Gold price hits a record

Gold hits another record and Microsoft boosts its dividend

Gold hit another record high on Tuesday morning. The price at the time of writing is $2585 per ounce, and the gold price is higher by 25% so far this year. The record high for the gold price is casting a glow over the entire commodity space, which is mostly higher on Tuesday. Brent crude is rising after falling back below $73 per barrel on Monday, as concerns grow about the demand picture. European stocks have also opened higher.

The gold price and interest rate cut expectations

The commodity space is giving us an interesting view on overall market action and how central tomorrow’s Fed decision could be for financial markets for the rest of this year. Gold is the ultimate inflation hedge. Thus, as expectations that the Fed will start its rate cutting cycle with a large cut of 50 basis points grows, investors are buying gold, in case this triggers another round of inflation down the line. The market is now pricing in a near 70% chance of a 50bp rate cut tomorrow, up from a 30% chance a week ago. The gold price is telling us that the market is convinced that the Fed will be dovish at its meeting tomorrow, even though there are signs that core inflation pressures exist.

Silver keeps pace with gold

When the gold price reaches extremes, it is also worth looking at the gold/ silver ratio. This ratio tells us how much silver it takes to buy an ounce of gold. Currently the ratio is 83, down from a high of nearly 90 during the summer. This suggests that the record high for the gold price is not an isolated move. Silver is considered an industrial metal. The fact that it has kept pace with the price of gold suggests that the Fed rate decision is also impacting industrial metals in a positive way. The decline in the gold/ silver ratio is a sign that traders believe the global industrial outlook is positive, which is good news for the broader economy. This is also reflected in the stock market performance in recent weeks.

Chart 1: Gold/ Silver ratio

Source: XTB and Bloomberg  

Consumer stocks and mid-caps get their moment in the spotlight

The equal weighted S&P 500 index rose to a record on Monday, and the equal weighted S&P 500 has outperformed the market-cap weighted S&P 500 in the past month. On Monday, the top performing shares on the US’s main index included Bed and Bath works, Carnival and Dollar Tree. This mix of retail and consumer stocks is a sign that investors have warmed to this sector, as the prospect of chunky rate cuts from the Fed come into view.

If the Fed disappoints financial markets, then we could see a selloff in consumer stocks and the equal weighted S&P 500, along with a decline in the gold and silver price. A disappointment from the Fed would be a 25bp rate cut, or a 50bp rate cut, but a rise in the FOMC members’ expectations for the terminal rate, meaning that rate cuts are being front loaded.

Bank stocks propped up by M&A activity

Bank stocks are also worth watching. In Europe, the Eurostoxx banking index is outperforming the overall Eurostoxx index. This has widened over the last month. Usually, falling interest rates can weigh on bank stocks as it can reduce their future net interest income, however, merger activity helps to prop up this index. UniCredit took the market by surprise by taking a 9% stake in German rival Commerzbank last week, and it is seeking permission to extend its stake to 30%. This has helped to boost banking shares across Europe and Commerzbank’s share price has surged by 25% since the announcement.

As interest rates fall across the West, this could lead to a surge in M&A activity, which could prop up global stock markets. In the US, the banking sector’s performance has been mixed. In the last month, the KBW stock index of regional banks has outperformed some of the larger banks, including JP Morgan and Bank of America. Morgan Stanley has been one of the weaker performers, after it suffered a large sell off in the summer months. However, its share price rose by nearly 2% on Monday, and we could see a prolonged recovery if a drop in interest rates leads to a rise in investment banking and fee-based activity.

Microsoft offers investors a sweetener

As the market warms to mid-caps and consumer stocks, what will happen to tech stocks? Microsoft announced on Tuesday that it was embarking on a share buyback programme and increasing its dividend by 10%, and in the pre-market its share price is higher by 1.3%. Microsoft said that it would buyback $60bn of shares, which is its joint-largest programme for buybacks, and it has no expiration date. The 10% uplift to the dividend will be distributed to shareholders in November. This comes at the same time as the company is investing heavily in AI. The timing of the announcement could be a sign that big tech is willing to offer investors sweeteners, as the environment for AI shares gets tougher.

Ahead today, the market is likely to remain laser focused on tomorrow’s Fed meeting. The US retail sales report is also released for August, and core retail sales are expected to rise 0.3% last month. The yen is still the strongest performer in the G10 FX space after breaching the key 140 level at the start of the week. The pound and the euro are fairly unchanged vs. the USD as we wait for tomorrow’s Fed meeting.