Brent crude has rebounded back above $70 after hitting a five-year low of $68 earlier in the week. Both crude oil benchmarks are up about 1% this morning, Crude futures have also risen modestly today after both WTI crude and Brent crude for January delivery dropped about $2 yesterday.
Recovering oil prices were good for energy stocks, which boosted the S&P 500 to yet another record close on Tuesday. The S&P is leading the charge for the U.S. stock market generally, as all three indices were in the green after Wednesday’s open. Gold was steady overnight, although silver saw some volatility ahead of the opening bell in U.S. markets after closing flat on Tuesday. The precious metals are tracking with oil prices this morning, as silver and palladium were slightly above unchanged while both gold and platinum quickly rose by about $12 each in early trading.
Yesterday in the Markets
Tuesday’s closing numbers:
Economic News Affecting Gold
The precious metals predictably consolidated yesterday after making dramatic moves on Monday. This coincided with the dollar hitting a five-year high, closing above 88.6 on the DXY spot index. The greenback was up another 30 basis points early on Wednesday morning, threatening to vault past the 89.0 mark on the index.
Yesterday saw the release of the ADP Employment Report, an indication of changes in private sector payrolls over the last month. Employers added 208,000 jobs in November, which was below economists’ expectations but still gave a positive outlook for the labor market: this marks the 57th consecutive month of positive job growth in the private sector. Much of the new hires were made by small businesses, accounting for nearly half (101,000) of the newly-created jobs. At the same time, however, data from the U.S. Labor Department showed that wages are growing at a slower rate. Workers’ compensation per hour rose by 1.3% last quarter, well below estimates of a 2.3% increase. When adjusted for inflation, 3Q wage growth was just a paltry 0.2%. For U.S. firms, this means that productivity is up–but for middle-income Americans, it means they are only seeing their wages track with inflation.
Stocks have been recovering over the last two trading sessions thanks, in part, to upbeat auto sales in November. The ISM Non-Manufacturing PMI also rose from 57.1 in October to 59.3 in November, sharply above expectations. This is a fairly good indicator that the U.S. economy is expanding despite low inflation. Lower prices meant that consumer spending also rose in November after a steady showing in October; the increased spending was seen across all tax brackets, although the most growth occurred at the high end of the income spectrum.
Many believe this sets the stage for a better-than-expected holiday season for retailers, which would provide strong positive momentum heading into the first quarter of 2015. Data from the St. Louis Federal Reserve, however, suggests that Americans may not necessarily spend more on consumer goods during periods of very low energy prices. The situation remains fluid, but this has undoubtedly been the year of mixed economic signals, so at this point, anything goes.
Fittingly, Dallas Fed President Richard Fisher emphasized that time is up on the “considerable time” forward guidance from the Federal Reserve. Speaking in Dallas yesterday, the soon-to-retire central banker warned that bond yields would fall and corporate debt would flood the market before rates rise if the Fed waits too long. Fisher is one of the more hawkish Fed presidents, so the tenor and substance of his remarks should come as no surprise. It will be interesting to see how the Federal Reserve Open Market Committee responds to his very reasonable concerns when the group meets later this month.
Geopolitical News Affecting Gold
Europe continues to struggle with disinflationary pressures as it searches for an effective strategy to combat chronically low prices. Many economists and policymakers within the Eurozone currency union have voiced their concerns about the viability of the central bank’s proposed stimulus policies, questioning whether these measures will produce the needed escape velocity from the current recession.
Others, however, point out that the European Central Bank may not have to pull the trigger on any drastic moves, but can merely dangle the prospect of QE as a carrot for investors. Already, Eurostocks have pushed within 0.1% of their six-year highs, as the Stoxx Europe 600 Index, a benchmark measure of European equity, gained 0.6% yesterday to cap off a 13% rally from its October low. ECB President Mario Draghi seems to be hoping that increased activity in the markets will come to pass on its own before expanding the bank’s stimulus intervention. Falling energy prices have had a divergent effect on different markets: they are a bane for oil-exporting nations and deflationary zones like Europe, which would desperately like to stoke inflation, while they have been a boon for emerging markets like India. Cheaper oil means cheaper imports, allowing countries like India to trim their trade deficits.
There was potentially scary news from Ukraine this week, as it was reported that an accident of some sort occurred at a nuclear power plant in Zaporizhzhya. The power plant, Europe’s largest, was apparently tripped up by a short-circuit rather than an all-out disaster, as many feared when the news first broke. The Zaporizhzhya plant houses a 1,000-megawatt nuclear reactor, so protocol required the Ukrainian government to alert the International Atomic Energy Agency of any accident that could possibly impact the safety or environment of surrounding countries. (Understandably, this policy was adopted in 1986 following the horrific nuclear accident in Chernobyl, Ukraine.) The need for nuclear power in Ukraine is heightened at the moment, as 66 coal mines in the country have halted production due to the ongoing conflict with pro-Russian separatists near the eastern border.
Speaking of Russia, the country’s central bank has yet again scrapped a scheduled bond auction due to “unfavorable market conditions.” The bank spent another $700 million in an attempt to curb the ruble’s interminable slide, the first such intervention by the central bank since it allowed the Russian currency to freely float in mid-November. This expenditure is in addition to some $30 billion that the bank shed from its reserves in order to counteract the ruble’s decline. The results have not been pretty: despite the unloading of the bank’s currency reserves and the consistent addition of gold reserves, the ruble has continued to fall, hitting an all-time low against the dollar at an exchange rate of over 54:1.
In China, it seems that Beijing has finally gotten on top of the “Occupy” demonstrations taking place in Hong Kong. A large group of pan-democratic protesters, including the three student leaders of the movement, have “surrendered” to government authorities for their part in the demonstrations. The protests began with clashes between students and riot police in late September, and have meandered along with scant coverage by the international media since. While the “surrender” appears to be a symbolic move, as none of the surrendering parties will be charged with crimes for now, it nonetheless signals that China has broken many participants’ resolve and doesn’t expect any future escalation from the few protesters who remain.
The Fed will release its Beige Book at 2 pm today, providing firsthand accounts from regional banks about recent economic activity. The key event on the docket tomorrow is the ECB meeting; no decision on additional stimulus would be good for gold and euro, while the opposite would benefit European stocks. Another item to keep an eye on is the Non-Farm payrolls report on Friday.