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US Election Uncertainty Could Replace Trade Policy Doubt as the Main Bugaboo Into 2020

Market Analysis /
Stephen Innes / 30 Dec 2019

This week's holiday-shortened economic calendar is chock-full of with noteworthy data releases and Fed speak, namely the Chicago PMI (today), consumer confidence (Tuesday), the manufacturing ISM, and the December FOMC minutes (Friday).

Accordingly, the Chicago PMI and manufacturing ISM surveys are expected to remain below 50, consumer confidence should stay elevated, given buoyant equity prices and an active labor market. As long as the manufacturing surveys do not take another significant turn lower and consumer spending remains sturdy, the Fed is likely to stay on hold in 2020.

At this stage, the market is only pricing in a slight chance of a rate hike towards the end of next year. As such, market participants may pay considerable attention to the FOMC minutes, notably if they reveal any new discussion around the Fed's policy review.

Investors have weathered a torrent of global riptides over the past year; the US economy enters 2020 – the eleventh full year of a record-long expansion – on much surer footing than anyone had forecast. Global growth momentum is showing nascent signs of bottoming. For now, the significant tail risk from unfavorable outcomes from trade talks and Brexit have been avoided. And critical leading indicators for the US economy have, all things considered, remain steady.

As such, several major shops are in the process or have upgraded US growth outlooks for 2020. But before anything else, most of these assumptions are predicated that a trade escalation is avoided with China and auto tariffs are put aside. A rise on any of these fronts combined with all-encompassing "election year" uncertainty, would put the fragile state of the global rebound in doubt and could steer the global economy into a mild recession.

Is it too early to start factoring in US election risk? Absolutely Not! Thank the Democrats who brought forward elections risks given their Road to the White House seems to be built around airing Presidents Trump dirty laundry on a daily through a no-win impeachment process. 


Gold Outlook

For gold traders, it certainly feels like the US election uncertainty is replacing trade policy doubts as the main bugaboo into 2020. 

But from a pure macro and risk perspective, it currently makes little sense for gold to be trading above $1500/oz. The surging equity market and higher gold prices seldom, if ever, exist in the same time frame and simultaneously moving higher.

What’s driving gold?

With the persistent back-burner drivers, Brexit, and Phase 1 keeping a bid under gold and a Fed on hold forever narrative likely emboldening gold investors. However, once the P1 deal is confirmed, the market will likely push on to consider the plethora of global macro uncertainties that remain; after all, we are only starting to see early signs of a global economic recovery. But more significantly on the trade front is how much more progress can realistically be made ahead of the US elections next year. After all, the 7.5 % reduction in September tariffs is a skinny deal and is unlikely to turn the Fed even mildly hawkish.

Gold's reaction to P1 suggests that a lot of optimism was already priced in ahead of the announcement, and gold passed that critical litmus test with flying colors. This was unequivocally bullish for gold prices and triggered another buying splurge into the holidays. SPDR ETF, the world's biggest gold-backed exchange-traded fund, reported a rise of 2.92 tonnes to 888.85 tonnes.

Gold, as a hedge against an equity pull-back, makes sense as bonds will be very reactive to that correction (Yields lower). Still, it's the history of gold seasonally doing well into January (+5.22% for 5yr trailing average), which bolsters the case even further to stay long gold into the year-end turn.

There has been much made of Vanguards article on Bloomberg where the Chief economist called for a 50 % chance of a market correction (10 % fall) but frankly statistical probabilities all but guarantee for that to happen. However, it's the US recession risk dashboards that are still flashing yellow that could be the harbinger of a bear market correction (20 % fall) that makes gold a must-have component in any balanced portfolio. 

I think there is more to the Russian sovereign wealth gold buying story than meets the eye. Vladimir Putin is the mastermind to re-establish Russia's sphere of influence and what better way to accomplish that feat than to reduce Russia's dependence on the US dollar by shifting both sovereign wealth fund investment strategies and central bank reserve allocation into gold. 

Official sector buying should remain a regular feature in 2020 as central banks diversify reserves away from the USD. But if Russia starts hoarding gold production and begins to back up the truck at the Royal Mint, it would severely crimp global gold  supplies and drive gold prices higher So, if Vladimir Putin's pursuit of snapping Russia's reliance on the US dollar comes to fruition, it could trigger a significant gold rush. 

At the end of the day, Gold is a commodity and tends to exhibit all the same supply and demand characteristics as other commodities; only gold is getting scarcer hence more costly to mine.


Read more: Top 7 Market Movers to Watch for 2020 by Stephen Innes (Dec 23)

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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