On Monday, many traders came to their desks to find an unwelcome surprise.
Commodity prices had dropped precipitously. Gold, in particular, was remarkably lower. As investors searched for an explanation, stocks fell.
Of course, the markets eventually regained their footing, and things normalized later in the day. But it was a stark reminder that there are still underlying issues in the market.
Analysts advanced several technical theories to explain the move, but all of them fit into a general theme: reflation trading.
Are we heading for a correction?
The S&P 500 has hit a new record high 64 times so far since the pandemic crash.
But then the logic of “what goes up must come down” starts to apply. And there is increasing chatter that a correction might be in the works.
The latest warning came from the co-heads of Stiefel Bank. Specifically, they stated that US stocks could face a 10% correction in the second half of the year.
Currently, easy money from central banks around the world largely fueled the record run-up in stocks after the pandemic crash. Not only has leverage for trading become easier, but a lot of people had the extra cash and extra time to try their hands at the market.
As the market normalizes though, the expectation is that some of the key factors pushing stocks up might be about to fade out.
So, why gold?
Analysts suspect that the unexpectedly good employment numbers reported on Friday was the proximal cause of the “flash crash” last Monday.
The data came out after the Asian close, so the Far East did not have time to react to them before the weekend. Then there was less liquidity in the markets because of holidays, so there was a much stronger reaction.
The improved employment data suggested that the Fed might be closer to starting its taper than expected. This strengthened the dollar and generally kept commodity prices under pressure.
But in the context of uncertainty for the third quarter because of the delta variant, there might be something of a “perfect storm” of “temporary” negative data.
It’s not just one thing
Economists expect inflation to slow by the end of the year. However, inflation is still high right now and will likely remain high for the rest of the quarter.
At the same time, they anticipate the Fed to announce either later this month or at their September meeting that they will begin tapering in the future. Bond yields may rise in response, pushing the dollar higher and weighing on the stock market.
While the uncertainty would ordinarily help gold, a correction in the stock market is actually a good opportunity for people to invest. Especially if they are looking for value stocks to offset the expectation of inflation while the economy continues to grow.
Last year’s uncertainty about the pandemic drove gold up, and since the vaccines’ announcement, it has been trending downwards.
The flash crash suggests that there are still people holding on to gold, waiting for the right moment to move into more volatile assets.
That implies that gold still has more room to fall and there is pent-up demand to push stocks if there is a correction in the next couple of months.
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Thursday, 12 Aug, 2021 / 12:21