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Inflation dominating Fed policy, gold and stocks

Fawad Razaqzada Fawad Razaqzada 25/11/2021
Inflation dominating Fed policy, gold and stocks Inflation dominating Fed policy, gold and stocks
Inflation dominating Fed policy, gold and stocks Fawad Razaqzada
 
  • Inflation remains key concern
  • Fed to withdraw support faster
  • Gold steady after big drop
  • Value stocks could outperform – Covid permitting
 
Thanksgiving means the US markets are closed today and with Wall Street trading only for limited hours on Friday, it looks like we are set for a quieter end to what has otherwise been volatile week. Looking ahead, there’s increased uncertainty about the direction of global stock markets, owing to concerns about inflation and the impact it will have on central bank policy, as well as the resurgent virus. Rising bond yields are hurting technology stocks, although value stocks are outperforming. Gold is also weighed down by rising yields, but will inflation come to the rescue of the metal?
 
marketsSource: ThinkMarkets and TradingView.com

 

Inflation remains key concern

 
Chief among investor worries has been inflation, which rose to a three decade high in the US last month. Meanwhile, other economic data continues to remain largely positive, as we found out yesterday with consumers’ incomes (0.5%) are spending (1.3%) rising more than expected in October, while jobless claims fell to a record low. Against this backdrop, investors are increasing their expectations that the Fed will have to speed up its policy normalisation. This is something the central bank’s policymakers indicated, with the minutes of the FOMC’s last meeting showing they want to taper the central bank’s bond purchases at a faster pace, even before data showed inflation accelerating. According to the minutes of the FOMC’s November meeting: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher.”
 

Fed to withdraw support faster

 
With inflation accelerating since that meeting, analysts are now calling for tighter policy sooner. Economists at Goldman Sachs, for example, expect the Fed to double the monthly taper amount from January to $30 billion, completing the process by mid-March, before making the first of the year’s three rate hikes in June. Others such as analysts at Deutsche Bank, think that the Fed will not wait until next year and instead it will accelerate the pace of tapering at its December policy gathering.
 

Gold steady after big drop

 
Inflation is what could actually save gold, as investors seek to protect their wealth from the impact of rising price levels. Just take a look at the Turkish lira or the Japanese yen to see what inflation and high oil prices can do to you when hoarding fiat currencies over gold. Yet, paradoxically, inflation is the exact reason why gold has sold off this week. Surging inflation in the US has raised investor concerns that the Fed will pursue faster policy normalisation in the months and years ahead, with other central banks likely to follow. As a result, bond yields have risen, increasing the opportunity cost of holding non-interest bearing assets like gold and low-dividend-yield assets such as growth stocks in the technology sector.
 

Value stocks could outperform – Covid permitting

 
As mentioned, rising bond yields have increasing the opportunity cost of holding low-dividend-yield assets such as growth stocks in the technology sector, especially those of which that are non-profitable. As yields continue to rise, we will likely see increased rotation into value stocks. But standing in the way of that rotation could be Covid and further lockdowns. Europe is really struggling right now. There was a sharp plunge in German consumer confidence in November, falling to its lowest level in six months. Undoubtedly, this was on the back of worries about the fourth wave of Covid, as well as surging inflation. The potential for more lockdowns measures means the outlook for the festive season is going to be a bit murky. This may discourage European investors to take on too much risk, potentially meaning equities might struggle on both growth and value fronts.
 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
×
Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
×
Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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