Chinese regulators, fearful of the fragile and highly-leveraged state of the economy, dropped a bomb on its bond and stock markets when they suddenly announced that junk bonds would no longer be allowed as collateral for short-term cash loans.
These loans, known as repurchase agreements, involve the sale of bonds to a buyer, with the agreement that they will be repurchased at a later date at a higher price (which reflects the interest on the loan.)
European stocks were also drug down on the news, and Wall St. opened sharply lower. The dollar is down 1/2% in New York, while the yen is seeing Asian safe haven demand. That safe haven demand is extending to precious metals, which are seeing big gains. At 10am, spot gold is up $21to break over the $1,225/oz mark. Silver is up over 3% to $16.90, platinum has gained 1.5% to $1,247, and palladium has broken through the $800 barrier to $806/oz.
Yesterday in the Markets
Gold showed unexpected strength on Monday, in the face of crude oil prices plummeting 4.3%. This is usually a bearish indicator for precious metals. Those crude prices, hitting a 5-year low, hammered energy stocks. The S&P Energy Index hit a 17-month low. The CEO of Kuwait’s state-owned oil company said Monday that it was likely that oil would remain near $65 a barrel for the next six to seven months. That’s right where his words moved the market on Monday, with the 5pm New York price on WTI futures at $62.98/bbl, and Brent crude at $66.09/bbl.
The S&P 500 saw its largest one-day drop since October 22, while the Dow lost 106 points and the Nasdaq lost 40 points. The DXY dollar index went negative for the day by 10am, recovered from its dive in afternoon trading, but still closed slightly down.
The low oil prices helped China post a record trade surplus in November, and is helping ease at least a little of the pain in India’s trade deficit.
Monday’s closing numbers:
Economic News Affecting Gold
Global stocks are down for a second day, while investors move to gold and other safe havens. Treasuries are higher again this morning, with the yield on the 10-year note down 4 basis points in early trading to 2.21%. Yields dropped 5 basis points on Monday.
Stocks in Shanghai saw their largest one-day drop since 2007 on the announcement of tighter loan collateral rules, while the renminbi/yuan saw the largest two-day drop in history. The Shanghai stock market has been literally flooded with foreign “hot money” in the last week, as foreigners have been allowed to invest in Chinese stocks. Today was a reminder how overly-leveraged the Chinese economy actually is.
Oil is fluctuating in New York, down slightly after being up 1/2% shortly after the open.
China’s largest gold mining company continues its quest for swallowing foreign mines with an agreement with Canada’s Pretium Resources. Zijin Mining Group has purchased 9.9% of Pretium, which is developing what is called an “ultra high grade” gold mine in British Columbia. Zijin will get a seat on the board of directors at Pretium in addition to the stock.
Geopolitical News Affecting Gold
The U.S. Senate is set to release a report on CIA “enhanced interrogation” techniques and the use of extra-judicial rendition today, over the objections of the CIA and former President George W. Bush. U.S embassies have been put on heightened alert in anticipation of violence when the details of torture and “black sites” are released.
China releases consumer prices and producer prices reports tomorrow. These will be sharply scrutinized after today’s events. In the U.S., mortgage applications, petroleum reserves, and the monthly budget deficit report are due.