Investors will be looking for some signs of stability the rest of the week as market declines and volatility have seen a sharp rise. The stock market had its worst Christmas Eve showing on record on Monday, with the Dow Jones Industrial Average dropping by almost 700 points. The declines put the benchmark S&P 500 within just a few points of bear market territory.

 

Monday’s sell-off came on the heels of what many consider to a bizarre and unexpected announcement by Treasury Secretary Steve Mnuchin. Mr. Mnuchin felt the need to reach out to the nation’s six largest banks while on vacation over the weekend and had conversations with each CEO regarding their respective bank’s capital position and liquidity.

 

The phone calls and subsequent announcement were done in an effort to calm the markets but clearly that plan backfired. The discussions of bank liquidity brought up concerns that were reminiscent of the 2008/2009 financial crisis, and investors are now wondering why Mnuchin felt the need to have these talks and why he felt he had to have them now.

 

Although markets have been under some significant pressure and volatility is clearly on the rise, there has not been any widespread concerns about liquidity or the health of the financial system in general. These actions over the weekend have raised some eyebrows, however, and investors are left wondering if there could be more negative news on the horizon.

 

The shakeup in the Trump administration has continued in recent weeks, with Secretary of Defense Jim Mattis and Chief of Staff John Kelly both deciding to exit the administration. These two men are considered to be a rational and calming influence in the administration and their absence is certain to raise some serious concerns about foreign policy and other issues.

 

The U.S. Government remains partially shutdown in the meantime as President Trump has stated that the shutdown will remain in effect until he gets the funds he has demanded to build a wall along the country’s border with Mexico. There have thus far not been any significant, tangible efforts to reopen the government and the current shutdown looks as if it will stretch into the New Year.

 

The bottom line is that there are numerous, serious issues at play that have the potential to fuel further risk aversion and massive declines in risk assets. The mix of geopolitical issues (both foreign and domestic), the trade war with China, a global economic slowdown and rising rates are all factoring into recent market behavior. The situation may get worse before it gets better, and the current asset rotation could continue in the weeks and months ahead.

 

The gold market is now trading at a 6-month high and appears poised for further upside. Although a pullback could be seen in the sessions ahead, such a pullback may be considered healthy after the market took out key resistance at the October highs around $1252. Stocks have gone from “buy the dips” to “sell the rips” while the gold market has now become a buyers’ market. This shift in market dynamics could keep a strong bid in the yellow metal and may very well lead to the next major cyclical bull market in gold as stocks enter what could be a deep and protracted bear market.

The gold market is taking a bit of a breather in early action to start the new trading week. Prices did, however, reach a 5-month high in overnight action before pulling back. The market is attempting to break through key resistance at the October highs around $1252 and looks poised for further upside on a successful breach.

 

Safe-haven demand for gold has increased substantially in recent weeks, and given the current economic and geopolitical backdrop investors may continue to seek out alternative asset classes. Rising stock market volatility and further declines in risk assets could keep a very strong bid in the gold market, and an increasingly dovish Fed will also likely add fuel to the fire.

 

The ongoing war on trade with China remains a focal point of concern for investors. Although President Trump suggested after his meeting with Chinese President Xi Jinping that a deal may be close, skepticism has grown and the recent arrest of a Chinese executive by Canadian authorities and her possible extradition to the U.S. is not helping matters. China is growing increasingly angry, and the matter has the potential to put any talks on trade in serious jeopardy.

 

Recent developments in the ongoing investigation into possible Russian Collusion in the U.S. may also have investors on edge. New documents released last week seem to suggest that the special counsel is approaching a conclusion, and there is increasing talk of impeachment. With the democrats set to take control of the House in January, the investigations into this issue could potentially expand further and the Trump administration could have an increasingly difficult time implementing its agenda. Headline risk is significant and the potential for a major shakeup in Washington may also keep investor appetite for risk limited.

 

The ongoing Brexit saga is also weighing on sentiment as U.K. Prime Minister Theresa May recently cancelled the vote on her Brexit deal. Apparently, May felt that she would not be able to get the deal passed through the House of Commons at this time and the vote may be rescheduled for next week or even put off until early January. News of the delay sent the pound tumbling to 18-month lows. With major issues such as open borders and free trade arrangements hanging in the balance, any further breakdown in negotiations has the potential to send major waves through global financial markets.

 

In the meantime, growing concerns over a global economic slowdown will also weigh heavily on markets and risk appetite. Recent data out of China showed shrinking imports and exports, with exports rising by only 5.4% while consensus estimates were looking for a gain of 10%. To say that Chinese trade data is sluggish would be an understatement and the trend towards slower growth and demand could keep global markets on edge. Recent data may also suggest that the nation may take additional steps to try to halt the recent economic slide.

 

All of the issues outlined above could fuel significant risk aversion and even panic selling in global markets. As stocks continue to work their way lower, a protracted bear market may become increasingly likely. Further declines in risk assets will likely propel gold and other perceived safe-haven assets higher as a major asset rotation gains steam.