Morning Market Update May 23: Bernanke Blues

Gold is seeing some safe haven demand this morning as stocks are down, with reports in Asia that the premium for gold bars has hit an all-time high, due to a local shortage of the physical metal.

The specter of the quantitative easing “punchbowl” being taken away, raised by Fed Chairman Ben Bernanke yesterday during Congressional testimony, has caused stock markets worldwide to swoon.

Adding to the downer, the HSBC Chinese flash PMI for May recorded the first contraction in seven months. The reported 49.6, against an expected 50.5, continued the downward trend of April’s reading of 50.4. Analysts were expecting 50.5, as the second quarter is traditionally a strong period for Chinese manufacturing.

The pessimistic news caused markets throughout Asia to go negative, and depressed base commodities. The Nikkei index in Japan dropped 7.3%, the largest one-day correction in two years, as the yen hit a two-week high against the dollar.

The bad news out of China only heightened the sour mood in Europe, which was already depressed over the possibility that the U.S. Fed would stop quantitative easing. European stocks and the common currency both declined, despite the Eurozone Markit PMI improving to 47.5 for May. Yes, it marks 18 straight months of economic contraction, but it is a three-month high for the index, which came in at 47.0 last month.

In the U.S., stocks are poised to continue their downward momentum on the back of the contraction in Chinese PMI. One spot of good news in the U.S. economy is the unemployment numbers. First-time jobless claims last week came in at 340,000 new applications, 23,000 less than the week before. The four-week moving average was 339,500, essentially unchanged from the previous week’s 340,000.

Continuing unemployment claims fell 112,000 to 2.91 million. These numbers do not include those people whose unemployment has run out, or have stopped actively seeking employment.

by David Peterson

Morning Market Update May 22: World Markets Gyrate on Bernanke’s Words

Precious metals were up early this morning, helped by dollar weakness ahead of Federal Reserve chairman Ben Bernanke’s testimony before Congress on the state of the economy.

In a vivid display of how markets worldwide react instantly to news, the dollar tanked and precious metals and equities got a boost as Bernanke opened his testimony by saying that the Fed’s $85 billion a month of bond purchases would continue until solid data indicated that the economy could stand on its own.

The party for precious metals was short-lived however, as later in his statements Bernanke said that the Fed was concerned about long-term inflation risks connected to continued quantitative easing. Gold promptly dropped $40 and equities swooned, as the dollar index soared over half a point to well over 84.

At noon New York time, gold has recovered to be basically even with yesterday’s New York close, the stock market has recovered, and the dollar has kept its gains for the day.

The next bit of drama today will be the release of the minutes of the FOMC’s May 1 meeting. Analysts are eagerly awaiting the information, to see how the fight between monetary doves and hawks over quantitative easing had progressed.

by David Peterson

Morning Market Update May 21: Was This The Double Bottom?

Yesterday’s short-covering rally in gold has fizzled as a resurgent dollar tops 84 on the DXY again. This is contributing to the lower prices in precious metals after yesterday’s excitement.

A single large sell order in Asia at a time of extremely thin volume early Monday had the earmarks of an attempted takedown on gold prices, but the market decided to not play along. Afternoon prices spiked to just below $1,400 an ounce as the shorts got squeezed. The momentum didn’t hold in European trading today, and precious metals have seen a steady decline in New York this morning.

A statement from R.J. O’Brien & Associates in Chicago states that gold has probably established a double bottom, and they predict that we may see $1,500 an ounce next month. Others are also speculating on the possibility that the decline in the yellow metal has been halted, but everyone is hitting the sidelines to await Fed chairman Ben Bernanke’s testimony before Congress tomorrow on the state of the economy. Also on the docket for Wednesday is the minutes from the May 1 meeting of the Fed’s Open Market Committee, where national monetary policy is set.

If the $85 billion in government bond purchases continues, interest rates will stay depressed and reduce the opportunity cost of holding gold. Another upside for gold is that injecting $85 billion every month into the market adds to the devaluation pressure on the dollar. This makes dollar-denominated commodities, like gold and oil, cheaper to buy in other currencies.

by David Peterson

Morning Market Update Feb 27

Gold is seeing some consolidation this morning after gaining over 4% yesterday on a “Bernanke bounce.” Gold zoomed yesterday afternoon as the Fed chairman told the U.S. Senate the quantitative easing would continue for the foreseeable future. Today, he speaks before the House of Representatives, where he will undoubtedly say the same thing.

The big news in the U.S. is that we are two days away from mandatory across the board spending cuts to the federal government. “Across the board” means that the respective departments have NO choice in where to cut back- they must cut every program and project by 9%. This is where the pain of the “sequester” comes from, and what was supposed to make it too horrible to even contemplate allowing to happen. As the non-negotiations in Washington this week prove, no one should under estimate the disfunctionality of either party in Congress.

Durable goods orders were reported up, while new mortgage applications were reported down today. The dollar is slightly down from a 6-month high that was hit yesterday, while oil is barely up from yesterday’s two-month low.

The euro was up slightly as today’s Italian bond sale did not blow up over the political deadlock caused by the national election. It remains to be seen if a coalition government can be cobbled together from the three main factions. 55% of Italians voted for anti-austerity candidates, casting into doubt the long-term future of Europes third-largest economy as a member of the EU.

China and Hong Kong stocks were up overnight, on expectations that restrictions on foreign investment would be loosened. Chinese stocks had the best day in three weeks, despite a reported drop in exports that may signify that the economic recovery may be weaker than first thought. The Nikkei was down today, led by a drop in automotive stock caused by the yen stopping its slide against other major currencies. A stronger yen is bullish for gold, as it makes gold cheaper for Japanese buyers. Due to Japan’s deflationary economy, there are few higher yield competitors for gold.

by David Peterson