Morning Market Update May 29: Is End Near for Fed QE?

May 29th, 2013 by

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Short covering, continued physical demand in Asia, and a lower dollar on fears that the Fed may take away the quantitative easing “punchbowl” of $85 billion a month of new money into the market are supporting gold today, as volatility is the watchword in commodities and equities.

Gold saw a small spike in the middle of Euro trading this morning, as an unexpected climb in German unemployment and the OECD forecasting a worse Eurozone contraction this year than last weighed on sentiment.

U.S. stocks opened sharply lower today on fears that good economic news in the housing market will increase the chance that the Fed will taper or stop its “money printing.” Analysts report a large dollar sell order overnight blew out several stops,  causing the greenback to plunge against all major currencies, including the Australian and New Zealand dollar.

Treasury yields surged to 2.17% on the 10-year bill, the highest in over a year. Analysts note that this is the first time we have seen T-bills react to the possible end of QE in the U.S., adding to stock market jitters.  The Mortgage Bankers Association reports this morning that mortgage applications dropped by 9%, in the face of the highest interest rates in a year, as home prices continue to spike.

In Asia, fears over the end of American easy monetary policy and the surge in government bonds rates led to a selloff of high yield stocks in Hong Kong, causing the first losing day in three sessions. In China, the domestic auto sector helped the mainland index post a marginal gain. The Nikkei index in Japan was slightly higher today, as the yen of all things saw a bit of safe haven demand.

Some analysts express confusion at gold’s resilience in the face of rising Treasury yields and the specter of the Fed turning off the money spigot. However, demand in Asia is still strong enough to absorb the outflows from gold ETFs in the West, and supply problems are still being reported for physical gold at the retail level in China.

On the subject of recent volatility, other analysts note that the short term struggle between supply and demand in the East are complicating the market as futures contracts cycle to July and options expire.

Silver may be poised for a rebound to $25/oz, according to Commerzbank. They notice a positive divergence between the daily price and the Relative Strength Index, and believe that we have seen a bottom formed.

by David Peterson