Is fear contagious across asset classes?

Outlook

The big data event today will be the ADP private sector payrolls. It may be a reality check—jobs are okay—or is could confirm that the Fed is right to worry and remains on a path to another rate cut in December.

At a guess, it will take second place behind speculation about what looks like a global equity market meltdown. The eurozone released really quite good PMI data but the euro is just wobbling. Sentiment is trumping data today.

Forecast

Is fear contagious across asset classes? If fear is starting to grip the stock market, or at least the tech sector, will it shift to the safe haven of the dollar? Maybe worries about the stock market bubble is an underlying reason for the dollar to have been gaining in the first place. We have been naming the robust economy but maybe it’s cross-contamination.  

We do not know enough about contamination, the process by which the Crowd attributes an overwhelming need to sell on some one-time event to everything, everywhere. The madness of crowds becomes the new wisdom of crowds if enough of the crowd start selling. All the talk of the tech bubble and that it “should” or might burst is the first chapter, with hard evidence now appearing.

The US stock market does not lead the Dollar. For many years, the dollar index and S&P had an inverse correlation, which nobody could explain.

The Dollar upmove is pausing today, suggesting it might—maybe—get contaminated by the US stock market’s woes. Or it can resume its rise on safe-haven status. It’s not clear we will ever be able to attribute a relationship. 

The dollar has many negatives, not least that the government is now in its longest-ever shutdown and the ruling party has done nothing to fix it. One ray of light is that Trump doesn’t like a stronger dollar. Does he come out and do something specifically to drive it back down? Yeah, probably, in time. We suspect we could get another comment about the yen to set things off. Japan is not exactly hiding under the bed, but is famously careful about annoying the US, especially this ogre. Note that dollar/yen is back on track for gains, unlike the others where we see wobbling.

Much as we hate to say it, the dollar looks like resuming gains.

About gold and official reserves: China alone has cut its holdings of US dollars in reserves by about $1.1 trillion to $760 billion, a 17-year low. China has other US assets aside from Treasuries, including corporate bonds and equities, for a total of probably about $2 trillion. Total Chinese reserves are $3.3387 trillion as of September. 

Other central banks have reduced holdings of US Treasuries in favor of gold. Ah, but do they have as much gold as they want? In other words, is the contribution of foreign central banks to the gold rally tapering off? ECR Research says “Central banks will therefore continue to buy, but less aggressively than in previous phases.”

This is one reason to think the retreat in gold will persist and what we are seeing is a “blow-off top.” ECR estimates that if it follows a traditional pullback format, we could get “a rapid correction to around the middle of the parabola – around $3,900 for gold and around $45 for silver. This is usually followed by a rally towards the previous peak, which, however, does not reach that level. This is often followed by a new decline, back to the previous low or even the starting point of the parabola (around $3,400 for gold and around $35 for silver). After that, little usually happens: prices continue to fluctuate around the bottom for a long time before a new prolonged upward phase begins.”

Our simple chart showing the last year has a 50% retracement level at 3448, which is not that far from the 200-day and would be a break of the channel.

Then there are interest rates. Despite a lot of confusion, if the economy is weakening and the Fed continues to cut, this is favorable for metals. Or the AI thing really does add to productivity and growth. Eventually this means higher rates, lower metals.

Be aware that the analysis uses a very long term perspective with indicators like the 55-day and 100-week moving averages. And our long-time warning—the Trump effect. He wants a weak dollar and is scaring folks. Stupid bullying is still bullying and he has been mostly getting away with it. What outrageous thing will he do next? Whatever it is, it will be gold-friendly.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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