US government shutdown averted, as Trump’s Fed pick boosts the dollar and weighs on gold

As we reach the end of a long trading week, European futures are pointing higher, while S&P 500 futures suggest another lower open for US stocks. However, things could calm down today after some extreme price moves across asset classes on Thursday. The prospect of another US government shutdown appears to have been averted with two days to go before the funding deadline. The Senate Democratic leader Chuck Schumer said that a bipartisan funding deal has been reached with the Republicans.

Although US futures are lower today, averting another shutdown should be good for risk sentiment, and it is a massive relief for consumer and business confidence as we move through Q1. With less political chaos on the cards, this could remove one headwind for financial markets, which have generally had a good start to the year.

Trump set to announce Kevin Warsh, a former Fed governor, to replace Powell  

The market will also find out who the next Fed chair will be at some point on Friday. The favourite is now said to be Kevin Warsh, who was a former Fed governor between 2006 – 2011. Back then, he was a renowned hawk, however, he has recently aligned himself with President Trump and called for lower interest rates. He was also in favour of shrinking the Fed’s balance sheet when he was on the FOMC, which the Fed recently stopped. This is an interesting pick from the President and may give the market some hope that Fed independence will be preserved by elevating a former Fed insider. US Treasury yields are higher in early trading, as the market focuses on Warsh’s hawkish past.

It is worth noting that the nominee could face a complicated path to getting confirmed by the Senate, after both Democrats and Republicans have called for Fed independence to be maintained over the will of the President.

The momentum rally faces challenges at dizzy heights

The rally in the momentum trade that has powered stocks and commodities to record highs this year, came to an abrupt halt on Thursday, and yesterday’s market moves are a reminder of what happens when momentum trades get crowded: whipsaw price action. A double whammy of issues slammed into a market that was getting ahead of itself. Fears about AI spending and a de-escalation of tensions in Iran sent stocks, gold and silver sliding.

Gold continues to slide as Warsh expected to be next Fed governor

The question now is, has Thursday’s violent reversal caused permanent damage, and can the momentum trade return? In short, this period of volatility is not over, and the gold price is lower by 4% today. This comes as the market prices out some of the ‘Fed independence’ risk premium that had built up in the yellow metal in recent weeks and months.

Trump’s Fed pick is also boosting the USD this morning, and rising US Treasury yields has seen the dollar rally on a broad basis. GBP/USD is lower by 0.4%, and the yen is weaker by 0.5% vs. the USD. EUR/USD is also heading back towards $1.19 as we wait to hear if Kevin Warsh will be the next Fed chair.

In the short term, the correlation between gold and the dollar is strong, so as the dollar strengthens and the dollar ‘debasement’ trade gets scaled back, this could weigh on gold and silver prices.

The AI trade is not over, but it is changing

Gold did not fall in isolation on Thursday. US stocks posted their second day of losses, and early indications from the futures market suggests that US markets may struggle as we reach the end of the week. Asian stocks have also traded with a cautious tone. The AI trade continues to come under scrutiny; however, we do not think that Microsoft’s drop, it fell 10% on Thursday, is enough to de-rail the AI trade for long.

There was some see-saw price action within the Magnificent 7 on Thursday. Microsoft sank by 10% while Meta rallied by the same amount. Both are betting big on AI; however, investors were happier with Meta’s narrative that advertising revenues can support its AI ambitions and were concerned by Microsoft’s unexpectedly high capex spend in Q4.

Is OpenAI really worth more than $800bn?

The AI trade is not dead in the water, but it is shifting and investors are starting to ask more questions. As we move to the end of the week, tech remains in focus. How will the market react to news that Amazon is in talks to  invest $50bn into OpenAI? Amazon would use OpenAI’s models in its products, while at the same time providing much-needed computing power to the maker of ChatGPT.

OpenAI is in talks to raise money from several investors, and its latest funding round could be worth $100bn. This would value the company at $830bn, a huge valuation for a relatively young company. The AI space continues to be a hive of activity, but the question now is, will investors warm to OpenAI’s elevated valuation? Amazon executives clearly don’t see an AI bubble, so should the market trust these investments and deals that are triggering rapid growth in the AI space? Amazon’s share price fell slightly in post-market trading on Thursday night, but after Microsoft’s rout, it is still worth keeping an eye on how Amazon performs on Friday. If the market punishes Amazon for this investment, then it could spell a deeper selloff in the US tech sector.  

iPhone powers Apple to record-breaking earnings  

Apple will also be in focus after it reported earnings on Thursday night. Apple delivered revenues that easily surpassed expectations for last quarter, which is traditionally a strong period for the company. Revenues were $143.75bn, higher than the $138.39bn expected, this is a record for sales and is a 15.7% increase YoY. Sales were boosted by robust holiday demand for the new iPhone 17. Service sales also reported decent growth of 13.9%. Net income and earnings per share were also significantly higher than expected.

The outlook is what really matters, and future sales growth is expected to be bolstered by continued strong sales for the iPhone. Supply disruptions have been worked out of the system. Added to this, fears that rising memory prices would depress margins has failed to materialize for Q1.

Memory problems can’t get in the way of cash-generating machine

So far, so good, but there were some bleak spots in this report. Sales at its wearables business were not strong, and the iPhone is doing all of the heavy lifting. Also, cost pressures, including memory costs, could start to weigh on profits from Q3 this year. Overall, this is a strong earnings report, but the outlook failed to set the market alight, and its share price could come under pressure later today. However, it is worth noting that Apple is a cash-generating machine, it reported free cash flow of $123bn last year. Its cash pile is expected to grow to $130bn this year. With a bullet-proof balance sheet, Apple should be able to navigate any conditions that are thrown at financial markets in the coming months.

The stock price reaction was muted in post-market trading after Apple’s results were announced and the share price was higher by 0.5%. Thus, it may take some time for the stock to recover its 5% loss for the year so far.