Stock Market Shows Resilience Because of Central Bank Support

Stock Market Shows Resilience Because of Central Bank Support | Blame Game and A New Narrative | Longest Inflow For Gold

Trade tensions continue to ramp up between the US and China. These tensions caused a heavy sell-off on Wall Street yesterday and the momentum was picked up by the Asian markets. The S&P 500 index dropped minus 1.56% and the Dow Jones minus 1.19& while the NASDAQ minus 1.67%.

Having said this if we see these benchmark indices with respect to their record highs, they are only off 4 to 5% from these levels and the reason for this is that fundamentals do not matter because central banks are here to save the markets from Armageddon.  This particular element is creating resilience for the major benchmark indices and this is the key reason why we are not seeing a major sell-off among markets.       

Over in Europe, we are expecting the market participants to stay on the back foot and caution is the main word among them. Although, we may see some bargain hunters coming into the market, we do not expect any landslide moves.

Gold Inflows Continues- longest inflow since 2009

The shining metal, gold is back above the critical level of 1500 and made a high of 1509 today.  This shows that investors are consistently inflowing money into the shiny metal.  The worldwide holdings in a bullion-backed exchange-traded fund, ETF has seen 17 consecutive days of money inflow.  This has been the largest consecutive inflow since 2009. The captivating element is that these inflows are coming while the price is still in a battle with a 1500 mark, and we can't really say that if bulls have actually won this battle. What I mean by this is that investors are anxious to park their funds in the safe-haven assets.

Pinning Blame, Who is Better?

The blame game is on and Donald Tusk has warned Boris Johnson that this isn’t the time to play dirty games given what is at stake. By the look of things, we contemplate it is practical to say that the threat of no-deal Brexit has anchored on the back of this event. Remember, the probabilities of an accidental no-deal Brexit were always tall, and now, they have skyrocketed. Although, we still uphold our base case (and optimistic view ) that another election is the likely outcome. Recollect, the rhetoric of the general election is going to include no-deal Brexit meaning lawmakers would transfer the blame and the responsibility to the public. The British politicians have made a joke of the U.K.’s political system. Boris Johnson is likely to have this stance in his election campaign that a new deal Brexit is still strongly on the table.

This is a completely new development because before what the market was expecting was that a general election means perhaps no Brexit it or Brexit with a deal.  

Looking at the Sterling-Dollar pair, we have seen some serious sell-off for the currency because speculators saw an opportunity, they wanted to draw blood out of this trade. Especially that the deadline, October 31, is just around the corner. The pound-sterling one-week risk reversal has skyrocketed and this simply means that a significant number of players are expecting larger volatility.

This Isn’t QE

Fed chairman, Jerome Powell delivered something which markets weren’t expecting: extension of their balance sheet. When the Fed announced a tapering of their balance sheet, the message was clear: the dovish monetary policy no longer rules and investors cannot base their bets on QE. But now, the Fed is in a denial stage. The chairman doesn’t think that the extension of the balance sheet is QE anymore. The bank’s chief confirmed that is going to announce soon plans to add to reserve supplies. This expansion would be done by purchasing the T-bills.