On Monday, after weekend talks failed to reach a solution that would reopen the federal government and raise the federal borrowing limit by October 17, the S&P 500 Index dropped to its intraday low below 1,700. However, the index reversed course early in the afternoon on a report that President Barack Obama planned to meet with Congressional leaders from both parties at the White House later in the afternoon.
According to Reuters, yesterday Senate leaders made progress on a U.S. debt deal. Additionally, today they may reach an agreement to bring a halt to the fiscal standoff. The emerging deal would avoid a potential default, end the 15-day-old government shutdown and change the immediate deadlines in favor of three new ones over the next four months.
Although it’s far from complete as the Senate may delay passing the plan and House Republicans may seek to block or change it, investors still believe that an extension to the debt ceiling, or at least a resolution that buys more time, is highly likely. So do we – no matter how the authorities decide to call it, we think that more money will be available. Printing it is just too easy politically.
Yesterday, the S&P 500 rose for a fourth day and closed at the highest level since September 19. It’s worth noting that the index is within 16 points of its September 18 record of 1,725.52. The S&P 500 has advanced 3.3% in the last four trading sessions and this is its biggest four-day rally since January.
The rally in stocks seems to have triggered a decline in the precious metals sector and the following stocks’ moves could further contribute to metals’ performance.
Will the stock indices keep rallying? Let's take a closer look at the charts to find out what the current situation in the general stock market is (charts courtesy of http://stockcharts.com).
Looking at the above chart, we see that the move below the rising medium-term support line was quickly invalidated and the outlook improved dramatically based on Thursday’s session.
The official reason was “signs of progress in negotiations to raise the U.S. debt limit, at least temporarily.”
In our view, it’s almost certain that the debt ceiling will be raised, and the only unknown is the justification that politicians will use to do it this time. Therefore, we can expect stocks to rally further as the market becomes more optimistic about it. As mentioned earlier, yesterday the S&P 500 rose for a fourth day and closed at the highest level since September 19, which confirms the above assumption.
In the previous week, gold’s reaction was quite interesting – it didn’t rally even though the additional perceived probability of the increase in the debt limit should trigger such a move. This time, markets seem to have focused on this piece of information as a relief, and people sold gold, which is no longer needed as a hedge – at least a lot of investors seem to have thoughts like that.
The implications for gold are bearish, and this makes them bearish also for the rest of the precious metals sector, although to a smaller extent.