Morning Market Update June 18: Whispers and Uncertainty

June 18th, 2013 by

Gold is down moderately as traders close positions and hunker down ahead of the Fed Open Market Committee meeting, which starts today. Speculation over what Mr. Bernanke will say Wednesday afternoon is much more active than the markets are, as stocks traded on very light volume around the globe. Everyone’s getting into a safe place where they can react to the FOMC’s decision.

The dollar was near a four-month low overnight, before popping briefly at the New York open on U.S. CPI data, but the boost was short-lived. The euro saw support overnight from better than expected German consumer confidence, while the yen weakened. The Indian rupee hit another all-time low versus the dollar, suppressing gold demand in the world’s largest importer of the yellow metal.

Oil is slightly weaker after hitting a four-month high yesterday on Syria worries.

In Asia, the Nikkei was lower on light volume. Hong Kong stocks were flat, and Chinese stocks nearly so, eking out a 0.1% rise. The Chinese government is stuck in a tough situation, economically, as the economy slows down, but housing prices continue to spiral upwards, fueling inflation.

Platinum group metals are lower on news that European auto sales hit their lowest level in 20 years.

In the U.S., consumer prices came in at +0.1% in May, against expectations of 0.2%. April had seen a large 0.4% drop. The low inflation is primarily due to the first drop in food prices in four years. Very low inflation gives the Fed more leeway to continue the current $85 billion a month in liquidity injections. Single family housing starts rose more than expected, which is good economic news in general as this will stimulate demand in related industries.

This week’s FOMC meeting is probably seeing the most market uncertainty than any other this year, as everyone tries to out-guess the Fed. Bernanke’s testimony before Congress, where he discussed the downsides to the current quantitative easing program, has led to a month of markets running around like startled chickens.

Some analysts believe the unofficial messages the Fed has been spreading over the last month was to temper the “irrational exuberance” in the stock market, and to get Wall St. used to the idea that the “free money” party has to end eventually. Others speculate that a majority of the Fed believe that the long-term inflation risks are getting too great to continue expanding money reserves in the banking sector.

Precious metals will probably feel some short-term pressure when U.S. quantitative easing ends, and interest rates rise slightly, but the trillions of dollars of cash injected by central banks worldwide will eventually find its way out of the banks and into the economy, sparking higher inflation rates and currency devaluation.

by David Peterson