Dow Jones, Nasdaq 100, S&P 500, Gold, Fed, Trade War – Talking Points
- Wall Street and gold prices rallied in 2019 on trade deal bets, monetary policy
- US-China “phase two” deal uncertain this year, attention focuses on the Fed
- Technical outlook for Dow Jones, Nasdaq 100, S&P 500 and gold analyzed
Dow Jones, Nasdaq 100, S&P 500, Gold Price Recap – Rallying in Tandem
The Dow Jones, Nasdaq 100 and S&P 500 began last year on a shaky footing after plummeting in the fourth quarter of 2018 which would see them close the year with a negative return. In the months to follow, US equities continued higher despite a lingering trade war that worked to create volatility and uncertainty alike.
While stocks fluctuated wildly on the back of new trade war developments, gold emerged as an attractive investment amid the uncertainty and began to establish solid returns as the year progressed. Further, trade war headwinds worked to erode global growth forecasts which sent recessionary fears soaring and stocks retreating. The fundamental forces at play made it seem as though US equities were destined for another year of losses if not for a key tailwind, the Federal Reserve.
Monetary Policy and Repurchase Agreements
Originally planned for 2019 was a path that envisioned three rate hikes. But this outlook quickly reversed course amid growing concerns about the health of the global economy as trade wars heated up. In the end, the Fed cut rates three times last year instead. Another crucial development in driving equities and anti-fiat gold prices higher was the swelling in the Fed’s balance sheet amid a sudden cash shortage in the financial system.
In late September 2019, overnight lending rates unexpectedly surged to as much as 10 percent. This was well above the central bank’s target window of 1.75 – 2.00% at the time. The Fed turned to open market operations (OMO) to tame short-term borrowing costs, specifically repurchases, also known as repos. These function as another window for institutions to borrow capital from the central bank.
In exchange for collateral (often in the form of Treasuries) and interest, financial institutions can borrow cash on a near-term basis. The timeframe for these can range from overnight to 14 days. It acts as an injection of liquidity, pushing down the cost of capital. Since these operations began, the central bank’s balance sheet has climbed from a low of $3.76t in August to above $4.15t in mid-January 2020 – see chart above.
The US-China Trade War
With that in mind, the road ahead for Wall Street and the precious metal in 2020 will likely heavily hinge on a couple of fundamental themes: trade wars and the Fed’s balance sheet. In the near-term, there is also the risk of how fears around the deadly coronavirus transpire. Much of the impact of trade talks has arguably already played out. That was marked by the official signing between the US and China on the “phase one” agreement. Sentiment markedly improved in the lead-up to the accord, though follow-through was rather lacking.
About $360b in U.S. tariffs against China remain and its fate is tied to a “phase two” trade deal. The White House hinted that its completion could come after this year’s presidential election. It is uncertain whether President Donald Trump could remain in charge and a change in leadership could throw talks in a different direction. In fact, the risks for equities around the election seem to be tilted to the downside. So what about monetary policy then?
Federal Reserve Policy Outlook
After cutting rates three times in 2019 and expanding the balance sheet aggressively to round out the year, the Fed has doubled down on its “wait and see” policy in 2020. Consequently, markets are currently fully pricing in just one cut to the Federal Funds rate this year while officials, like Kansas City Fed President Esther George, have argued pausing rate moves is more appropriate. While the Federal Funds rate looks to be relatively stable for the time being, policy regarding repo operations is more fluid.
The Case for a Continuation
To that end the Fed’s January rate decision revealed the central bank’s balance sheet is set to expand further still. As it stands, the Fed has injected more than $400 billion since September and stocks have reacted in kind. Nevertheless, Jerome Powell announced the central bank would continue overnight repo operations into April.
In turn, the Dow Jones, Nasdaq 100 and S&P 500 could enjoy a prolonged tailwind. Similarly, gold may enjoy a modest boost from the continued injection of US Dollars into the economy as it catches a bid on inflationary concerns.
Cause for Concern
Conversely, the precious metal and US indices could fall under pressure if repo operations are unexpectedly terminated or the Fed indicates rate hikes are necessary amid improving economic activity. While there have been encouraging developments since September, it is hard to deny the correlation between the Fed’s balance sheet expansion and the performance of the two asset classes, especially US stocks, which makes the threat of a change in Fed policy concerning.
That being said, it is exceedingly difficult to attribute specific gains to a single influence. Therefore, it is unknown to what extent the stock market and gold will react when the Fed ceases repurchase agreements, but it is likely to be adverse. Mr Powell hinted that they anticipate to adjust the size and pricing of these and eventually slow the pace of purchases over time.
With the Dow Jones, Nasdaq 100 and S&P 500 trading near record levels after a commanding rally higher, resistance to the topside is almost nonexistent. Barring a few trendline projections and prior highs, it appears as though the three US indices are destined for even greater heights should the fundamental landscape remain accommodative. On the other hand, months of equity gains have created a variety of levels at which each index can now look to for support.
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Dow Jones Technical Analysis
In the case of the Dow Jones, support will likely reside along the ascending trendline from the lows established in December 2018. Throughout 2019 the technical level maintained varying degrees of influence, a theme it should maintain until a serious break beneath is posted.
Dow Jones Price Chart
Secondarily, a series of prior highs, the 200-day simple moving average and horizontal support around 27,400 create an area of confluent support. On the other hand, resistance is rather sparse aside from the Industrial Average’s all-time high around 29,400.
Nasdaq 100 Technical Analysis
Since the technology sector has led much of the decade-long rally, it is of little surprise the tech-heavy Nasdaq 100 finds itself among the leaders of the bull market. Trading near record levels, resistance likely resides at prior highs around 9,265.
Nasdaq 100 Price Chart
Underneath, the Nasdaq should enjoy initial support in the form of an ascending trendline from lows tagged in October. Secondary and substantial support resides slightly north of 8,900, the confluence of the index’s 200-day simple moving average and two ascending bands marked by prior highs and lows. Additionally, the psychologically significant 9,000 milestone could offer a modicum of buoyancy.
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S&P 500 Technical Analysis
Shifting focus to the S&P 500, the chart again reveals a distinct lack of serious resistance apart from prior all-time highs around 3,336. Unlike the Dow Jones and Nasdaq which enjoy a buffer between current prices and support, the S&P 500 finds itself suspiciously near an ascending channel. Should it break, bears could look to drive prices lower as they attempt to test potential support around the psychologically significant 3,200.
S&P 500 Price Chart
Subsequent support may exist around the 3,100 area where an ascending trendline from December 2018 meets a trendline that coincides with various swing highs dating back to January 2018.
Gold Technical Analysis
Looking at gold prices, XAU/USD continues to confine to the long-term uptrend that picked up pace from 2018. As the yellow metal attempted to surpass highs from early January, negative RSI divergence emerged. That is a sign of fading upside momentum which can at times precede a turn lower or translate into consolidation.
Yet overturning the medium-term uptrend entails taking out a rising trend line from July 2019 – red line on the chart below. This would eventually pave the way for a retest of lows from November which create the psychological barrier between 1445.81 to 1459.23. Otherwise a resumption of the dominant uptrend entails taking out highs from March 2013 at 1616.88, exposing peaks from earlier in the same year.
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Gold Daily Chart
— Written by Daniel Dubrovsky, Analyst, and Peter Hanks, Junior Analyst, for DailyFX.com