QUICK READ: Crude oil has continued to tumble as both major world benchmarks are menacingly close to the $70 level. Although stocks were riding high yet again this week in response to a decidedly mixed bag of economic indicators for November, gold and silver slid below support levels at the week’s end. Fears of deflation are still acute in Europe and Japan, driving investors into Western bonds.
Crude oil prices are falling in earnest with no clear signs of a bottom yet following OPEC’s decision not to cut its output. Crude oil futures sit at 4-year lows, giving no indications of a trend reversal absent some unforeseen explosion in economic activity across the globe. Thus far this year, WTI crude has given up 30% while Brent crude prices have fallen 34%. Domestic gas prices have tracked lower every day since the beginning of October, the longest such streak on record, dating back to 2004.
The U.S. stock markets continued to climb this week despite being dragged down by sluggish energy stocks while much of the international community’s attention remains focused on the various signs that the global economy is slowing.
The dollar fell this week on rumblings that the timetable for raising the federal funds rate is being pushed back further in 2015, perhaps to the middle of 2016. The greenback tends to firm up when anything hawkish comes out of the Fed, as an increase in interest rates from near-zero to closer to normalized levels is likely bullish for the world’s reserve currency. Yet, it’s already been a relatively good year for the dollar, as it has strengthened against all 16 of its major peer currencies since the calendar turned to 2014.
The Fed had reason to be cautious, as mixed economic indicators have made the current recovery seem more tenuous. Markets hardly budged on the upward revision of third quarter GDP from 3.5% to 3.9% growth, because first-time jobless claims unexpectedly rose and U.S. consumer confidence in November dropped significantly from a reading of 94.1 to 88.7. Even in the States, signs of weakness in the economy have not entirely been shrugged off. In fact, Standards & Poors reports that nearly 50% of all global corporate stock issuers are currently speculative-grade, which smacks of an inflating junk bond bubble. Meanwhile, the S&P 500 (as well as the Dow Jones Industrial Average) are still routinely hitting record-highs; the S&P is up 11% since its October low, and will gain about 2.7% on the month.
Another indication that concerns over the health of the economy have not fully abated has been the flight into U.S. Treasuries and other government bonds. After falling 5 basis points on Tuesday, the yield on 10-year Treasury notes continued to slide over the course of the week, sitting at just 2.21% on Friday morning. Foreign demand for U.S. Treasuries is at its highest in 10 years, as yields on European bonds have also remained low. The German 10-year bund slid from 0.75% to 0.694%, while government bonds from Britain, Australia, Austria, Belgium, the Netherlands, Finland, France, Ireland, Spain, Italy and Portugal all likewise saw falling yields. This is due, in part, to many investors expecting the European Central Bank to begin buying government debt as part of its stimulus program.
The ECB will not be alone in its desperate quest to stoke inflation, as the Bank of Japan plans its own ambitious stimulus measures. With an injection of monetary stimulus coming down the pipeline, markets in Japan and Europe have been heating up. The Nikkei 225 has been mostly trading sideways of late, but has risen nearly 2,000 points (about 11%) since dipping to end October. Meantime, Germany’s DAX has finally eased a bit after an 11day streak in the green pushed the index near its record highs set earlier this July.
Safe haven demand for precious metals has been virtually nil, as money has instead poured into equities and government bonds. Gold was stagnant early in the week, seeing some greater volatility by midweek because of the thin trading volumes during the Thanksgiving holiday. After consistently hovering near $1,200, the yellow metal plunged below support, falling nearly 2% in Friday morning trading to just above $1,180. Silver also fell through its support levels to $15.75 on Friday, erasing this week’s rally, which touched as high as $16.90. Both platinum and palladium, however, have enjoyed renewed strength as the supply shortage from the 5month miners strikes in South Africa are beginning to take effect.
A LOOK AHEAD:
The PMI and ISM manufacturing indices will be released on Monday, December 1, updating the outlook on the pace of growth in U.S. industries. If “Black Friday” activity and online shopping sales on “Cyber Monday” are particularly strong, analysts may have to revise their bearish expectations for U.S. retail sales this holiday season.
By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.