Crude prices and slowing growth in the Chinese industrial sector are weighing on stocks worldwide this morning.
Factory production for November in China grew at a 7.2% rate, something every nation in the West would kill for, but disappointing news to the global export leader. Experts were expecting a 7.5% increase.
Gold dropped about $5/oz in Asia overnight, but held mostly steady in Europe. Silver also saw a slight drop in Asia, but more than made up for it in London trading. The platinum group metals are following the previous day’s movements, perhaps assisted by automated trading.
Crude oil continues to fall, having already posted a 45% drop since the high of $107 a barrel only six months ago. The anxiety is progressing past oil-producing nations, as the developed world is now worried about deflationary pressures. Producer prices in the U.S. fell 0.2% in November, in large part because of the collapse in oil prices. The annual producer price inflation rate was reported as 1.4%. Gold saw some profit-taking on the news, and Wall St. opened lower.
Yesterday in the Markets
Wall St. and the dollar both broke three-day losing streaks on Thursday, even though they all weakened into the close. West Texas Intermediate crude closed below $60 for the first time since July 2009, the height of the global financial meltdown.
Factors Affecting Gold
CreditSights Inc estimates that the meltdown in crude will cause defaults on high-yield energy sector corporate debt to double to 8% next year. Quantitative Easing by the Fed was cited as a major factor in the fracking boom, allowing exploration and drilling to be financed with artificially low interest rates. The report expects the squeeze to really hit in March to April, when banks reassess the creditworthiness of these shale oil companies in light of sub-$60 oil.
This is causing investors to flee junk bond funds, with the Wall St Journal reporting that almost $1.9 billion has exited junk bond funds this week alone. This is more than double the previous week, which saw $859 million in outflows. This reversal from a “chasing yield” mindset is increasing demand for safe haven assets, such as Treasuries and gold.
Junk bond frenzy isn’t the only high-risk activity from the financial meltdown that is drawing attention. The budget bill passed by the House of Representatives last night negates the provision in the Dodd-Frank law that forbids Wall St banks from investing depositor’s funds in derivatives. This puts the American taxpayer on the hook again to bail out the risky actions of the “too big to jail” banks.