The Merriam-Webster dictionary defines sentiment as, “attitude, thought, or judgment prompted by feeling: predilection.: special view or idea: opinion.: emotion.: refined feeling: delicate sensitivity especially as expressed in works of art. : emotional idealism.”
As it relates to financial markets, market sentiment is the view or attitude that creates our opinion about whether an asset class is overvalued or undervalued. It shapes and changes the value of stocks or commodity prices.
Market sentiment is highly sensitive to statements and comments made by Federal Reserve officials because those individuals have the power and influence to change monetary policy. There is a dramatic difference between the perception of the upcoming Federal Reserve monetary policy changes and the actions of Federal Reserve officials.
The Federal Reserve raised rates at every FOMC meeting this year except in January, from March through November, a total of six rate hikes. During the last four FOMC meetings (June, July, September, and November) they raised rates by 75 basis points. The aggressive nature of the Federal Reserve’s monetary policy moved gold down dramatically from March to early November. Gold traded to the highest value this year of $2078 in March. Until the beginning of November, the price of gold has dropped to about $1621, resulting in a price drop of 21.99%.
During the first week of November, the market sentiment shifted because inflation rates have declined fractionally and investors saw this fractional drop as a signal that the Federal Reserve will begin to loosen its aggressive monetary policy. This caused gold to rise dramatically from $ 1621 to intraday high $ 1792 by Tuesday, November 15. Because the CPI index fell from 8.2% year-over-year in September to 7.7% year-over-year in October investors believe that the Federal. The Reserve will be more dovish about future rate hikes.
However, Federal Reserve Governor Christopher Waller told a conference in Sydney, Australia on Sunday November 13, “We are not softening … Stop paying attention to the pace and start paying attention to where the end point will be. Until we get inflation. down, the end point is still way out there.” On November 14 some Federal Reserve officials made the opposite comments.
San Francisco Federal Reserve President Mary Daly, “This is far from victory”. Lorie Logan, the president of the Federal Reserve in the central bank of Dallas, said that the report last week was, “very welcome”, but would not reduce the need to increase the rate more likely at a slower rate.
Statements made over the weekend and Monday, November 14 dramatically changed market sentiment regarding gold prices. The price of gold hit an intraday high above $1790 the following day and then began to have three consecutive days of price declines from Wednesday to Friday. To add fuel to the fire today St. Louis Federal Reserve President James Bullard said that the Fed’s right benchmark policy may have to rise as high as 7%.
The statement moved the price of gold from Tuesday’s high to today’s price. As of 4:27 PM EST, the most active December futures contract currently stands at $1751.30 after posting a net decline of $11.60 today. The statement will likely continue to create bearish market sentiment for gold.
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