Well, another US employment report came and went.
And the market did nothing.
Employment gains for the month of September in the US came in at 157,000, slightly below consensus forecasts of 172,000. The Dow fell 0.15% on the news, while the S&P 500 finished 0.33% lower.
The verdict of the market is that the employment data was not weak enough to stop the Fed from raising rates in December. That could all change with another weak report in November, but, right now, investors are positioning for a coming rate hike.
This view saw gold prices initially fall sharply, as panicked longs threw in the towel. But the price then recovered to around US$1,255 an ounce.
Perhaps the worst of the selling is now over for gold.
Bloomberg reports that speculative positioning in the futures market is now as bearish as it has been since May, which was the last time the market was preparing for a rate rise…just prior to the Brexit surprise.
‘The net-long position in gold futures and options fell 22 percent to 205,176 futures and options for the week ended Oct. 4, according to Commodity Futures Trading Commission data released three days later. It was the biggest drop since the period ended May 24. Short holdings, or bets on price declines, surged by 59 percent, the most since May 2014.’
In other words, gold is becoming a much less crowded trade now. Hedge funds have scaled back their bullish bets and increased their bearish bets. This is much more conducive to a short term bottom in prices.
If gold can hold around US$1,250 an ounce (an important support level, as I pointed out last week) then it sets the stage for the bull market to resume in the weeks and months to come.
It will be especially interesting to watch gold’s performance if the Fed does go through with a rate hike amidst conflicting economic data. While it’s hard to see the Fed raising rates in such a scenario, they will feel like they have to move in December. If they don’t, will it ever happen?
So if gold rises on a December rate rise, it will tell you that the Fed has waited too long and moved too late. It will also tell you that gold is discounting economic weakness ahead, and that the Fed will have to reverse course.
But this is all conjecture. Let’s see what happens. For now, gold is holding up, and the speculative end of the market is much less bullish than it was a few months ago.
Keep in mind, though, that the ‘net long’ position is still 200,000 contracts, representing a notional gold exposure of 20 million ounces. (Each contract represents 100 ounces of gold.)
So it would be good to see this position continue to fall over the next few weeks.
One thing is for sure: Donald Trump won’t be giving gold a boost. His campaign is now in tatters, as key Republicans abandon him one month out from the election.
Over the weekend, a video emerged of Trump making disgusting comments about women. While that’s not surprising, it’s a stark reminder of Trump’s deeply offensive, misogynistic behaviour.
I know it’s a tough choice between a smiling assassin like Hillary Clinton and a complete and utter buffoon like Trump. But having complete disrespect for women is simply not OK, especially if you’re running for president! I can’t see how Trump bounces back in the polls from here.
A likely Clinton victory (ironically, with a misogynist/philanderer for a husband) will keep Wall Street happy for the time being. We’ll be able to go back to only worrying about what the Fed is going to do…or not do.
The recent vibe from central bankers is that their low to negative interest rate policy is hurting the banking sector. For this reason, they are increasingly highlighting the role of fiscal policy in trying to create economic expansion.
It’s simply too much to ask to get these people to think about letting the market work it out. As a result, expect talk about the role of fiscal policy to only increase from here.
Australia’s Treasurer, Scott Morrison, met with Janet Yellen in Washington on Friday, and, surprise surprise, he’s talking up fiscal policy. As the Financial Review reports:
‘Treasurer Scott Morrison has emphatically signalled he opposes more interest rate cuts by the Reserve Bank of Australia, arguing monetary policy has “exhausted its effectiveness”.
‘“Its ability to impact and influence is diminishing,” Mr Morrison told The Australian Financial Review in Washington on the weekend.
‘In a rare intervention, the Treasurer said instead of RBA rate cuts, the Turnbull government’s policies needed to do the heavy lifting to “boost incomes and lift living standards”.
‘He delivered the same message to investors in New York and finance ministers and central bank governors in Washington over the past few days.’
I don’t think property investors would agree that monetary policy has exhausted its ‘effectiveness’. Low rates are keeping upward pressure on prices, most notably in Sydney and Melbourne, where auction clearance rates remain very healthy (indicating very strong markets).
Of course, while this provides a short term boost to economic activity, it’s all a result of continued debt accumulation. In the long term, this only creates greater risks for financial stability.
The last few interest rate cuts have been completely unnecessary, but the RBA has moved, anyway, in the hope of weakening the currency. It’s been a failure. Rates are on hold for now, but that might be for only as long as China maintains its growth charade (courtesy of its own housing boom).
In a sign of how far the cult of central planning has come, Morrison, a Liberal, seems to honestly believe that the government can ‘boost incomes and lift living standards’. What a chump.
This thinking permeates our whole political and bureaucratic class. And it’s fed by a compliant and profit focused education sector that churns out rote learning monkeys to perpetuate this flawed thinking.
And on top of this, the US has a choice between Trump and Clinton to lead them over the next four years.
God help us all.
For Markets and Money