By Hussein Sayed
Goldman Sachs have moved their 12-month target to $2,000 from their previous estimate of $1,800
Financial markets continue to be moderately positive on risk with traders pricing in some form of gradual and sustained recovery.
The probability of new and prolonged lockdowns now appears lower than a few weeks ago, as the economic cost of aggressive social distancing and other similar measures is being seen as too high. However, concerns about the resurgence of a second wave of Covid-19 are growing and this has seen stock markets pause for breath after their record-breaking rebound.
With the pace of the revival still not clear as economies come out of lockdown, markets may be entering a more choppy, two-way phase as participants wait for new catalysts.
In this environment, central bank support and widespread fiscal measures continue to act as a backdrop. We need look no further than the largest one-day sell off in US markets since March a couple of weeks ago, which inevitably stoked fears of the more pronounced move lower that so many commentators have been forecasting.
And yet, the following day, as if right on cue, the Federal Reserve announced it would activate one of its several emergency facilities and start buying corporate bonds. This was not a new policy, simply one which had been dormant and untapped so far during the crisis, but the mere message assuaged those deeper concerns.
The ‘Fed put’ or perhaps as some observers have started calling it, the ‘Trump put’ is alive and well then. We would highlight that the Federal Reserve has lending powers only, as opposed to spending powers and it may be the next key focus area is not a second wave of infections, but of bankruptcies and a possible corporate solvency crisis as defaults increase.
Social distancing inevitably crimps demand so in this case, greater fiscal stimulus would be needed which means tax cuts – witness sales tax cuts in the UK being drawn up – and further cash handouts.
One part of the market which is pointing to greater bearishness about the future of the economy is the bond market. The US ten-year real yield is widely watched as it has been adjusted for inflation and this dropped under -0.6 percent recently, a new low not seen since the so-called taper tantrum of 2013.
When Treasuries are effectively paying a negative return, one asset which does shine is gold, and this has certainly been the case over the last few weeks. Low interest rates make the yellow metal, which doesn’t pay a yield simply for holding it, more attractive for investors who seek investments that do.
Gold had struggled for direction over the last few weeks due to the Covid-19 shock hitting emerging market demand, with India’s gold imports plunging in April and May, and Russia’s central bank stopped buying gold when oil prices were collapsing.
But demand for the haven metal has been strong more recently with prices up around 17 percent on the year so far and nearing levels not seen since October 2012. Coronavirus-related economic uncertainty has helped with ‘fear’ driven investment demand growing, led by expectations for ultralow real interest rates.
Interestingly, many investment bank analysts have raised their price forecasts lately, including Goldman Sachs, who moved their 12-month target to $2,000 from their previous estimate of $1,800.
Policy uncertainty and potential second waves will be drivers in the near-term, while greater inflationary pressures and a muted policy response by the US Fed further out will please gold bugs, if a much-predicted dollar sell-off picks up.
By Hussein Sayed, chief market strategist at FXTM