You Don’t Bet Against the Fed (Part 2)

July 3, 2019

Last time we looked at the Fed’s recent switch to a more dovish stance and examined what a series of rate cuts and/or the resumption of Quantitative Easing could mean for the US equity markets. We highlighted the geopolitical landscape, in which growth is slowing, trade tensions between the US and China persist and President Trump seems to want to play a game of competitive devaluation with his trading partners.
We unpacked the well-known saying among traders that “you don’t bet against the Fed”, explaining how despite the fact that all of the above are not good signs for the US economy, if the Fed decides to cut rates and print more money, that money will inevitably find its way into the US stock markets, which will also inevitably go up. This is irrespective of what the conditions are like on the ground for your average American citizen.

federal-reserve

Today we’ll take a look at a couple of assets that are bucking the above trend, and ask whether their recent rise alongside the S&P 500 is a sign that even though you’re not supposed to bet against the Fed, many traders are starting to look for action elsewhere. Following the last FOMC meeting earlier this month, US equities rallied, the S&P 500 pipped its April all-time high and is now in the process of setting a lower high. In June alone the S&P rose by 8.5%, it now looks poised for another move and traders are frantically trying to decide whether that move it to be up or down.

Business as usual? Perhaps, however in the same timespan gold has also rallied even harder than US stocks have, gaining more than 12% over the month of June and hitting levels last seen in September of 2013. This is out of the ordinary. Looking at a chart of gold’s price action over the last decade reveals three interesting things. The +180% run the yellow metal went on following the last financial crisis. The consolidation that took place after setting its all-time high in September of 2011. And finally, the new trend that seems to be developing with this most recent move up.

gold-chart

As you can see above, gold’s price action throughout June has seen it breaking resistance and exiting a six year long trading range. Should it close at its current level for the month this will be a hugely encouraging sign for gold bulls. But why is it going up? Gold is traditionally supposed to go up when stocks are down and inflation is on the rise. This is precisely the opposite of what is actually happening now. Stocks are at or near their all-time highs and inflation is sufficiently below its target to justify the Fed cutting interest rates.

According to the CME group’s FedWatch Tool, futures markets are now predicting a 100% chance of an interest rate cut in July. So, why are traders piling in to gold when you’re not supposed to be betting against the Fed? When it seems to be signalling to equities traders that it’s probably going to give them exactly what they want (low interest rates and an increasing money supply)? Let’s have a look at another chart…

Below you can see bitcoin’s weekly chart going back to 2017. Of course, we’re looking at gold over a much longer timeframe than bitcoin, but that’s because the latter’s cycles have tended to be much more condensed. Regardless of this, the similarities between the chart below and the chart above are striking. Bitcoin also just broke out of all resistance levels going back to the end of the last bull market at the beginning of 2018. It is also currently struggling with a resistance level above which there is not much historical price action to go by. Oh, and it is also leading the bullish charge by being up by some 250% since the beginning of the year.

btc-to-usd

What I will leave you to ponder is how odd it is to have all three of these very different assets rallying in such a manner at a time when global economic uncertainty is at its highest since the last financial crisis. Is the risk of piling into another US stock market rally getting to be too high for the potential reward? Is gold being viewed as not just a safe haven but a hugely undervalued safe haven? Is bitcoin finally mature enough to fulfill its role as a form of digital gold and thus be yet another place where money can flee from equities should the unthinkable occur? It’s going to be a terribly exciting summer where we will watch this dynamic unfolding over the next few months. For now, though, all eyes are on the next FOMC meeting at the end of July.

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