Japan Falls Into Recession Despite QE: Morning Market Update Nov 17

November 17th, 2014 by

Third quarter GDP in Japan caught traders by surprise, dropping at a -1.6% annualized rate to put the nation into recession. Analysts had expected a 2.2% increase after the second quarter’s huge -7.3% reading.

The Nikkei stock index in Tokyo dropped over 500 points, nearly 3%. Crude oil prices were lower, anticipating reduced demand from the world’s third-largest economy.

Also in Asia, the economic slowdown in China (which recently took the crown of “world’s largest economy” away from the United States) has caused the largest surge in bad loans since 2005. Even though the Shanghai Stock Exchange saw a flood of Western money on the first day foreigners were allowed to buy mainland stocks, both the Shanghai and Hong Kong exchanges finished in the red.

The dollar recovered to the upside in afternoon trading in Europe, both on the news about Japan, and the Bank of England’s warning over falling inflation in the UK, and worries of deflation caused by the slowdown in the EU economy. The pound dropped again for the fourth day against the dollar.

Gold and silver are trending slightly under Friday’s close, holding on to most of Friday’s big gains. Platinum is slightly lower. Palladium, which was the only precious metal to close lower on Friday, is up slightly.

Yesterday in the Markets

Friday was a volatile day on Wall St., while precious metals and crude oil rallied. The dollar dropped from near seven-year highs into negative territory around noon, adding fuel to a sudden gold rally. At one point, gold was up over $31 an ounce, before closing up $26.90. Silver closed up over 4%, platinum gained $16.00, while palladium lost $3.00 an ounce.

Crude oil was up over 2%, while Treasuries also gained. The yield on the 10-yr T-note was down 2 basis points to 2.32%. Stocks were mixed with the S&P 500 gaining one-half point, the Nasdaq up 8.40 points, and the Dow off 0.10%, losing 18.05 points.

Friday’s closing numbers:

Dow:17,634.74-18.05-0.10%
S&P 500:2,039.86+0.53+0.03%
Nasdaq:4,688.54+8.40+0.18%
DXY:87.5440-0.130 -0.15%
Gold:$1,188.50+$26.90 +2.29%
Silver:$16.33+$0.66 +4.21%
Platinum:$1,206.00+16.00 +1.34%
Palladium:$762.00-$3.00 -0.39%

Economic News Affecting Gold

gold-and-dollarTalk is growing in the gold market over the gold forward (GOFO) rates falling deeper into negative territory. The gold forward rate tracks the interest you will pay to borrow dollars by using your gold as collateral. When the GOFO turns negative, it signifies a shortage of physical gold. Instead of people paying interest to borrow dollars, they are paying interest to borrow gold (with the expectation that they can buy more gold to pay back the loan before the due date.)

Right now, the GOFO rate is negative out to six months, which is almost unheard of. In fact, GOFO rates have not been this low in 14 years, well before the financial crisis and the birth of quantitative easing. This could be a sign that traders expect a short-term physical gold shortage for the next three months.

One factor that may be causing negative GOFO rates is the fact that Asia (China in particular) went on a buying frenzy last year when prices dropped, and have continued to buy gold at a historically high rate. This gold is pulled from COMEX reserves and other Western sources, and never returns to market. Therefore, it isn’t available to lease out again. In fact, the gold lease rate had gone from 8 basis points to 34 basis points in just two weeks.

Another factor in the tightness in the physical gold market is that large amounts of gold is in the process of being re-cast for sale in Asia. The gold refineries in Switzerland are reporting a two to three week delay in filling orders for 1 kilo gold bars (the size preferred in Asia.) Speculation is that the 400 oz Good Delivery bars flowing out of Western gold ETFs and out of the COMEX is being sent to Switzerland and recast into kilobars.

The World Gold Council reports that jewelry demand in India is up by 60% in the third quarter from last year, despite the high import taxes and draconian import restrictions. India is also reported to have imported 1,243 metric tonnes of silver in October, since the importation of gold is restricted.

Geopolitical News Affecting Gold

terroristThe terrorist army of ISIS released a video showing the beheading of an American aid worker captured last year, which earned them an increase in the intensity of airstrikes against their group in Syria and Iraq.  Their recent claim to be minting their own coins of gold, silver, and copper is considered just a publicity ploy, as they have no facilities to mint coins. An editorial at CoinWeek gives the reasons why it would be impossible for the terrorists to actually mint coins.

The EU has agreed to purely symbolic sanctions in response to Russia moving armored vehicles and troops into Eastern Ukraine. With the economies of Western Europe hurting as much as they are, the political will to enact more meaningful sanctions just aren’t there. Putin may sense this, as he declared on German TV that Russia will not let the Ukrainian government defeat the pro-Russian rebels.

Looking Ahead

looking-aheadTomorrow, we get the both Consumer Price Index and Producer Price Index from the UK, which will garner special attention due to the fall in the pound sterling.

The U.S. releases the final Producer Price Index for October, and the National Association of Home Builders’ housing market outlook.

The ZEW economic outlook survey in Germany will be examined for sentiment regarding the near future of Western Europe’s largest economy.

 

 

 

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