US and European futures are trading with caution as investors are still concerned about two major factors. Firstly, the biggest fear among investors and traders is that hawkish monetary policies adopted by most of the central banks around the globe are most likely to trigger a global recession, and this is keeping them on the side-line. The other major factor is that traders believe that the current strength in the dollar index is most likely to serve as a major headwind for many US companies as they will struggle to post strong earnings. In addition to this, the current trend in the US and European stock markets indicate that bears are not done with their selling yet, and the path of the least resistance is still very much skewed to the downside.
The British Pound and Its Demise
An unfunded tax giveaway by the incoming Conservative administration is enough to send any Chancellor of the Exchequer running for cover. The British government’s “go-for-broke” economic plan was devised by Kwasi Kwarteng, who disregarded conventional macroeconomic wisdom. It turns out that the investors would have been happier if he had retained it. It’s unlikely that the Bank of England’s expected 100 basis point raise at the next meeting would stop the selling and may even cause more damage.
As a result of Kwarteng’s mini-budget, the pound fell across the board, and the market anticipated a huge rise in BOE interest rate hikes. The value of the pound relative to other currencies may be the finest barometer of public opinion in the United Kingdom. The British pound has lost 7 percent of its value since the beginning of August as measured against a trade-weighted basket of currencies (this is not just an American story).
The tax cuts proposed by the government as part of its “Growth Plan” are the largest giveaway since Conservative Chancellor Anthony Barber’s “dash for growth” in 1972. Fiscal and monetary stimulus were supposed to jumpstart the economy at the time, but instead, all that happened was a drop in the value of the currency and prices increased. While this round of tax reforms sees a fresh make-up, the similarities to the last one are striking.
If Kwarteng’s goal of 2.5% trend growth is reached, then his policy initiatives may have been (mostly) sustainable. Unfortunately, markets already know that this is unlikely since the growth trend is just a little over 1%.
Profit taxes are being reduced as the Chancellor has scrapped his proposal to raise the corporate tax rate from its current 19% to 25%.
Reduced personal income taxes, with an estimated 63% benefiting the wealthiest 20% of families, as calculated by the research tank Resolution Foundation. Decades of data from the United States and the United Kingdom show that these policies won’t boost GDP in the long run and won’t be self-sustaining.
Promising to boost productivity and unleash latent potential, numerous chancellors have advocated for supply-side reforms. Independent budget watchdog Office of Budget Responsibility has a “we’ll believe it when we see it” attitude. The market reaction indicates that traders and investors share this scepticism.
The precious metal is experiencing some buying today as the dollar index has finally eased off a little from its recent high. Still, the main risk for the gold price is the strength in the dollar index. We know that the Fed avoided adopting an overly hawkish stance with respect to its monetary policy, but the most important thing is that the Fed isn’t done with its job. This means that the odds are that any rally in the gold price may be used by the bears as a catalyst to sell more gold later.
Oil prices are also moving higher during the early hours of trading after trending in a downward direction for the past number of days. Traders are optimistic today that the oil cartel OPEC+ is likely to act as a group and they will do anything in their power to stabilize oil prices by cutting adequate oil supply more rapidly this time.