Friday, June 19, 2015

It's The U.S. Dollar, Not The Economy, Stupid

QUICK READ: After opening the week in negative territory, U.S. stock indices and the precious metals recovered together as the U.S. Dollar softened against its major peers. Conversely, Chinese equities on the Shanghai index sank into a sudden­­ though nonetheless unsurprising ­­correction. Volatile swings have returned to the world markets as the Greek debt situation remains fluid.

Between the potentially disruptive influences of default in Greece, the approaching normalization of Fed policy, and the overheating of the Chinese stock market, there was increased volatility on the global markets this week. Where funds flow over the course of the summer months could have a great deal to do with how these risk factors play themselves out.

Although U.S. stock indices opened nearly 1% lower on Monday, the array of economic data released on the day was mixed. Mining and drilling activity fell for the fifth straight month, with oil drilling down 8%, and it was the third straight month of declining consumer energy production. The NY Fed Manufacturing index fell to its weakest levels in 2 years during June, while industrial production and overall factory output were dragged down in May by the strong dollar and weak oil prices. Meantime, housing indicators were strong: U.S. homebuilder confidence hit a 9 ­month high, while U.S. building permits rose to an 8­-year high. Although housing starts fell 11% in May, this was still a signal of strength, as April’s numbers were practically off the charts. Automakers also gained on fresh demand for new cars.

The precious metals were mixed on Monday while the U.S. Dollar held at 95.0 on the DXY index. The 10­-year Treasury note rose, with yields down 4 basis points to 2.35%. After recently approaching an exchange rate of $1.50, the pound sterling recovered to $1.55 before strengthening further to $1.59 by week's end. The pound also saw its best gains against the euro in three months.

The metals slid further on Tuesday, with platinum leading the fall by closing $8 lower. It maintained its $100 spread below spot gold, with the two metals at $1,083/oz and $1,183/oz, respectively. The dollar was only marginally lower, and 10-­year Treasuries continued to see demand. Thanks to disruptions due to severe weather and flooding in Texas, WTI crude actually gained 0.4% to about $59.75/bbl while Brent crude fell 0.2% to $63.80/bbl. Ahead of Wednesday’s FOMC announcement, U.S. shares were 0.5% higher. Asian stocks were deeply in the red, with Shanghai down 3.5%, while European indices were slightly in the green.

As is often the case, the markets waited to swing until Fed Chair Yellen had wrapped up comments at her scheduled post-­meeting press conference. Citing a dot plot of the various Fed governors’ expectations for the timing and pace of future rate increases, Yellen reassured the markets that the economy remains on track for a rate hike before the calendar year ends, but that subsequent rate increases will be shallow.

Both equities and the precious metals rallied on these ambiguously hawkish yet dovish conclusions, although palladium sank 1.5% to $725/oz and platinum hovered above a six-­year lows. Silver closed 0.75% higher at $16.25/oz. The dollar and Treasuries were mostly flat.

With the FOMC no longer entering its monthly policy meetings with the express understanding that rates will not move, the month-­by-­month and data-­dependent nature of the committee’s forward guidance promises to keep investors busy as they attempt to position themselves ahead of the rest of the pack leading up to the first rate hike. U.S. indices turned back positive from a 0.25% morning dip following Yellen’s comments, while European indices slumped into the red. Besides Japan, Asian shares all broke into positive ground. After a roller coaster day of trading, the crude oil benchmarks closed essentially flat on Wednesday.

Thursday again saw the metals and U.S. equities advance in tandem. Gold gained more than 1% to settle back at the $1,200/oz mark, while silver and platinum returned to their previous levels from Monday. Palladium lagged behind, even with the dollar softer at just above 94.0 on the DXY. As a result, crude prices and U.S. stocks both rose for the third straight trading session, helping the Nasdaq close at a 15­-year high. Excluding Shanghai, shares were up across Asia and Europe.

The employment outlook in the States firmed up, with the most jobs added in May (280,000) in five months and a drop of 12,000 in weekly jobless claims. The Philly Fed Business survey registered far above expectations, signaling some momentum in manufacturing, and the current account deficit fell within the lower range of analysts' predictions. Inflation remained muted, as CPI rose a modest 0.4%, with only 0.1% price growth for core items.

China’s Shanghai Composite index lost a staggering 6.4% on Thursday, making it a full­fledged 13% correction on the week for the index. Many shares hit the lower bounds of their daily trading limits, seemingly bringing an end to the index’s bull run that spanned nearly three years - ­­far longer than past rallies for Chinese shares. Despite most analysts making calls for an imminent Chinese correction of late, analysts at JPMorgan suggested that this may represent a buying opportunity, because the government is likely to step in and keep stocks propped up if the correction becomes too painful. Though U.S. shares spent most of Friday about 0.25% lower, some greater volatility and higher trading volumes occurred due to the quadruple witching, when stock options and futures, as well as stock index options and futures, all expire simultaneously and investors must decide how to close out their positions. The next gold options expiry will fall on Thursday of next week, June 25th. Though the dollar remained below 94.2 on the DXY on Friday, the crude oil benchmarks each slipped more than 2%. Treasuries continued to rise, with yields on the 10­-year note sinking back to 2.27%. Both the euro and yen closed the week up against the dollar.

M&A News ~Health insurer Anthem competes with Aetna and UnitedHealth for a takeover of rival Cigna, helping Anthem’s shares surge.

~CVS is slated buy Target’s pharmacy and clinic division for $1.9 billion.

~Cox Automotive absorbs the related digital marketing services company Dealertrack for $4 billion. 

~The European Commission is still impeding General Electric’s takeover of French firm Alstom’s power turbines.

~The 180-­year-­old gunmaker Colt Defense files for Ch. 11 bankruptcy, and is ripe for acquisition. ~More mergers and acquisitions are expected in retail going forward. 

A LOOK AHEAD: Although GDP and PMI data (mainly from Europe) fills the middle of the week, Monday is a rather light day for market indicators, led by existing home sales in the U.S. and Flash Manufacturing PMI in Japan.

Image Credit: Wiki Commons

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