ECB Speeds Up QE: Morning Market Update May 19

May 19th, 2015 by

Euros raining from the sky!

The European Central Bank lit a fire under EU stocks and bonds in a surprise announcement today, announcing that it would accelerate its bond purchases through May and June (aka print more money, faster.)

This hit the euro common currency hard for the biggest daily loss in two months, sending it below 1.12 against the dollar. This gave the dollar a big boost overnight.

The strong dollar is wiping out the minor organic gains gold was seeing (at least when priced in USD,) sending it down $10 an ounce. After a very good last two weeks, this central bank-fueled correction doesn’t really change the short-term bullish outlook for gold. Gold is still rising this morning in euros, pounds sterling, and rupees.

Yesterday in the Markets

balance of gold and dollarThe dollar rebounded off a four-month low yesterday, gaining over 1% against a basket of currencies and rising above 94 on the DXY index. The dollar rally wasn’t enough to counteract the strength in gold Monday, which closed above $1,225 and ounce, up $2.30 (-$12.50 from the strength of the dollar, +$14.80 from normal trading.) Spot silver was up over 1% to close at $17.68, while platinum rose $9 an ounce to hit a six-week high of $1,175.

Bonds took a beating yesterday, with the 10-year Treasury note up 9 basis points to yield 2.23%. The Greek bailout crisis sent peripheral EU bonds lower, with the yields for Italian, Spanish, and Portuguese bonds climbing between 10 and 12 basis points. The 10-year Greek bond saw its yield rise 55 basis points, while demand for the two-year Greek bond collapsed, with its yield spiking over 300 basis points (3%) on the day.

greek-flag-no-bailoutThe situation wasn’t helped when the “most left of the leftists” faction of the ruling Syriza party in Greece held public demonstrations in favor of the nation defaulting on its sovereign debt. It is unknown if this was something approved by Prime Minister Tsipras to use as a bargaining chip, or if it is a true fracture in his support base. Either way, it isn’t making life any easier for Angela Merkel, as the German Chancellor is faced by a growing revolt within her own party’s ranks against more German taxpayer money going down the Greek money pit.

Stocks closed up after early volatility, with Apple pulling all three major indices higher. Rising bond yields helped banking stocks, and together they nudged the Dow and the S&P 500 to new highs.

Oil was marginally lower Monday, due to the renewed strength in the dollar. Another boost in Saudi crude production is offsetting worries over an interruption of supplies from Iraq caused by the civil war there between the government and the ISIS terrorists.

Factors Affecting Gold Today

European_central_bank_euro_frankfurt_germanyThe big news today is that that European Central Bank is going to “front load” bond purchases for two months, starting immediately. Stocks and bonds globally celebrated the news. The resulting plunge in the euro over this accelerated devaluing is giving the U.S. dollar a huge boost, resulting in pressure on all dollar-denominated currencies.

The greenback got another, smaller boost when U.S. housing starts were reported higher than expected, and building permits hit a seven-year high. Just yesterday, new home sales were reported softer than expected, with very low traffic in home centers pointing to softer sales in the near future. This causes one to wonder where the buyers for all these new homes announced today will come from.

Also in Europe, the ZEW economic sentiment survey in Germany dropped more than forecast, from 53.3 to 41.9. Experts were expecting a reading of 49.0. The Financial Times reports this morning that the UK is in deflation, raising the question whether the Bank of England will resume money printing.

Retail sales in the U.S. last week fell, compared to the same week last year, rising only 1.8%.

 

looking-aheadLooking Ahead

Tomorrow we get the minutes from the last FOMC meeting, which always gets the market’s attention.

We will also see Producer Prices in Germany, Japanese GDP, Bank of England policy committee minutes, U.S. mortgage applications, and U.S. petroleum stockpiles reports.

On the geopolitical front, keep an eye out not only for developments in the Greek situation, but the possibility of naval warfare between Saudi Arabia and Iran as the Iranian Navy escorts a cargo ship full of supplies and aid workers to a rebel-controlled port near the entrance to the Red Sea in Yemen. The Iranians have rebuffed Saudi demands to board the vessel before it is allowed past their blockade.

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