Weekly Winzer: Interest rate cuts, government shutdown, and the gold rally

A lot has been going on in the financial markets in recent weeks: the government shutdown in the USA, the first interest rate hike by the US Federal Reserve, and a record-high gold price. How do we interpret all of this – and what does it mean for investors? We spoke to Gerhard Winzer, Chief Economist at Erste Asset Management, about the current market situation.

Mr. Winzer, the government shutdown in the USA has topped the headlines in recent days. What does this mean in concrete terms, and why is it also relevant for investors?

A government shutdown is basically a standstill in government operations. About 750,000 civil servants in the United States have been sent on unpaid leave (“furloughed”) because Democrats and Republicans cannot agree on a budget. On the surface, this is nothing new, as such situations have occurred several times in the past, usually with minimal economic impact.

However, political polarisation in the USA is currently more pronounced than before. This increases uncertainty, and it does so not only politically, but also for the markets.

Does such a standstill have a measurable impact on the economy?

So far, the impact has been limited. Even if 750,000 employees are not receiving their salaries, this is hardly relevant in relation to the huge US economy: we are talking about roughly USD 30 trillion in annual economic output. In the short term, therefore, the impact is minor.

That being said, something else is more interesting: during a shutdown, no important economic data is published – and no new data is collected either. In other words, analysts and central banks are flying blind to a certain degree. The most recent monthly labour market report, for example, has not been published. This data gap increases uncertainty in the markets in the short term.

Let’s move on to the monetary policy: in September, the US Federal Reserve cut interest rates for the first time in a while. What does that mean?

The US Federal Reserve is the most important central bank in the world. It has lowered its key-lending rate, i.e. the Fed funds rate, from 4.5% to 4.25% and signalled that further steps could follow. This is positive for the capital markets, as economic growth remains robust at about 3%.

A second interest rate cut in October is already fully priced into the markets; indeed, the rate could fall to 3.75% by the end of the year.

Further cuts in key-lending rates are therefore positive for the capital markets – but what are the risks?

The big challenge for the Fed is timing. If it cuts its rates too early, there is a risk of inflation returning in the long term. If it waits too long, it could unnecessarily slow growth or even trigger a recession.

While the US economy is currently still performing well, inflation remains above target. The central bank argues that risks in the labour market have increased, with employment growth slowing. The markets interpret this as the golden mean: early enough to mitigate risks, but not too late to jeopardise growth. That is why they are responding optimistically.

As we are coming to the end, let’s take a look at the commodity markets: the price of gold is approaching the USD 4,000 mark, while the oil price has recently fallen again. What is the rationale here?

The strong gold price should not be read as euphoria, but rather as concern. Investors buy gold as a hedge against risks, and there are currently quite a few of those around: rising government debt, high budget deficits, inflation concerns, and geopolitical tensions. Gold is traditionally considered a safe haven for investors.

In short, the price of gold is rising because risk perception has increased. The opposite is true for crude oil – supply has expanded, and more supply means falling prices.

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.