Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Fed Not Likely to Join the QE Party Just Yet
Stocks had a hard time maintaining the momentum gained from Draghi’s negative rate-induced rally last week, which was largely responsible for new highs set in the Dow and the S&P 500. The reason might have been the World Bank’s negative revision to global growth, disappointing US Retail Sales (0.3% for May against 0.6% expected), a reversal of fortunes in Iraq, or it might simply have been technical in nature. At any rate, stocks lost some of their previous gains on relatively higher volume. Treasuries struggled even as stocks fell, the dollar rose against the euro, crude spiked to $106.85, and gold and silver saw steady gains for a second straight week.
Behind the scenes, the Fed has remained relatively inactive in terms of asset purchases. Its buying has amounted to less than $19.0 billion over the past three weeks. At that rate, the Fed may fall short of its tapered pledge of $45.0 billion per month – which implies that the Fed is fully committed to cooling stocks off, even though economic data heading into June begs for more easing. Let’s not forget, the Fed is still caught in a quandary over what to do with the bond market and/or the dollar market in the absence of meaningful foreign creditor support. In such straits, additional QE may do more harm than good. That leaves the Fed searching for internal sources of funding for bonds (i.e., from stocks). Thus, next week may be difficult for stocks if the Fed sticks to its tapering guns.
Gold may continue to inch up against the dollar, tapering or no tapering. Traders will be looking at $1,290 and then a breach of $1,300 as proof that an upside breakout may be in order. This is not necessarily based on events now unfolding in Iraq, but as a hedge against a grossly overvalued equity market – as many hedge fund managers have likely begun to recognize. Overseas, central banks such as the PBoC, the BoJ, and the ECB have all reiterated or increased their commitments to stimulus over the last two weeks – forced by the prospect of increasing defaults, as outlined here in comments last week. Inflationary pressures brought on by this stimulus should stabilize, if not increase, gold’s allure in these regions in the weeks to come.
VP Investment Management