With U.S. markets closed today in observation of Martin Luther King Jr. Day, the big news this morning comes from the Far East. The Shanghai stock index was nearly 8% in the red on news that the country’s regulatory authorities decided to suspend the opening of new margin accounts for the next three months because heavy margin trading has ostensibly inflated an equities bubble in the People’s Republic. With economic stimulus likely on the horizon, regulators are hoping to keep the easy money from flowing right back into an overheated stock market, where enormous amounts of borrowed money have been invested. Meantime, precious metals remained steady this morning, holding on to last week’s gains. Don’t let volatile price movements catch you off-guard today, as with the COMEX (and all U.S. markets) closed today, the markets could move pretty easily with thin volumes.
Yesterday in the Markets
Friday saw the continued shock wave of the Swiss decision to unpeg the franc from the euro. Treasuries eased up, with 10-year yields bouncing back above 1.80% after dropping as low as 1.73%. Wall Street rebounded from five straight days in the red, while the forex markets somewhat aimlessly searched for solid footing. Gold rose to a 4-month high, crossing above the spot platinum price, while silver surged some 80 cents to close above $17.75/oz.
Factors Affecting Gold Today
Hong Kong’s Hang Seng index was also not immune to the decision in China, slumping 1.5% on the pullback in mainland stocks. Many have commented on the inflated nature of the Chinese markets, but the government stepping in to stop brokerage firms from pumping the bubble even further is a pretty stark sign that the region’s markets will undergo a correction. The fall for the Shanghai index was the worst in almost 7 years, as the country’s financial markets must deal with the tens of billions of yuan of margin trades that have piled up. 12 different firms, including 3 of China’s largest, have been punished in connection with the excessive trades on margin.
Elsewhere in Asia, Japan’s 10-year bond is seeing its lowest all-time yield, below 0.2%. This theme has been repeated all across the world’s developed economies, as investors search for safety on the new year’s deflation jitters. There is some momentum of “reshoring” in Japanese manufacturing, as the weakness of the yen is now making it more attractive for factories and industrial production to return to Japan rather than remain in overseas factories.
Many were surprised to find that Germany actually repatriated some 120 tonnes of gold last year, 35 tonnes coming from Paris and 85 tonnes coming from New York. Following the return of over 120 tonnes of Dutch gold to the Netherlands last year, this will perhaps quiet the concerns that there was no gold for the U.S. to give back to the Germans, although the reality that central banks have been consistently adding gold to their reserves must make one question how much confidence these banks have in their country’s fiat currency.
Nonetheless, the big news in Europe remains what form the impending monetary stimulus from the ECB will take. French President Hollande publicly stated that the ECB will decide on buying sovereign debt on Thursday when it holds its next policy meeting. While this has been the expectation for weeks, Hollande’s statement would all but confirm that the €550 billion package of peripheral sovereign debt purchases ECB President Mario Draghi is seeking will indeed be implemented. The pending move is intended to revitalize the euro area economy, as well as stave off the currency’s rapid devaluation. The euro currently sits at an 11-year low.
Tomorrow morning the National Association of Home Builders will release its housing market index for January. We can more volatility on thin volumes today with U.S. markets closed for the MLK holiday.