With the first round of the French presidential election in the rearview mirror – and the potential for significant unintended consequences if a major country were to leave the euro currency abating, allowing markets a sigh of relief – many market trends have reversed in recent days. One such example can be found in the gold market, Goldman Sachs research points out. But where will this new market trend abate? Could a US government shutdown reverse recent market trends?
Immediately following the French election results – where investment banker Emmanuel Macron bested populist Marine Le Pen to lead the top two finishers into a May 7 run-off election – stock markets around the world were giddy, rocketing higher by more than 4% in one day in France. The yield spread between French and German interest rates, a proxy for risk of France leaving the euro, tightened and market uncertainty, measured by the European VSTOXX volatility index, fell dramatically.
Amid this market fervor, gold, a proxy for global risk, quickly fell $12 per ounce immediately following the election and has continued the counter trend lower.
In an April 24 report, Goldman commodities research analysts Max Layton, Mikhail Sprogis and Jeffrey Currie think volatile trading is likely to continue as the downside gold trend moves with a steady target in mind.
Near-term catalysts for a push lower in gold prices includes higher US interest rates and President Donald Trump unveiling a tax plan Wednesday, the analysts observed. But there is a potential fly in the market ointment.
As US Treasury yields rise in the wake of the French election – over 2.3% in early Tuesday trading, a reversal of a short-term downtrend that started in early March – gold prices moved lower.
Helping push gold lower is the expectation that the Trump administration could release new tax policies as soon as Wednesday, the Goldman report noted. A market positive move on tax policy could result in strong force of trend, but there is a point to watch for significant buyers from China to enter the market.
The gold market could continue to weaken over the near term, with Goldman eyeing a three-month gold price target near $1,200 per ounce. This was a key level at which Chinese buying had previously held and reversed a then downtrend. Goldman expects this level “to be important again,” should such a price drop occur.
Other fundamental catalysts moving gold lower would be new thinking on interest rate hikes. Goldman estimates there will be two hikes between now and September, which is one ahead of the consensus forecast. The withdrawal of quantitative easing will be faster than anticipated, Goldman predicts, as hard data from economic growth statistics will confirm the soft survey data that has been expressing market positivism.
But there is a reasonably significant fly in the ointment on gold and the stock market. If the US fails to reach a settlement on a government shutdown, gold could take flight and stocks might find gravity.
The initial deadline is this Friday, and Goldman estimates only a one in four chance of a government shutdown occurring. If the deadline is extended a week, the investment bank’s economists estimate a one in three chance of a government shutdown. US Senator Ted Cruz (R-TX) speculated last Tuesday that Democrats wanted a shutdown “to appease the radical left.” – Mark Melin
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