Friday, June 12, 2015

Markets Largely Steady Despite Risks On The Horizon

QUICK READ: Both U.S. stock indices and global bonds swung back into positive territory after a recent bearish hangover set the scene for a rocky start to the week. Though the case remains strong for an eventual correction in equities, not only in North America but in Asia as well, it appears the precious metals have more room to absorb hedging against this risk.

Spot gold opened at an 11-­week low on Monday, so some slight recovery was expected this week. Although there were no dramatic moves in either direction, the metals were divided in Monday’s trading session, with gold and platinum posting slight gains while silver and palladium slid back near support levels at $16/oz and $750/oz, respectively.

Meantime, stocks and bonds fell in tandem, while the dollar dropped sharply. Even though U.S. small business confidence grew to a 5-­month high in May, the Dow Industrials were off 0.45% Monday, while the S&P 500 lost 0.65%, and the Nasdaq was down 0.9%. European markets remained shaky ahead of the Greek negotiations, while the rest of the global markets were in the red across-the-board ­­except for Shanghai, which jumped by more than 2%.

After falling by more than 3.5% last week, crude oil was down again on Monday, falling partly on the announcement that OPEC will not be cutting its production quotas. On Tuesday, the two major world benchmarks each spiked about 4% on Tuesday morning, pushing WTI crude and Brent crude back to $60.50/bbl and $65/bbl, respectively. These price levels held steady by week’s end even after crude lost about 1% on Friday.

Tuesday morning also saw the dollar poke into positive territory before slipping into the negative for the day. World markets were again red across the board, excepting the fledgling Turkish and Brazilian indices, which may again become attractive as the global bond sell-­off spreads into the sovereign debt of emerging markets, as well. U.S. stock indices avoided their 4th straight day of retreat, closing flat after opening sharply lower. The precious metals held onto modest gains for the day, while the dollar again lost ground on its international peers.

The precious metals got a boost when the dollar fell further on Wednesday. Gold added about $15 per ounce to return to the $1,190 mark after the DXY index sank to 94.7. The other metals also managed marginal gains. Meanwhile, stocks saw renewed strength, with all three major indices advancing more than 1.2% on the day. Investor funds may have been briefly flowing into equities after their recent downturn because of their comparative attractiveness to major government bonds: the yields on benchmark 10­-year U.S. Treasury notes and 10-­year German Bunds both hit 9­-month highs this week. The T­-note yield has jumped from 1.86% to 2.48% (before returning to 2.34% on Friday) in a span of just 2 months, while the Bund has risen from a floor of 0.05% yield to about 1% during that same period.

Not coincidentally, funds have overcrowded into the corporate bond markets. The three traditional largest buyers of these securities (insurers, mutual funds, and foreign investors) have been concentrating ownership, with these three groups holding two­-thirds of all corporate debt. They snapped up a large portion of the $9 trillion in corporate bonds offered after 2009 in the wake of the financial crisis. In the last decade, these “big three” types of investors have accumulated an additional $3 trillion in bonds, meaning any downturn in these assets could be highly correlated in their huge institutional portfolios.

Even analysts at Wells Fargo have been warning that a simultaneous drop for the dollar and bonds could prompt the mutual funds and foreign investors to dump their shares en masse. The big players in the bond markets (BlackRock, PIMCO, Vanguard) have issued similar advice in their investor reports. Median corporate bond yields are at a 17-­month high of 3.36%. Seemingly ignoring that the U.S. is seeing the weakest productivity for an economy in expansion since WWII, stock indices rallied on Thursday thanks to jobless claims holding steady below 300,000 for the 14th consecutive week and retail sales rising 1.2% in May. Indeed, there were a record high number of job vacancies in April, marking the first time on record that job openings were outstripping new hiring. This should indicate that the labor market has some space to grow. Wholesale (producer) prices also saw their biggest gains in May in over 2 years. Yet, it’s abundantly clear the stock markets don’t particularly follow fundamentals, instead responding more to trends, prevailing sentiment, and optics.

The bounce-back in U.S. and Chinese stocks is therefore more about momentum than underlying strength. After a pullback begins, trader behavior on the buy side can often succeed in keeping the indices propped up. Before Thursday’s bump, both the Dow Jones and the S&P 500 were on the cusp of relinquishing all of their gains for 2015; in terms of market breadth, approximately 60% of shares listed on the S&P closed above their 200-­day moving average at the end of last week, the lowest proportion in 8 months. Even as the market continues to top, plenty internal indicators such as this have been going sideways.

Here are two more telling reasons to believe that stock values are expensive relative to the issuing firm’s actual strength: According to the AP, 72% (360) of the companies listed on the S&P reported adjusted profits for Q1 that exceeded net income, and the proportions are rising. Moreover, more than a fifth of those companies (105) had adjusted profits that were at least 50% above their reported net income. This trend of inflating corporate performance has likewise been on the rise.

Due to some profit-­taking, the precious metals slid back on both Thursday and Friday, posting modest losses across the board. By Friday, gold held around $1,185/oz, silver halted near $15.95/oz, while the Platinum Group metals were nearly flat at $1,100/oz (Pt) and $745/oz (Pd). Stock indices across the U.S. and Europe did end the week on a sour note, though their counterparts in Japan and mainland China were still in the green on Friday. In forex, with the dollar moving back above 95.0 on the DXY index, the euro held just above $1.12 and the yen fell to about 123.5 per USD.

A LOOK AHEAD: 

Monday promises to be rather busy with news: the Empire State Manufacturing index and industrial production data will be released in U.S.; manufacturing sales come out in Canada; adjusted retail sales and the producer/import price index will be announced in Switzerland; Italy releases its most recent CPI reading; and the meeting minutes from the last gathering of the Reserve Bank of Australia will be released.


By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.