Stock market this week

Latest update: 24-10-2021 16:19

Main role central banks

On Thursday we get the ECB. The Fed next Wednesday. Over the past few weeks, the high inflation concerns have faded into the background a bit. Reason for investors to get back into stocks again.

This week and next week, that high inflation, in combination with what the central banks are going to say about it, will once again play a major role.

Supply and demand

Central banks have been busy boosting demand since the financial crisis more than 10 years ago. During the corona crisis, they went even further.

Ultra low interest rates and a lot of money printing were the instruments. It has worked. But now we are in a different situation.

The demand side is still lagging compared to before corona. But it is already bigger than the supply side can keep up with. Due to all kinds of disruptions in the supply chain, we now have a major supply problem.

Empty shelves, long delivery times and sky-high prices (inflation) are starting to affect everything. Stimulating the current central bank policy from the demand side more and more is not appropriate. It does not solve the current supply problem. It just makes it bigger.

There is little that a central bank can do about the supply problem. It is possible to slow down the demand side with less stimulation. That will become the policy.

With tapering (buying less bonds) people will try to slow down the economy a bit. There is a risk to that. If they intervene too strongly, the economy will cool down too much. They will want to prevent that.

Because it is very difficult to get an economy that has been slowed down too much again. This week (ECB) and next week (the FED) we'll find out how they're going to handle that.

It is important for investors to realize that central banks are going to adjust the economy. Central banks are not concerned with the stock markets. They will always want to avoid damage to exchanges. But that's not the main policy.

It's about the economy and inflation. Tapering and therefore less money going to financial markets will have consequences for the stock markets. Not yet that little slowing down of the economy. That effect will only become visible in company figures in six months or more.

The direct effect will be less money going to the financial markets and therefore less budget to buy shares with. A discussion about whether central banks will taper is not necessary in the current economic situation. Because that's going to happen.

The big questions are only whether it will be announced this week (ECB) and next week (FED) and for what amount. We will see.

The gold and silver price

Last week, the gold price just failed to get above 1800 dollars permanently. We now have to wait for the ECB, but especially the FED. Gold and silver should not be bothered by tapering.

The fact that the yields will rise slightly due to tapering can have a small and only temporary negative effect. Investors then mainly look at the yield on the American 10-year government bond.

That yield was 1.6% on Friday. This can increase to 2% as a result of tapering. However, with an American inflation rate of 5.4%, it still makes no sense to buy such a bond as protection against inflation.

Only when yields or interest rates rise above inflation have they become competitors of gold. However, that's not going to happen. The mountain of debt is simply too great. In order to keep that mountain of debt affordable, the interest/yield will have to remain low for a long time to come and inflation will have to remain high.

I expect that the upcoming ECB and especially the FED meeting will provide a turning point for gold and silver. Central banks will have to admit that inflation will remain high for much, much longer.

Central banks will start tapering. But not to upset the economy much less than gold and silver investors now fear. The ECB and FED will also indicate very strongly that interest rate hikes (much more damaging to gold and silver than tapering) are far from being an issue.

Higher inflation and less vigorous central bank intervention than currently expected will signal a strong rally in gold and silver.

After the ECB and FED meeting, a new era will arise for gold and silver that will last for several years. Two things will play an important role in this.

First, of course, to what level will inflation rise. It wouldn't surprise me if we see US inflation close to 10% within six months.

Second, how much tapering can the economy handle without going into a severe recession. The state of the economy will set the limit to which central banks can fight inflation.

They want to avoid a major economic contraction. That will mean that there is very little that can be done to combat that high inflation. For the coming years, investors in gold and silver only need to follow 2 things closely.

Inflation and economic growth/contraction.

Many gold mining and silver mining stocks have fallen sharply this year. Given the gold and silver prices, they are even oversold. It currently offers good entry opportunities. 

The weekly forecast for the stock markets

This will be an important week for the earnings season. I am mainly talking about a number of large American tech companies that are coming with figures this week. We started the earnings season with the major US banks.

Last week and also this week many service providers and tech. Production companies that usually take a little longer to prepare the figures come later.

Particularly at those production companies, the setbacks due to delivery problems and price increases can be significant. The advantage is that these production companies have a low weighting on the stock exchanges.

On Thursday we get US economic growth in the third quarter. I expect that to be the number with the biggest impact on the stock markets this week.

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The weekly forecast for the AEX

The AEX continued to make new all-time highs last week. Nothing seems to stand in the way of a further rise. And that in itself should always be a warning on the stock market.

For this week, the AEX will mainly depend on how the figures of those large tech companies fall. The ECB on Thursday could also cause a lot of movement. This is particularly the case with the ECB's disclosures on the economy and inflation.

AEX investors are now faced with the choice of central banks to choose whether or not to trade against central bank policy. Experience shows that contrarian central bank trading never ends well.