European stock markets took the cue from Asia and rose in early trade on Wednesday, with the FTSE 100 up around a quarter of a per cent amid support for the miners. Asian markets edged higher, led by a more than 1 per cent gain in Japan’s Nikkei as a weaker yen and renewed snap-election speculation fuelled hopes of fresh stimulus.
In London, BP slipped 1 per cent as it warned it will need to write down its green energy business by up to $5bn ahead of results on 10 Feb. The write-down won’t affect the underlying results, so the market reaction has not been too punishing. More on that here
Wall Street slipped as policy risk crept back into focus with Federal Reserve chair Jerome Powell’s situation, with financials bearing the brunt. The Dow fell 0.8 per cent, while the S&P 500 lost 0.2 per cent and the Nasdaq eased 0.1 per cent. Financial and payments stocks sold off sharply as investors revisited Donald Trump’s proposal to cap credit card interest rates at 10 per cent. Visa and Mastercard slid around 4 per cent, catching up a bit with the move lower in Capital One and American Express as Trump reiterated his policy. JPMorgan posted a solid Q4 earnings beat, but softer investment banking fees tempered the reaction and shares declined more than 4 per cent.
Geopolitical tensions and the threat to Fed independence are sauce for the goose as far as gold bugs are concerned. The yellow metal rallied to a fresh record high and dragged silver up to another all-time high as President Trump warned Iran would face “very strong action” if it did not “show humanity” in the face of ongoing protests in the country against the regime. Gold was a whisker off $4,640, while silver extended its parabolic rally to clear $90. Oil prices advanced sharply again yesterday before easing off a touch this morning. West Texas Intermediate spiked to $61.50 and the 200-day line sits around $62.40.
Markets are reacting to these Trump headlines all the time now, but the underlying narrative remains strongly supportive of precious metals, even as crude markets are expected to face a glut for the rest of the year. Worries about a flare-up in Iran is all about closure of the Strait of Hormuz – a hackneyed headline risk for oil traders but one that does cause near-term concerns. Adding further fuel to the geopolitical fire, Greenland and Denmark’s foreign ministers will hold talks with US vice president JD Vance and secretary of state Marco Rubio later. Greenland’s Prime Minister ruled out joining the US.
Apart from Iran and Greenland, gold is also higher because of the worries about Fed independence – it’s maybe not that the market is explicitly baking in a looser Fed in 2026 that will do the bidding of the White House, it’s more a confidence signal in the value of money and institutions in the US. Political pressure on the Fed is nothing new – the idea of independence being sacrosanct is really a product of the 1990s – but it does tend to mean higher inflation expectations, higher term premia for bond yields – higher long-dated yields, and a weaker USD.
Gold is not just a hedge any longer. We have seen a shift in the way gold is being viewed as an asset class, which really started in 2022 when Russia invaded Ukraine and central banks started buying. The usual dynamic between gold as a function of real yields and the dollar has essentially broken down, and it has evolved from a cyclical macro trade to a strategic asset with flows and prices driven by structural demand from central banks, geopolitical fragmentation, and rising fiscal and monetary policy risks associated with financial repression – pressing down on bond markets to prevent yields blowing out.
US December CPI printed at 2.7 per cent year-on-year, bang in line with expectations. Core inflation stayed at 2.6 per cent, its lowest since 2021, below the expected 2.7 per cent. That keeps the Fed on track for rate cuts later this year, even if equities struggled to gain.
By Neil Wilson, investor strategist at Saxo UK
