Thursday May 19, 2016 09:11
(Kitco News) - The NASDAQ 100 is coiled to move. If it rallies, it would likely provide a further “green-go” for Federal Reserve (Fed) tightening. If it declines, it would likely contribute to reducing Fed tightening expectations. Fed tightening, while most of the rest of the world’s central banks are easing, is the primary pressure factor on the US dollar price of gold.
Fed tightening expectations have leaped this week, back to similar levels last seen early in January when gold was still below the $1,100/oz. handle. Fed Funds futures have shifted the expected effective Fed Funds rate to near 0.75% a year from now, up from about 0.60% at the end of last week. Hawkish Fed rhetoric has lowered the tide for most assets. If stock market volatility increases, like it did earlier in the year, Fed tightening becomes less likely. If the stock market continues to rally, like it has since February, the Fed would likely have its “green-go” signal to tighten. “Excessive risk-taking” is the phrase often used by Fed governors to describe what most market professionals are well aware is a reference to the excessive stock market returns of the past few years, notably coinciding with QE3. The stock market, as measured by the S&P 500 (essentially beta) is unchanged on the year, but the NASDAQ 100 is down 5%.
Stuck in a range - The sharp increase in gold and US Treasury bond prices this year suggest these markets may be more focused on the relative weakness in the NASDAQ. The NASDAQ 100 was the leader in the 90’s rally and for most of the post 2009 recovery. This week marks the third week in a row that the widely traded ETF, QQQ which tracks the NASDAQ 100, has been stuck in a narrow range between the 50-week and 100-week moving averages (featured chart). Options expiration this week may keep things pinned, but the market is ripe to move. If it resumes the decline from earlier in the year, Fed tightening is more likely to be off the table and could shift to easing, if the stock market decline is persistent. If QQQ resumes its February rally, the Fed will likely have the green-go to tighten, the US dollar would likely strengthen and gold would likely to suffer.
QQQ is ripe to move. It should have implications for Fed tightening and gold