US Fed projections dampen mood across stock markets

Market report Michael Blumenroth – 12.06.2020

Weekly market report

The topic of the week thus far has been the rapid change in sentiment caused by Wednesday evening’s Fed meeting, and in particular the subsequent press conference with Fed Chairman Jerome Powell. 

On the positive side, the markets saw the Fed signalling a continued loose monetary policy for the next few years. In the new projections, not a single central banker expects key rates to rise in 2020 or 2021. For 2022, only two of the 17 council members see a slight interest rate hike. To secure the flow of credit to households and businesses, the Fed also intends to keep the purchasing programme at least at the current level in the coming months. For the time being, it is purchasing government bonds for 80 billion dollars and mortgage securities for 40 billion dollars per month, a measure that has been welcomed by the markets and is likely to impact the gold price positively. 

Investors say goodbye to hopes of a quick recovery of the US economy

The rather sceptical, cautious outlook of the central bank was a shocker for many. Council members projected a deep GDP slump, followed by a sluggish recovery. As for the US unemployment rate, which currently stands at 13.3 per cent, the monetary watchdogs expect only a slow recovery, predicting a decline to 9.3 per cent at the end of the year and to 6.5 per cent by the end of 2021. Many market participants who had been betting on a quick recovery and invested in stock indices, boosting them towards the levels of early May, opted out. The gold price initially benefited from the retreat to safe havens, but flattened yesterday alongside a rising US dollar.

Gold price rises week on week

This morning, gold in US dollars stands at more than one per cent higher than last week on Friday morning, when it traded at 1,713 $/ounce. Following surprisingly strong data on the US labour market, the gold price retreated to 1,671 $/ounce on Friday afternoon but has since been moving upwards quite continuously until yesterday afternoon. The week’s high of 1,744.50 $/ounce was almost exactly the same as the previous week’s. Last night, the precious metal retreated slightly and trades at 1,732 $/ounce this morning. 

The euro rose to a three-month high of 1.1422 €/US$ on Wednesday evening, but has since depreciated somewhat. 

The price of Xetra-Gold thus also rose slightly over the course of the week within regular trading hours, from 48.50 €/gram last Friday morning and a weekly low of 47.50 €/gram on Friday afternoon to 49.35 €/gram yesterday afternoon. It currently stands around 49.25 €/gram.

The question now is whether the markets will revert to increased caution in the long term, also since the number of new Covid-19 infections in some US states is currently on a steep rise. This could boost gold as a safe haven. A side effect, however, could also be a stronger US dollar, with a negative impact on the US dollar gold price. Whatever is in store, the next weeks will certainly not be boring. 

I wish all readers a happy and sunny weekend.

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