Both stocks and gold rebounded modestly this morning on the expectation that President Obama will announce around noon EST that the U.S. is easing its long-standing sanctions against Cuba. The administration is seeking to finally normalize relations with the Caribbean nation, lifting trade and travel embargoes to the island for the first time in over 50 years. As part of the process of melting the diplomatic permafrost, Cuba has released captive American citizen Alan Gross, who has been held there over the last five years.
This sudden and long-awaited policy shift has overshadowed the upcoming FOMC meeting this afternoon, where the Fed’s decision on how soon to raise benchmark interest rates has been highly anticipated. Precious metals were largely flat in late morning trading, holding until the policy bombshells mentioned above take their course in the afternoon.
Yesterday in the Markets
The stock markets were hammered again on Tuesday as investor funds continue to pour out of equities and into Treasuries ahead of Wednesday’s meeting of the Federal Reserve Open Market Committee (FOMC). The Dow Jones closed 110 points lower while the Nasdaq lost 1.2%. This pushed the Dow less comfortably above the 17,000 threshold just a handful of trading days removed from coming within a hair of 18,000. With the sizable drop, global stocks lost a staggering $1.8 trillion in value over the course of the last week.
U.S. indices were dragged down by Southwest Airlines and Delta Air Lines, which each slid about 5% on news of a security glitch in Delta’s mobile boarding system. Tech titan Microsoft also shed 1.8%. After rising from six-week lows earlier in the week, the S&P 500 has settled back below 1,990. Wall Street saw its third consecutive day in the red, aided by a further slide in oil prices. Brent crude lost about 2% to close below $60, while WTI hovered just above $55. The fresh declines in crude prices even came amid the dollar easing, as the greenback dropped about 0.63% on the DXY, dipping below 88.0 on the index.
The precious metals tracked with stocks, all posting losses that have eaten away at last week’s advances. Silver slipped back below $16 after seeming to establish support around $17.10 the week previous. The Platinum Group Metals have both plunged from recent highs, briefly pushing platinum below $1,200 while gold went on a bit of a roller coaster ride before backtracking to just below the $1,200 mark. The spread between gold and platinum has evaporated to virtually nil.
Factors Affecting Gold Today
With the FOMC meeting looming and money flooding into government bonds, securities are seeing a bump this morning on expectations that Fed policy will move in a more hawkish direction going forward. Gold was unchanged at noon in New York, idling ahead of the FOMC announcement at 2 pm. Many expect the Fed to remove the “considerable time” language from its forward guidance, signaling an impending rate hike. Between plummeting oil and commodity prices and the uncertainty over the FOMC meeting, gold has had a tough going, with U.S. Treasuries swallowing up much of safe haven demand. The 10-year note rose, as yields fell another 6 basis points to just 2.06%.
The major geopolitical factor continues to be the crumble of the Russian economy. The ruble has sunk some 15% over the past two days alone, prompting the Russian Central Bank to dramatically raise its key interest rate from 10.5% to 17%. This follows a 1% increase of the benchmark rate only a few days ago; it began the year at 5.5%. Moscow is desperately hoping the emergency measure will stave off any further devaluation of the currency and help the Russian government regain control of the markets.
In scenes of hyperinflation reminiscent of Weimar Germany and 1980s Argentina, Russian consumers queued through the night to buy durable goods such as large appliances and automobiles before the ruble could devalue further. Auto dealers report sales are up as much as 30% as Russian citizens clamor for tangible assets before more price hikes take effect.
To make matters worse, many Russian corporations can no longer fund their operations or afford to refinance, which may prompt the government to step in with bail-outs in order to prevent further private sector failures.
Things are so bad that Apple has halted its online sales in Russia because it can’t update item prices fast enough to keep up with the ruble’s swan song. After the Russian stock market lost 12% on Monday, Forex brokerage houses are shutting down international trade in RUB/USD. Russia is not helped by the possible sputtering of China’s economic growth, which is dragging down base metals and other raw exports that the Russian economy depends upon. This comes as the U.S. prepares fresh sanctions against the country.
Along with the slowdown in China, emerging markets (especially those with the most export-driven economies) are being hit hard by the situation in Russia. An index tracking 20 emerging market currencies fell to its lowest level in more than 10 years. The Turkish lira is at an all-time low, for example. While the U.S. is celebrating lower consumer prices on cheap gasoline, countries that rely heavily upon their exports can only watch in horror as global commodity prices fall further. For perspective, the emerging market meltdown that took place in 1998 was mitigated by the Fed cutting rates–which is now not an option under ZIRP.