European markets and US futures are set to decline after U.S. equities plunged as the Federal Reserve chairman Jerome Powell failed to quell investor concerns that tightening policy will choke economic growth. Basically, the Fed has simply brushed away all the pressure which President Trump tried through his Twitter.
Tensions increased among investors when the Fed signalled that gradual rate hikes in 2019 are still going to take place and this was enough to squash all the optimism. Even though the pace of the rate hike isn’t going to be the same as this year but investors have serious qualm that this is going to create grave liquidity issues.
It is likely that the stocks would continue their tumble until the dust settles. Looking at the gold price action, it becomes clear that investors were quick enough to shave the profit, hence the price retraced from its high of 1260. However, there is still a lot of momentum and it is likely that the bulls may start to push the price higher as the price is still staying near its one week high. In other words, the path of least of resistance is skewed to the upside and the move could be gradual. This is because panic has already taken over and the Asian markets have entered in a bear market territory, down over 20% from their peak.
Havens are going to remain in demand with yen an gold being the most favourable instruments. Of course, VIX is your instrument and there is a clear spike there. We expect volatility for the European stocks to also spike as the market opens. The option’s markets suggest that there is still some juice left in this trade as the downside protection is still expensive.
As we said before, the cracks which are surfacing in the economic data over in the U.S. are only going to things more difficult and there may be no surprise if the Fed is forced to make a U-turn next year