With the global economy weakening, you may wonder what will impact capital markets in the second half of 2023. Will the U.S. Federal Reserve stop raising rates? What factors will influence dollar and gold prices? What will be the key themes of the year ahead? Several vital stories in the remainder of 2023 are worth considering when investing in global markets.
Fed is expected to slow or pause rate hikes in the remaining 2023
The Fed has raised interest rates eleven times since March 2022 to control runaway inflation, raising its key lending rate in July to the highest level in 22 years. This caused a decline in the U.S. stock market, a rise in Treasury yields, a banking crisis, and a strengthening of the U.S. dollar.
In the first half of September, U.S. Federal Reserve officials said the U.S. central bank can afford to sit tight for now but do not rule out the possibility of another rate hike to fight inflation. According to the CME FedWatch Tool, the probability of a pause at the upcoming FOMC meetings is high, with a 93% probability of holding at the end of the September 2023 meeting and a 58% probability of pause at the end of the December 2023 FOMC meeting.
Investors should keep in mind that business cycles usually outpace economic cycles. Therefore, if a pause is announced at the September FOMC meeting on 19 – 20 September, the U.S. dollar will likely weaken, and stock market prices will rise.
Early onset of U.S. presidential election mania
The next 60th presidential election is scheduled for 5 November 2024. On 15 November 2022, Donald Trump announced the launch of his campaign. On 25 April 2023, incumbent U.S. President Joe Biden announced his candidacy.
Suppose we superficially characterise the two sides of the upcoming election. In that case, it comes out that Donald Trump and the Republicans are committed to traditional values, including being in favour of lowering the tax burden and doing away with non-performing subsidies. At the same time, Joe Biden and the Democrats welcome immigration, equality, and increasing the tax burden on the rich.
Both candidates have already launched their campaigns, meaning the number of political commentaries will increase even before the primary elections in early 2024. In the current situation, the Republicans' preponderance of votes is perceived as a positive signal for the markets—stock market growth. At the same time, the preponderance of votes favouring the Democrats is perceived as a negative signal—strengthening of the U.S. dollar. Investors should listen to the early signs coming from the U.S. media regarding the presidential election and adjust their investment strategy depending on the emerging early signals.
India's wedding season could accelerate the gold price
Seasonality strongly influences gold performance throughout the year, particularly with major consumers in India and China who use it for cultural and religious purposes. The period from November to February is a particularly favourable time for the precious metal, which falls in the middle of the wedding season in India. More than half of all gold demand in India is for weddings, which require a massive amount of jewellery, and gold is often seen as a sign of wealth and status among Indians.
With the U.S. Federal Reserve signalling a pause in key rate hikes, the effect of the wedding season could be synergistic—rising demand for gold against a weak dollar will boost gold prices from November 2023 onwards.
We live in an unstable economic and political environment of challenge and turmoil. However, amidst the challenges, there are opportunities for those investors who keep their finger on the pulse of the action. From September 2023 onwards, there will be many opportunities, starting with the U.S. Federal Reserve's interest rate decision and the wedding season in India. If you want to know more, read the rest of the article in part two.
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