After a tumultuous Monday, volatility is turning lower this morning. European stocks are in the red, but losses are mild so far, and US equity market futures are pointing to a higher open later today. The gold price reached a record early on Tuesday, but has also pulled back, and upwards pressure on Treasuries is easing, while short term bond yields in Europe are falling. The dollar is also picking up after lows in the Asia session. It appears that traders in the European session are taking a breather after a heavy day of selling in the US on Monday. However, the tone will likely be set during the US session. This is a news-driven market, and we will continue to watch what comes out of the White House as it has the power to deeply impact market sentiment.
Finance ministers’ meetings worth watching
Ahead today, the economic calendar is light, but the IMF World Bank meetings that take place this week are worth watching. The world’s top finance ministers will be there, with US tariffs likely to be top of the agenda. Any diplomatic progress to halt or lessen the impact of tariffs could have a big impact on risk sentiment in the coming days.
Gold: how long can the rally last?
As we return after the Easter break, the big question is can any other asset class keep up with gold? The yellow metal is higher by another $50 on Tuesday and at one point rose to a fresh record at $3,500. It is higher by 32% YTD, and its fortune is in stark contrast to the fortunes of US stocks, which plunged once more on Monday. The Nasdaq is hurtling back towards bear market territory and is down 17% YTD, the S&P 500 is down 10%, and the tech-light Dow Jones is proving to be the most resilient, and is lower by 10%. Gold could be at risk of a short-term correction due to the ferocity of its recent increase. Although we think that some of the moves that we have seen in markets are the result of a strategic allocation shift, the 15% rise in gold in the past month is unsustainable, so a pullback from here would not be unexpected.
Chart 1: The gold price and the dollar index
Source: XTB and Bloomberg
The rally in gold is one side of the coin, the other side is the decline in the dollar. The dollar is lower once again on Tuesday, and the dollar index has fallen to its lowest level since 2021. The yen is leading the way, and USD/JPY had broken below the key 140 level, the lowest level since 2023, before bouncing off these lows. The dollar is the weakest currency in the G10 FX space so far this year. It has lost 16% vs. the Swedish krona, 12% vs. the Swiss franc, 11% vs. the euro and the yen and it is down more than 6% vs. the pound. The dollar is an unloved currency, and the recent rush into gold is a sign that there could be more weakness to come. The push higher in bitcoin, which is higher by another $1100 on Tuesday, could also be a sign of investor flight out of the dollar.
Treasury concerns fuel flight to gold
The gold – US dollar – US Treasuries relationship is coming to the fore. The sharp rise in gold, the decline in the dollar and the jump in Treasury yields is causing existential angst among investors, which is inevitably weighing on equities and risk sentiment, with US stocks in the firing line. Although S&P 500 futures are higher on Tuesday, they have already given back some early gains, along with a surge in safe havens so far this morning, it could be another tricky day for risky assets.
Trump takes aim at the Fed, again
The surge into safe havens and out of US stocks on Monday, was due to comments President Trump made about the Federal Reserve. The President warned that the economy would slump if the Fed did not cut interest rates, seemingly forgetting that he inherited a strong economy, and his trade policy may be partly to blame for any slump. Suggestions from the President that he could move the Fed chair, which he could only do if he worked outside of the law, has also rattled investors in recent days. As we have been saying, the market is pricing in a political risk premium for US assets. A President who is pursuing an unorthodox economic policy, who is threatening the stability of the US financial system and who is engaged in a damaging trade war between the US and China, and potentially the rest of the world, is wreaking havoc on portfolios so far this year, and is strengthening safe havens.
This is a man-made crisis, which is triggering a major strategic global asset reallocation shift:
- Out of US long term debt and into European long-term debt.
- Put of the dollar and into safe haven currencies like the Swissie and the yen along with the euro.
- Out of the US dollar and stocks and into gold.
- Gold is the only metal or energy commodity to post a price gain in the past month.
- Gold is benefitting, while other industrial metals get hammered, like Aluminum, due to tariffs, and copper, due to its exposure to global growth.
The blame game ahead of US Q1 GDP
The shifts out of US assets, should make the White House take notice. However, for now, it looks like the President is passing the buck when it comes to growth. Q1 GDP for the US is released on 30th April. So far, economists expect a sharp slowdown in the rate of annualized quarterly growth to 0.4% from a 2.4% rate in Q4. Some estimates are predicting a sharper decline. If we do see negative growth in Q1, President Trump has already chosen who he will blame, the Fed chair. The question for investors: will he use this as an excuse to get rid of him a year before his term ends? If yes, then this could add an even larger political risk premium to the US dollar, Treasuries and US stocks.
Ahead today, the European and US economic calendars are light. Thus, we may see the current mini recovery in risk assets continue until we get another driver for markets. However, we cannot see a prolonged recovery in US assets for now, with gold taking centre stage.
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