Markets Rebound On High Volatility: Morning Market Update Oct 21

October 21st, 2014 by

10945992_xxlThe dollar is seeing some volatility this morning, as the the DXY dollar spot index has been undulating above and below the 85.0 mark. In fact, the markets at large have been characterized by volatility the last several trading days, as the volatility index is at a 13-month high. This comes just three months after the index hit its lowest ever reading.

Part of the reason for the volatile trading is that big banks are being constrained by the new regulatory rules for holding capital. They cannot hold as much corporate debt as they were before, and are uninterested in buying the assets that clients want to sell, as the banks themselves are selling off “junk bonds” and similar high-risk securities. In an effort to create greater transparency in the securities markets, financial regulators are nearing a resolution on loosening requirements for government-guaranteed loans, particularly rules relating to mortgages.

Yesterday In the Markets

All of the major U.S. stock indices gained on Monday. The S&P 500 rose 0.91% for its third consecutive day in positive territory, the Nasdaq gained 1.35%, and even the Dow Jones managed to edge into the green, up 0.1%, despite a precipitous 8% decline in the stock of tech giant IBM that dragged the rest of the industrial index down with it. European markets were choppy but ended up as the ECB began its asset purchasing program.

The DXY index slid back to 84.989 at Monday’s close, a drop of 0.14%. Meanwhile, precious metals continued to tick upward as each of the metals appear to be experiencing a trend reversal after bouncing off of recent lows.

Gold: $1,246.90 (+$8.70) +0.70%
Silver: $17.43 (+$0.16) +0.9%
Platinum: $1,264.00 (+$11.00) +0.88%
Palladium: $760.00 (+$9.00) +1.20%

The high level of volatility on the markets has coincided with a record volume of trades in U.S. Treasuries. Monday saw a dramatic 46% increase over the previous single-day volume record as traders continued to dump corporate debt in an old fashioned sell-off. This brought the yield on 10-year T-notes down to 2.19%, though it eased a bit in after-hours trading to hover around 2.22%. Treasuries are seeing considerable safe haven demand as economic uncertainty looms around the globe, particularly in Europe and Russia.

Economic News Affecting Gold

The big news in the financial markets yesterday came from Citigroup, which estimates that, in total around the globe, banks will likely have to fork over an aggregate of $41 billion in fines in order to settle charges of manipulating the currency markets. Although this doesn’t account for possible cooperation on the part of the banks that could cut some of the fines, the hammer is sure to come down pretty hard: regulatory authorities in both the U.K. and the U.S. have been clear that they take the potential rigging of forex trades very seriously–at least as seriously as the Libor rigging scandal that took place in 2012.

moneymanSeveral other countries are likewise investing whether or not big banks cheated consumers by manipulating the foreign exchange markets. For their part, UBS has been proactive in disclosing their possible misconduct to U.S. anti-trust authorities and the EU in the hopes of securing leniency from regulators. (UBS, Switzerland’s largest bank, took similar course of action regarding the Libor scandal.) At this point, paying exorbitant fines has essentially become the cost of playing the game for many of these TBTF financial institutions.

Geopolitical News Affecting Gold

Russia continues to feel the sting of economic sanctions from the West, as its economy descends into a recession. The government has been draining its foreign reserves in order to keep the fledgling ruble afloat, totaling some $13 billion. The government also made its largest monthly gold purchase in 15 years, adding 1.2 million ounces to the country’s reserves. This appears to be a sign that the Kremlin is doing everything it can to hedge against a worsening economic outlook.

As a result of its economic woes, Russia’s sovereign debt was downgraded this month by Moody’s from Baa1 to Baa2, the second lowest investment grade given by the benchmark service. Similarly, Standard & Poor’s lowered Russia’s credit rating to BBB- this past spring. The Russians are not helped by falling oil prices, as the gooey black stuff is still tumbling to 4-year lows. This, in turn, has not helped natural gas prices, either; the two energy sources are some of Russia’s principal exports, especially to Europe. Even without the sanctions against Moscow by the EU, if growth doesn’t pick up pace in Europe, Russia will continue to see its export revenues dry up.

Slowing economic expansion in China also placed some slack on global markets. Although this quarter’s GDP, released last night, came in slightly above expectations at 7.3%, this is still the lowest quarterly expansion of the economy in China since 2009. Just as it has overtaken the U.S. as the world’s largest economy, many analysts have slashed their projections for China’s future growth, with some experts citing figures as low as 3.9% for next year (although any country in Europe would kill for “only” 4% growth).

Looking Ahead

Tomorrow sees the release of the Consumer Price Index, an indicator of inflationary conditions, while first-time jobless claims are scheduled to be announced on Thursday. The European Central Bank continues its asset purchases, and is said to be buying Italian sovereign debt on Tuesday.

 

by Everett Millman

Gainesville Coins Portfolio Tracker and Financial News