Stocks roared higher on Tuesday following a more dovish tone from ECB’s Draghi and ahead of what is expected to be a more dovish Fed.
ECB’s Draghi confirmed what the market had long suspected. Draghi offered the markets the clearest indication yet that the ECB stands ready to launch another round of stimulus if needed. The euro took a hammering whilst the Dax soared over 2%.
Fed up next
Draghi’s comments come just as the Fed start their two-day monetary policy meeting today and investors are starting to position themselves for a more dovish statement. Whilst a rate cut is not broadly expected today, market players believe that the Fed will start to adjust the statement to signal a rate cut either as soon as July, if not September.
According to the CME Fed funds the expectation of a rate cut in July is now up at 88.7% whilst the market is pricing in a 96.7% probability of a September rate cut.
The big question here is just how dovish will the Fed be? The surprise element would be if Fed Chair Powell struck a more neutral tone.
A low interest rate environment is beneficial for businesses as borrowing costs remain low. Expectations of a rate hike have been on the rise over the past few months amid the ongoing US – Sino trade dispute and weaker US economic data. Lifting US equities whilst pulling the dollar lower.
Gold often performs well in a low interest rate environment, thanks to the lower opportunity cost of holding non yielding gold.
Safe Haven boost amid growing Middle East Tensions
In addition to the more dovish calls from the central banks, risk aversion has also been supporting the yellow metal. Trump sending an additional 1000 troops to the Middle East has fanned fears of a confrontation between the US and Iran following the tanker attacks last week. This has boosted flows into safe havens such as gold and the Japanese yen.
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