09/28/16
By Filippo Lecchini
The FED meeting is gone; long live the meeting. The conversation about interest rates, now roughly one year old, has been following similar patterns around every meeting. As reasons and numbers supporting a hike stir the conversation in favor of a move, the market gets a bit volatile then eventually dismisses every concern, and by the time a meeting comes around it’s a non-event again. Some will argue that the FED is wrong, some will maintain the FED is right. Both positions have merit. Normalizing monetary policy is necessary because with rates near zero, the number of tools available before a crisis would be limited. But growth matters too. If the indicators suggest that the economy is relatively fragile and potentially exposed to shocks, then the FED should not rush anything.
There is however another aspect of the decision that not everyone is taking into account. Interest rates go hand-in-hand with currencies. As the rest of the world, or most of it, pursues aggressively some form of easing, the US is relatively “tightening” by keeping the status quo unaltered. If the dollar strengthens in relative terms, exports are negatively affected and capital flows might push interest rates higher. The final numbers ultimately depend on expectations, but if the FED moves in the same direction that other forces are already pushing, they face the risk of overshooting its targets.
Similar to the conversation about the end of easy monetary policy, the end of the oil supply glut makes the rounds almost daily as rumors and statements follow one another. The informal OPEC meeting in Algiers at the end of September might be updated to “formal.” Whether that preludes to an agreement on a production freeze is yet to be seen.
What’s ahead for gold? It has been in rally mode since last December as a second interest rate hike did not occur. At the time the spike was dubbed as a natural reaction meant to reverse course as soon as the rates moved. That all made sense, but maybe it’s worth taking a closer look. Loose monetary policy is not unique to one country. With no yield to capture almost anywhere, the possibility of an overbought equities market, and after years of quantitative easing, good old fashioned gold might as well be an option. The counter argument is that rates will go up at some point, and that will curb a potential rally. No matter what investors think, gold will play a role one way or the other.
Looking ahead:
The International Energy Forum and OPEC meeting will happen on Sep 28th in Algiers.
As fall approaches the equities market turns to corporate earnings for some insights on the state of the economy. The reports might determine what the market does from here.
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