Precious metals are slightly lower across the board this morning, as the market reacts to the yield on the 10-year Treasury note rising above 3.1%. Higher Treasury yields are supporting the dollar, which is pushing the 93.5 level, and weighing on the euro and British pound.
Stocks opened slightly lower this morning, with the earnings miss by computer networking giant Cisco Systems being pointed out as a major contributor. Small caps are bucking the trend in stocks, as the Russell 2000 is building on its all-time high of 1,616.37 hit yesterday.
Concerns over the possibility that Iran would be blocked from exporting the majority of its crude (China will still be buying) led Brent oil break the $80 mark in London this morning. The $80.18 a barrel price is the highest that the international benchmark has sold for since 2014, before the US shale-induced global oil glut.
European companies are pulling out of Iran ahead of the resumption of US sanctions against the Islamic Republic. Despite EU governments supporting the 2015 deal with Iran that lifted sanctions in return for Iran abandoning its nuclear program, European companies would rather lose Iran’s business than face the wrath of the Trump administration, which has promised to enact sanctions against any company dealing with Iran.
An even larger factor in EU uneasiness is the pledges of the anti-establishment coalition in Italy that is taking power. The anti-immigrant League has joined forces with the leftist-populist 5-Star Movement to form a new government. 5-Star garnered the most votes in the recent election, while League came in second.
The coalition has promised to slash taxes while at the same time expanding welfare, and reversing pension reforms. This will explode the government deficit, and break EU rules on fiscal responsibility. This will result in marked resistance by other EU member nations if Italy ends up needing a bail-out later on.
The yield spread between 2-year and 10-year Treasuries stands at 50.7 basis points this morning. This is marginally higher than the spread recently, which has hovered in the mid-40s. There is growing concern that any further rate hikes by the Federal Reserve will push the yields on short-term Treasury bills higher than the yields on long term notes. This is known as an inverted yield curve, and is widely seen as a leading indicator of a recession.
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