(Kitco News) – Precious metals and the broader markets are risk-off as they await the Federal Reserve’s interest rate decision on Wednesday, but the uncertainty surrounding the Iran war could mean the Fed fails to deliver that clarity once again, according to Kevin Grady, president of Phoenix Futures and Options.
Grady told Kitco News on Friday that with oil prices, yields, rate expectations and equities all unsettled, the smart money is still sitting on the sidelines.
“Right now, the short-term trend is in flux because we have this situation with Iran, so energy prices are all over the place,” he said. “But you saw what happened [on Thursday] with Alphabet. Everybody was just afraid of their CapEx, but if you look at just their earnings alone, they made a ton of money.”
“I think earnings are good. I think economic data is good. So I think overall the economy is good,” he said. “I just think that right now, no one knows what's going to happen.”
Grady said that everyone is still out of the market because of the prevailing uncertainty. “Every single move is exacerbated because there's less people trading, there's less volume,” he said. “People are just risk-off. Everyone's in risk-off, all the traders are in risk-off. Obviously the algos are in there, and they enjoy this environment. But no one really wants to play, because you just don't know.”
“Who's going to put on a position over the weekend? And what's your rationale for doing so? It's a coin toss,” Grady added. “It could get better, it could get worse, but it's a coin toss. And I don't think anybody, especially the larger institutions, no one is trading based on coin tosses. So everyone's remaining flat.”
Grady said the only real activity in the gold futures market is coming from traders rolling over their positions as the front-month contract moves from August to October, which will wrap up at the end of this week.
“A lot of times what happens is people have a gun to their head: You want to roll this position, you want to pay to roll this position? Do you love it? Or do you just want to liquidate, reassess, and see where it goes? That's part of what's putting a little bit of pressure,” he said. “But right now, with rates all over the place, it's just a situation where people are in risk-off, and they just don't want to touch it.”
Grady reiterated that the important thing to watch on any significant price move – whether up or down – is the volume.
“If the market is up $100 on 600,000 volume, that matters,” he said. “If the market is up on 80,000, it just means there were some buyers in there and the algos just ran the market up. I think that's the key.”
“No one wants to take a shot. No one wants to be a hero,” Grady said. “Right now, everybody's in risk-off mode waiting to see some more clarity on the Iranian situation and from the Fed.”
What’s difficult for market participants is that the Fed is acting within the broader context of the war and its potential impacts on the U.S. and global economies, and those calculations are constantly shifting.
“When you look at what the Fed's coming out with [this week], that's one big piece of the puzzle,” he said, but the Iran war still dictates much of the direction. “When the MOU came in, all of a sudden you saw these things click, and we started going away from the war and more focusing on the economy: Let's look at Warsh, let's look at the Fed, let's look at earnings, job stats.”
“You saw that when the Iranian situation does subside, it reverts back to the economy,” he said. “And I think the underlying economy, everyone likes what they see.”
Grady agrees with the market’s consensus belief that the Fed won’t adjust rates, and he said the focus will be on verbiage – the statement and Warsh’s press conference.
“We have the new economic data that came out,” he said. “Obviously, the inflation numbers are very important.
Grady said markets will be looking for more clarity about the FOMC’s views on inflation after the surprising number of members who saw future rate hikes in the cards at the last meeting.
“I think that's the thing that rocked the market,” he said. “There were so many [FOMC members] looking for rate hikes, and they were like, ‘Whoa, wait a minute, this is a lot more people!’ Even some of the people that were saying, ‘no, we're good for now,’ are looking at rate hikes. I think now people are going to be looking to say, ‘Hey, we saw this data, does this change your mind?’”
Grady said he thinks Warsh and the Fed are being forced to take a position on the impact of the Iran war on inflation going forward.
“If you look at energy prices, they're higher, so that's demand,” he said. “But I think it's also that a lot of people are staying out of the market. People are just a little nervous, and the markets are tenuous. Even the stock market's looking at this as, whether it's going to be, two weeks, two months, it's going to end, and they're going to get the energy [prices down].”
Grady cautioned, however that in the near term, the situation with Iran and the Houthis is very uncertain, and he expects the conflict to escalate significantly before any resolution. “I think we have to just wait and see,” he said. “I think that everyone is in risk-off mode.”
“The market is looking for consensus,” Grady added. “They're going to be looking at the meeting to see if they achieve that. And then if they don't, I guess that just feeds into more uncertainty. Again, it doesn't provide a clear direction. It just says we're even more uncertain. The FOMC is as uncertain as the war.”
