter about its intentions. Yet we have seen time and again that this strategy is usually an effort to quell any market disruptions. In other words, it protects the stock market. When the crowd of retail investors realizes this, we could see gold prices surge.
In some sense, the Fed's hawkish turn could be seen as a clandestine stress test: If the Fed pushes the rates-are-going-up narrative, it can then gauge how the markets react to this notion before they even do it. Although it clearly engages in manipulating the sentiment of the markets, the way the Fed gauges the temperature of the economy is an important part of the central bank's job. (Whether or not it does that job effectively is a separate matter of debate.)
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