Gold

Yields falling across the US treasuries curve supports gold, however the recent movement may result rather from cheap oil than dovish FOMC. Nonetheless, gold price approached the 200 session moving average and betting on dovish FOMC one should also expect gold to break this important resistance, opening way towards USD 1280. On the other hand, hawkish statement from J. Powell could bring price back towards USD 1240. The latter scenario cannot be entirely excluded. Expectations on dovish FOMC are based on ongoing economic slowdown, that can be seen in falling stocks and some leading indicators as the manufacturing PMI. On the other hand, another important sentiment indicator, ISM index does not flash a clear warning beacon that could frighten the rate setters. Moreover, it is the market that should fear FOMC, not the FOMC fear the markets.

The medium term outlook for S&P 500 stays bearish, however short term direction is unclear. Dovish FOMC would easily encourage demand, while investors using technical analysis may be additionally lured by low RSI, staying close to 30 pts. Combined, the two factors could easily lift the index to 2600 pts. In our view, breaching this level is not the baseline scenario in short term.

In Asia, Hang Seng stays sticked to 26000 pts. Short term volatility will be driven by FOMC, with the nearest support at 24600-25000 pts. Upside potential is on the other hand limited by the 100 session moving average at 26800 pts.

Gold price may show no clear direction until Wednesday as investors are awaiting clues on future interest rate path.  With rate hike being much likely on Wednesday, in short term gold may approach the nearest support level at USD 1235. Then it may turn north again, aiming 1250-1255. If the FOMC commentary turned out dovish, gold may even break this resistance opening the way to USD 1280. in this case, upside potential would obtain additional support from technical situation as the 50-period moving average would cross the 200 MA, while it has already crossed the 100 MA in November. Upside trend on gold is also justified by the economy heading into a slowdown and political uncertainty in euro zone.

Factors supporting gold may however worry stock markets. The US S&P 500 index, that is still playing with 2600 pts., may finally fall below this support, opening the way to 2510-2530 pts. Still, after the FOMC meeting, that may be slightly dovish, stocks may rebound, perhaps testing 2600pts. However, possibly softer FOMC rhetoric is not necessary good news for cyclical assets as it stems from worries about the real economy. Thus, downside risk prevails for S&P 500 in mid-term horizon.

Stocks seem to await FOMC also in Asia. In short term, the Hang Seng index seems well supported at 26000 pts., which level should hold assuming no hawkish statement from FOMC. The index is however moving within a downward trend and the short term upside potential is limited. The nearest level where traders are likely take profit is located at 26800 pts.

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