Saturday, May 23, 2015

U.S. Dollar Strengthens On Inflation Data, Precious Metals Decline

Gold Bars

QUICK READ: It was a largely flat week for equities as trading volumes dropped ahead of the holiday weekend in the U.S. It seems large investors have been staying on the sidelines in the stock market, while the bond market remains uncertain after last week’s sell­-off. The precious metals gave back much of last week’s gains due to a strengthening U.S. dollar after rising inflation data signaled a possible rate hike by the Federal Reserve. 

With continued uncertainty about the U.S. economy spilling over into Europe and Asia, equities traded sideways this week while a growing number of major market participants are calling for an inevitable correction of an oversold stock market.

Among others, Bank of America Merrill Lynch is now telling its investors to escape the “Twilight Zone” of equities, which are by certain measures overvalued, in favor of uncorrelated tangibles like gold. The fact that the total value (in shares) of the S&P 500 is 10% over and above the actual aggregate value of those company’s assets does indicate that the stock market may be approaching a liquidity crunch even as U.S. indices continue to trade near all­-time highs. With trading volumes somewhat lower due to the approaching Memorial Day weekend in the United States, stocks saw a fair amount of intra-day volatility this week only to close on Friday essentially unchanged. It's unlikely traders wanted to open large positions ahead of the long weekend. The Dow Industrials settled just below 18,300; the S&P was solidly above 2,100; and the Nasdaq reached as high as 5,100. As usual, action picked up on Wednesday afternoon following the release of the FOMC’s April meeting minutes, but whatever signals investors took from the committee’s statement proved inconsequential by week’s end.

The FOMC did reveal that volatility in the bond markets “may be greater . . . in view of the increased role of high­-frequency traders,” finally acknowledging the questionable practice of using high­-speed automation to derive an advantage in trading. Treasuries, as well as government debt around the developed world, have seen considerable fluctuations of late as the markets remain uncertain of where monetary policy and growth outlooks around the globe are headed. After oscillating throughout the week, yields on the 10­-year Treasury settled near 2.20% by Friday’s close.

Somewhat encouraging economic news in the U.S., along with the unresolved Greek crisis in Europe hurting the euro, helped the dollar resume its bullish rise, vaunting past 95.0 and then 96.0 on the DXY scale at midweek. According to the CPI reading, core consumer prices rose during April, while home sales for the month were up 17% year­-over­-year. As some fresh confidence buoyed the dollar, crude oil benchmarks were predictably soft. Despite this downward pressure, West Texas Intermediate and Brent crude still hovered around unchanged for the week at $60/bbl and $65.50/bbl, respectively.

The U.S. dollar strengthened on the possibility of a hike in the federal-funds rate due to strong U.S. economic and inflation data. Precious metals weathered the profit­-taking storm after last week’s rally, paring their gains but holding above important support levels. Gold gave up about $20 over the week but found footing above $1,205/oz, avoiding similar fire sales earlier in the year when confidence in the global economy ran higher.

Spot silver continued to be rather robust despite falling from a 4­-month high of $17.50. By the close of markets on Friday, the argent metal remained above $17.10/oz.

The Platinum Group Metals charted divergent paths, with platinum falling through the $1,160 and $1,150 levels, marginally widening its gap with spot gold. Though platinum is often seen as a precious metal alternative to gold, it has nevertheless attracted a lot of action on the short side anytime the gold price has pulled back in 2015. Interestingly enough, palladium was able to stand pat at $790/oz, perhaps because it has enjoyed demand as an alternative to platinum. It is telling that investors may now be seeking “alternatives to alternatives” in a market showing little upside in either risk assets or fixed income classes.

A LOOK AHEAD: U.S. markets will be closed on Monday for the Memorial Day holiday. A slew of U.S. economic data will be released on Tuesday, however, including durable goods orders and new home sales for April; the Case-­Shiller Home Price index; the Dallas Fed manufacturing survey; and the latest consumer confidence measures. 

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

Image Credit: Wiki Commons