(Kitco News) – Asset prices from stocks to crypto and gold trended higher in early trading on Thursday as a pullback in the DXY helped ease the pressure on risk assets, while a solid earnings report from Tesla and optimistic sales forecast boosted hopes for a strong earnings season.
“The USD has recently reclaimed some of its lost mojo, reflecting a host of factors that we have been expecting to turn in its favor recently,” said Mark McCormick, Managing Director and Global Head of FX and EM Strategy at TD Securities. “Most importantly has been a pivot in the ‘data’ narrative, favoring the US over EZ and China, central bank repricing, and higher associated macro volatility. US equities continue to outperform.”
“With that in mind, it is time to hunker down and accept the US election is upon us (secondary drivers like China stimulus will take a back seat until it's concluded),” he added. “Recall, FX markets are serial monogamists, focusing on one theme at a time.”
Amid the uncertainty around who will win and how their policies will impact the economy, McCormick noted that the outcome is “a binary event with massive tail risks on either side.”
“[A] Red Wave would kick-start a sizeable USD rally. It would rekindle memories of US Exceptionalism, anchored by tariffs, tax cuts, deregulation, and negative impacts on the outlook for EZ and China,” he said. “The US wins at the other's expense, which leans hard into an initial strong (broad) USD through a mix of equity performance, positive carry, growth, and interest rate differentials.”
“Alternatively, we have the Blue Wave. That's the worst outcome for the USD, reflecting first and second-order effects,” McCormick noted. “The first is that markets will need to unwind Trump trades and hedges, even if preelection positioning is a tad light.”
“The second-order effect is that a Blue Wave could start to undermine the USD, as the potential for higher taxes and more regulation starts to see US equities underperform the rest of the world,” he added. “China stimulus looks like a game-changer, as markets look for alternatives to US equities, kick-starting a rotation to Asia FX and search for ‘value’ in FX.”
McCormick noted that “Betting markets have the Red Wave priced at 48% and the Blue Wave at 12%, so the tails favor the USD. Somewhere in the middle, while Trump is more bullish for the USD in the very short-term, a Harris victory doesn't spell doom for the USD. Indeed, inflation and growth drive the market rather than Harris, while Trump resets the market towards politics. The rub is that the ‘data’ currently favors the USD regardless of who wins, suggesting to buy USD dips into 2025 even if Harris wins.”
On the equities front, David Morrison, Senior Market Analyst at Trade Nation, underscored that “While there has been a welcome bounce in stock indices this morning, it has been a disappointing week so far, which has seen most of the majors pull back sharply from recent highs.”
“Yesterday’s pullback was led by the tech-heavy NASDAQ, which ended up at 1.6%. This was despite a late rally in the last two hours of trading, which helped lift all the majors off their lows for the day,” he said. “Investors have been rattled by the ongoing sell-off in bonds, which has led to a jump in bond yields. This began just after the Fed cut rates by 50 basis points last month, and has continued ever since. But this has provided an opportunity to take some of the heat out of equities which have been on a tear for the past twelve months.”
“So far, every significant pullback has proved to be an opportunity for investors to add to their exposure at cheaper levels,” he added. “Even the summer scare, when the unwinding of the yen carry trade coincided with a downtick in US economic data, only lasted little more than a few weeks. Since then, the Fed has cut rates by a thumping 50 basis points, and more cuts are expected before year-end.”
“Add in strong labor and retail sales numbers, together with projections of Q3 GDP growth of over 3%, and you have a Goldilocks scenario,” Morrison said. “The only fly in the ointment is the significant danger of a Presidential Election vote which doesn’t provide a clear winner on 6th November.”
Regarding gold, Morrison noted that “Gold prices retreated yesterday to record their first significant pullback in a fortnight.”
“The market had experienced steady, and relatively solid-looking, gains ever since it tested support just above the $2,600 level,” he highlighted. “In the two weeks since then, it added around 5% to hit a fresh record high yesterday morning just above $2,750. Prices subsequently pulled back, and the selling accelerated after the US open, before finding support slightly north of $2,700. Since then, gold has pushed higher.”
Morrison warned that while “It’s tempting to think that the correction is over and that the bulls can shout the ‘all clear’ for higher prices… bulls should be prepared for further attempts to drive gold lower.”
“If so, it will be important to see if $2,700 continues to work as support,” he said. “Silver also took a bashing yesterday as it fell back after hitting a twelve year high on Tuesday. But support held around $33.50, as there was no significant or protracted break of this level. Prices bounced back above $34 in early trade this morning, which also looks constructive from a bullish perspective.”
At the time of writing, spot gold is trading at $2,731.80 for an increase of 0.63% on the session.
As for cryptos, data provided by TradingView shows that Bitcoin (BTC) bulls have responded to yesterday’s plunge to $65,200 by rallying higher, pushing King Crypto to resistance at $68,000 before bears fought back, which led to a pullback to support at $67,700.
BTC/USD Chart by TradingView
“The cryptocurrency market has been rising since the start of the day on Thursday, recovering strongly from Wednesday’s late afternoon sell-off in the wake of global financial markets,” wrote Alex Kuptsikevich, chief market analyst at FxPro. “At its lowest point, the market capitalization was down to $2.23 trillion, and at the time of writing, it had risen to $2.32 trillion (+0.1% in 24 hours). The market’s intraday movements will reveal whether this marks the bears’ last stand or if the current rebound is just a bull trap.”
“Bitcoin’s intraday dynamics are bullish,” he added. “Wednesday’s end-of-day lows saw a flash drop below $65.5K, completing a 61.8% Fibonacci retracement of the 10-21 October rally. A quick exit to the recent highs at $69.5K would make the main scenario an extension of the upside with the potential to strengthen to $76K before further consolidation.”
At the time of writing, Bitcoin trades at $67,801, an increase of 2.39% on the 24-hour chart.
