Saturday, December 20, 2014

FOMC Meeting Sends Markets Into Santa Claus Rally

QUICK READ: After an abrupt plunge in equities last week began to look like a minor correction, the FOMC statement on Wednesday rescued the stock markets, sending the Dow Jones soaring over 700 points in two days as U.S. stocks fully recovered from last week’s $1 trillion sell­off.  More than the “Santa Claus rally” that many expected, this is much more a “Yellen Claus rally.”


The past two weeks saw renewed turbulence in U.S. stock markets, continuing a trend that began in October. The major indices were each in the red on Monday, as the S&P 500 fell below 2,000 and the Dow Jones approached 17,000 just weeks after being a hair below 18,000. Treasuries rose in response to the flight from stocks, as the yield on the 10­year T-­note closed at just 2.07% on Tuesday, its lowest yield since May 2013. Tuesday also saw major airlines Southwest and Delta drop by about 5% on a security glitch that interfered with passengers’ boarding arrangements. Tech titan Microsoft shed 1.8% as the Dow lost another 110 points and the Nasdaq fell by 1.2%.


The pendulum swung back swiftly in late trading Wednesday following the FOMC meeting. The Fed’s forecast of “patience” in waiting to raise interest rates propelled the markets to their best showing in 2014: all U.S. indices rose by at least 1.5%, with the Dow climbing almost 300 points and the S&P logging its largest single­-day percentage gain of the year. Even crude oil was up nearly 3% before quickly falling back to unchanged. Momentum continued to build as jobless claims came in at a six­-week low, consumer prices fell with cheaper gasoline, and home builder confidence hovered near a nine-­year high.


Thursday picked up right where Wednesday afternoon left off, as stocks again soared. All three benchmark indices posted gains well above 2%, and the Dow Jones index posted its biggest one­day percentage gain (2.4%) in over three years. In total, the index rose by more than 700 points in the matter of two days, its best nominal rally in six years. It also lifted the Dow to a 7% gain year-­to­-date.


Precious metals had a tough time gaining ground amid the massive transfer of investment funds from stocks to bonds and then back again, but the fundamentals for gold appear to be relatively strong. Not only has the yellow metal repeatedly bounced when it nears its support level around $1,186.40, we are also seeing an increase in long positions on COMEX gold at the same time that China is expected to take the reins from India and drive strong seasonal demand for gold during the Lunar New Year, which falls on February 19 next year.


A strong dollar held back the precious metals’ moderate recovery throughout the week. This came after a consolidation on Monday that saw gold and silver erase the previous week’s advances, and brought platinum below the $1,200 threshold. This places the gold price in just about perfect parity with the platinum price, offering some speculative opportunities for traders who expect the two metals to eventually move closer to their historical ratio. Even Forbes recently called the short­-term outlook for gold “bullish.” After easing back above 2.20%, 10­year bond yields shed two basis points on Friday to 2.18%. While gold mostly traded sideways and silver crossed back onto the positive side of $16 per ounce, crude oil prices again made an attempt at a bona fide reversal on Friday. Both leading global benchmarks were up sharply in afternoon trading, with the Brent crude up almost 4% and West Texas Intermediate up about 4.5%. Meantime, stocks calmed down and rose modestly during Friday’s session.


A LOOK AHEAD: 


4Q GDP numbers will be released on Tuesday, along with a slew of other important economic indicators: new home sales, personal incomes and outlays, consumer sentiment, and durable goods orders are all on the docket Tuesday, December 23, providing investors with data on both tangible productivity within the real economy as well as more ethereal gauges for the consumer spending outlook.


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