Gold prices are under some pressure today as stocks trade sharply higher and investor appetite for risk increases. Crude oil and the dollar index are both near the unchanged line in quiet trade thus far.
Markets are still sorting themselves out following yesterday’s ECB meeting announcement. The ECB has taken further measures in an attempt to boost its struggling economy and fight deflation. The central bank pushed rates further into negative territory by cutting its bank deposit rate from minus .3 to minus .4 percent. The ECB also cut its main interest rate from .05 to 0 percent. If that wasn’t enough, the bank said it would also increase its QE from 60 billion to 80 billion euros per month.
While the initial reaction in stocks was positive, that optimism faded as ECB President Mario Draghi suggested that rates would not be cut any further. The euro currency saw one of the most volatile days in its history, plummeting initially before gaining solid ground against the dollar.
The notion that rates may not be cut further has some interesting implications. If current measures do not adequately stimulate the Eurozone economy, what will? What other tools might the central bank have at its disposal to fight a slowing economy and deflationary pressures?
Currency markets saw heavy volatility in the aftermath of the ECB meeting, and thus far today the dollar index has not seen much recovery from the selling yesterday. The weaker dollar could potentially lend a boost to commodity prices and there is talk of a bottom having been reached in raw commodities. Crude oil continues to draw attention and with the market now approaching the $40 per barrel level, some believe that a bottom has been found.
While a stable oil market may give stocks and risk assets a boost, rising commodity prices could potentially compete with stocks in the coming months for investor capital. As of today, however, the SP500 is firmly back above the 2000 level and investors appear to be comfortable buying equities at current levels. The market could be approaching a key test, however, as it gets closer to previous all-time highs. If stocks are able to carve out a new high, a fresh leg higher in prices may be seen. On the other hand, if stocks fail at or near the highs, a fresh wave of selling could hit the markets and drive risk aversion. Such a scenario could potentially work in gold’s favor.
