Optimism on the deal faded
The optimism about the fiscal deal has faded. There is a sense that the deal merely kicks the can further down the road, and the next fiscal battle is already looming on the horizon. Indeed, the focus has now shifted to the damage of the shutdown and whether this will be large enough to prompt the Fed to further delay its tapering decision. Yesterday’s data were rather mixed (see below). As a result, the equity market softened. Meanwhile, there was also speculation that the fiscal mess will keep the Fed on hold for the next few months. Government bonds and gold have rallied, while the USD and cyclical commodities moved lower, reflecting expectations of a longer period of aggressive monetary stimulus and concerns about the US economy. Gold prices bounced above USD 1,310 per ounce. As well as the weaker USD and Fed tapering expectations, gold prices have also received support from signs of a tight physical market. In India, there have been reports of a rise in the premiums that customers are willing to pay for physical gold on top of the gold market price. This could be a signal of a shortage in the market.