Gold is unwinding some of yesterday’s huge safe haven bid on profit taking, after pro-Russian separatists using sophisticated surface to air missiles (apparently supplied by Russia) shot down a Malaysian Airlines Boeing 777 jetliner over Ukraine.
Silver, which had also seen a large jump in price, saw profit taking overnight as well. Platinum is moderately volatile this morning, and palladium saw a little pop in price at the COMEX open after softness in Europe. Palladium hit a 13-year high yesterday, of $893/oz.
The dollar is above 80.5 on the DXY dollar index this morning, after seeing a little pop on the New York open itself, The yen is slightly lower as safe haven demand eases, and the euro is also slightly weaker this morning on economic worries. This is providing some of the strength of the dollar today.
The yield on the 10-year T note fell 8.5 basis points yesterday to 2.453% on safe haven demand, and is up only slightly this morning, at 2.47%. WTI crude is $103/bbl this morning, and Brent crude is $108/bbl. Both developments are supportive of gold.
In international news, Israel commenced a ground invasion of the Gaza Strip late yesterday afternoon, U.S. -time. The operation aims to root out the rocket launching and fabrication facilities of the terrorist group Hamas, which has fired over 1,300 rockets at Israeli cities.
Recriminations are flying regarding the tragic loss of Malaysian Airlines flight MH17 over eastern Ukraine, with Russia and Ukraine accusing each other of shooting down the civilian airliner. European stock markets have been volatile, while attempting to break into positive territory. The IMF isn’t helping matters, saying today that investors are “too upbeat” on European stocks, considering the facts of the economy.
Wall St. opened higher, after the largest one-day selloff in three months for the S&P 500.
The Nikkei saw its biggest one-day drop in three weeks, as the index sank to a one-week low over the downing of Flight MH17. Hong Kong shares were also down, for the same reason.
Russian stocks on the dollar-traded IRTS are down 8% since more sanctions were announced against Russia, the day before the airliner was shot down.
With all the loss of life and tragedy in the news, reports that China is facing its second large corporate bond default is receiving scant attention. Huatong Road & Bridge Group has announced that it will default on both the interest and principal payments on bonds due next week. This is the first time a large Chinese corporation has missed both the interest and principal payments on their bonds.
The Peoples Bank of China, the nation’s central bank, is unlikely to ride to the rescue and bail out Huatong. China has the highest levels of corporate debt in the world, and the PBoC feels that people are ignoring risk, expecting the government to make them whole if their investments fail. Analysts warn that there are many more corporate defaults waiting in the wings, and this crisis is far from over.
Similarly in the U.S., St. Louis Fed president James Bullard worries about a bond bubble here at home. Echoing warnings by fellow Fed President Richard Fisher, Bullard warned that inflation is already rising, which makes real interest rates even more negative. (Real interest rates are the interest rate minus inflation.) Bullard said that the Fed needs to hike its overnight lending rate sooner, rather than later. A Reuters poll predicts that the first rate hike by the Fed will occur between April and June next year.
Returning to the subject of bonds, investors are up in arms over companies issuing junk bonds, then changing the terms AFTER people have purchased them. This is greatly increasing the tail risk on the junk bond market, which has risen to $110 billion, just in Europe alone. These changes by the issuers are removing safeguards that investors were counting on when purchasing the debt.