Broad Based Market Rally Created by Stimulus Expectations
Stocks are continuing to build off of the gains seen last week and this is being matched in direction by the value in gold, as prices are now trading at their highest levels in 16 weeks. These gains in gold are coming mostly as a result of investor speculation that the Federal Reserve and the People’s Bank of China will be forced to inject additional monetary stimulus into their respective economies as a way of countering recent economic data which has suggested that manufacturing growth in both regions is stalling.
In other commodities stories, Soybeans rallied in trading to reach new all-time highs just below $17.45 per bushel and exchange rates in emerging markets were also seen trading with a bid tone. The SPX (the MSCI All Country Index and the S&P 500 are both matching this general direction, with gains of roughly 0.5 percent while spot rates in gold are showing gains for the seventh consecutive trading session and have climbed to trade at $1665 per ounce thus far this week.
Investor Stimulus Expectations
These broad based rallies are being encouraged by investor stimulus expectations that major central banks will be looking to ease monetary policy at upcoming interest rate meetings. Part of this speculation is coming from the meeting minutes from the previous meeting with the US Federal Reserve, which showed that several voting members of the committee are now in favor of additional stimulus measures if there is not material improvement in the nation’s economic data.
Similar speculation is being seen with respect to the People’s Bank of China, where the central bank’s Governor (Zhou) made comments suggesting potential changes to lending rates and reserve ratio requirements for private banks could still be implemented. Manufacturing data in China has been one of the key weaknesses and investor sentiment has now shifted to expect additional easing measures before the end of this year.
Looking at the data, a preliminary reading in Chinese PMI (Purchasing Manager’s Index) dropped significantly to 47.8, which is much lower than the 49.3 reading that was seen in July.
Assuming this figure holds true, this will be the weakest reading since the end of 2011, and would mark the 10th straight month that this economic indicator has posted levels below the 50 level that signals expansion. This would be the most negative run since the index was created 8 years ago.
Gold has seen some major technical breaks in the last few sessions, as prices have broken above the much tested and closely watched 1630 level. This was a triple top previously, so the break here signals a test of much higher levels back above 1780 longer term. In order to reverse this bias, we will need to see prices fall back below 1590 but this is looking increasingly unlikely anytime soon. Buy positions can be initiated into the low 1600s looking for a run back toward 1800 in the coming months.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.