Friday, November 7, 2014

Precious Metals Tumble Amid Record Highs for Stocks

QUICK READ: The midterm elections in the U.S. last Tuesday saw a sweeping victory for the GOP, as the Republican Party recaptured control of the Senate and padded its comfortable majority in the House of Representatives. Coupled with last Friday’s surprise announcement that the Bank of Japan was implementing more monetary stimulus, the GOP landslide has pro­business sentiment (and thus the stock markets) riding high while precious metals slide below support levels.

The tone for trading on the equities markets was set last Friday, when the Bank of Japan made the surprise announcement that it would be expanding its already unprecedented monetary stimulus program. This came just as the Federal Reserve is wrapping up its own quantitative easing measures. The BoJ has stated it wants to increase the money supply by another 10 trillion yen over the next several years. The news sent markets sky-rocketing, as over the next few days the dollar grew firmer and the global stock markets rallied. The dollar was trading well above 114 yen during the week, while the Nikkei 225 crossed above 17,000 before falling back on Thursday.

The victory for the Republican Party likewise had many investors salivating at a potential breakout in stocks. Following a prolonged losing streak, U.S. stock indices have been on a tear as volatility has returned to the markets, offering investors some interesting bargains and profit­-taking opportunities. The Dow Jones hit a new intra-day record high on Wednesday and subsequently closed at record highs on Thursday and Friday. The S&P 500 also notched record-­high closing numbers on the last two trading days of the week, while the Nasdaq has been vacillating up and down due to poor earnings by tech firms in the energy sector following the drop in crude oil prices.

WTI crude and Brent crude got a slight reprieve this week after falling to 2­and­1⁄2­year lows. On Wednesday, a pipeline in Saudi Arabia exploded, grabbing headlines and helping move oil prices back into positive territory. This came after the Saudis announced they would be lowering their prices for U.S.­bound oil, but not for European or Asian buyers. This measure is clearly intended to undercut domestic American producers. The recent slump in energy prices 

Precious metals have been among the worst performers this week, giving back all of gains made at the beginning of last month. In fact, just in the roughly two weeks since October 21, spot gold is down 9%. Silver has fared even worse, dropping by more than 10% over that same span to about $15.50. Not only do these price drops represent 4-­and­-1⁄2-­year lows for the two metals, but they have plunged through important resistance levels, leading to uncertainty over what price point investors will offer renewed support. Despite the dovish sentiment in U.S. markets, demand for U.S. Treasuries has been strong on the end (for now) of the Fed’s QE and uncertainty over global growth. After the yield on 10-­year Treasuries steadily rose throughout the week, it sunk by 7 basis points on Friday to 2.31%.

Solid employment data in the U.S. has also been pointing to a recovering economy, as the average weekly jobless claims fell to a 14-­year low. October was the ninth consecutive month in which non-farm payrolls rose by at least 200,000 new jobs, indicating that momentum in the labor market is picking up. Official U3 unemployment sits at 5.8%, although the actual labor participation rate is at just 62.8%, the lowest level in 36 years. It’s slightly too soon to call it a recovery, but the financial news media has been doing exactly that amid the bullish fervor that has accompanied the return of GOP control in both chambers of Congress. hasn’t helped declining commodity prices, either. 


Next week’s first-­time jobless claims report will come out on Thursday, as investors wait to see if slack in the labor market is finally abating. Friday promises to be a big day for U.S. markets, with October’s retail sales, import & export prices, consumer sentiment, and business inventories all to be reported. Remember that bond markets will be closed on Tuesday in observance of the Veteran’s Day holiday, so don’t forget to show your support for our troops!