The potential for a full-scale civil war in the Gulf state of Yemen is stoking anxieties this morning for both its geopolitical implications and its possible adverse impact on the oil market. Both crude oil benchmarks were rising fast this morning, advancing over 2% each, while the precious metals were also moving higher–gold surged back above $1,205/oz–with the mounting tensions that the Yemeni situation is generating. Not only is bombing in the country threatening to disrupt crude production, but the conflict could also embroil the major Sunni (Saudi Arabia) and Shiite (Iran) countries in the region in a proxy war.
Yesterday in the Markets
All of the stock indices were down sharply yesterday, with the Dow Jones Industrial Average tanking some 293 points. The S&P and Nasdaq were down 1.5% and 2.25%, respectively. 10-year Treasury yields pulled back to 1.94%, while the metals rose modestly across the board.
Factors Affecting Gold Today
Despite jobless claims coming in at a 5-week low, the violence in Yemen is overshadowing the rest of the market news. The potential output curb from the bombing has pushed WTI crude back above $50/bbl, while Brent sat near $57.50/bbl. Although Yemen is a relatively small oil producer (39th-largest in the world), the implications run much deeper than that. Equity futures still pointed lower this morning, and the dreary sentiment was not limited to possible war in the Middle East. The headlines have also been dominated by the German Airbus that mysteriously crashed in the French Alps: revelations have emerged that the co-pilot of the flight deliberately locked the pilot out of the cockpit and crashed the plane, seemingly on purpose. Look for gold to continue to see safe haven demand in the near-term while the details of the fateful Germanwings flight continue to come to light, and the fighting in Yemen perhaps escalates.
Meantime, the Fed still faces a conundrum about not only when it will raise rates, but how it will do so. It’s been proven since the financial crisis that moving the federal funds rate has actually been a poor predictor of other rates on the market; because it’s been pushed to an extreme limit, it seems this policy tool has lost its usefulness for the Fed. Unless it intends to scramble for control of markets after raising rates, the Federal Reserve will have to figure out a more elegant plan for normalizing policy–confirming the fears about the possible complications of the Fed engaging in highly unconventional monetary policy in the first place.
Friday is a light day on the international front, with Italian retail sales numbers being the only data of note. In the U.S., however, corporate profits and consumer sentiment measures will be released, along with the all-important GDP numbers. Janet Yellen will be speaking at a San Francisco Fed conference at 3:45 pm EST.