The Next Opportunity

Last week’s article⁠ argued that Hong Kong would struggle to escape the repricing of risk assets under higher interest rates. The Hang Seng subsequently broke below the support area discussed, supporting that near-term assessment. The next question is whether markets might extrapolate the tightening cycle too far. In December 2018, the median Fed projection still pointed to two rate increases the following year. In 2019, there were none. Instead, the Fed cut rates three times. Today’s circumstances differ, but that reversal is a reminder that rate forecasts change with the economy. Further hikes remain possible in 2027, although their extent may fall short of current market expectations. Once asset prices reflect an aggressive tightening path, even a modest change in those expectations can create opportunities.

Gold still calls for patience. With prices back near US$4,000 an ounce, the preference remains to wait for another pullback. The longer-term view outlined in July⁠ is unchanged: central bank demand and concerns about the purchasing power of money can support gold over time, while prices still need to digest the earlier surge. The 1970s offer a useful reference, with substantial corrections occurring within a much larger advance. The working expectation remains that consolidation in 2026 could give way to another bull phase in 2027. The next decline could form a higher low or undercut the previous low. What matters more is whether prices subsequently stabilise and establish a sustained recovery. Until that happens, calling any decline the final one would be premature.

Long-term bonds, meanwhile, are becoming worth another look. The effects of high rates accumulate as companies refinance maturing debt, households become more cautious about borrowing, and investments are postponed. If those pressures cool demand and inflation, markets may lower their expectations for future interest rates. Long-term Treasury yields could then fall before the Fed formally cuts, benefiting funds such as TLT. The renewed appeal of bonds lies in their higher income yields and the potential for prices to recover if less tightening proves necessary than expected. This is consistent with remaining cautious about high rates: the same conditions weighing on risk assets can gradually weaken economic growth. But persistent oil-driven inflation and heavy US government borrowing could keep investors demanding higher yields. The case for TLT depends on how those forces evolve. One Fed meeting without a hike would not, by itself, be enough.

These are personal market observations and do not constitute financial advice (NFA).