Weekend Update December 19

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: After an abrupt plunge in equities last week began to look like a minor correction, the FOMC statement on Wednesday rescued the stock markets, sending the Dow Jones soaring over 700 points in two days as U.S. stocks fully recovered from last week’s $1 trillion sell-off.

GOVERNMENT & POLICY

Getting That Dovish Feeling

Don’t call it a “Santa Claus” rally. Please.

It was rather clear what happened to the markets midweek: after U.S. stocks upchucked over $1 trillion in value last week, the Fed provided investors and speculators with all they needed to hear: “patience.”

They might as well as summed it up as, “Not yet.” By promising patience in making the first increase to the key federal funds rate, the Fed put everyone back at ease about the potential risk of the free credit magic carpet being yanked from beneath them. Much was made about the supposed replacement of the “considerable time” language the FOMC had been using in its statements, but the committee surreptitiously slipped the phrase in, simply burying it a bit deeper in the announcement.

Nonetheless, the last time the Fed’s forward guidance on rate adjustments made a similar transition from “considerable time” to “patient” back in January of 2004, interest rates saw their first hike five months later. This has signaled to most observers that, if precedent is any indication, rates can be expected to increase sometime in Summer 2015.

Fed Chair Janet Yellen vowed that the central bank’s actions will be “data-dependent” rather than time-bound. She also indicated in her post-meeting press conference that the aforementioned precedent for policy normalization set by the Fed a decade ago would not necessarily be followed. In this last instance of rate adjustments, the central bank mapped out its scheduled quarter-point (25-basis-point) rate increases over several months; many traders exploited the predetermined nature of these gradual rate hikes, and Yellen implied that the committee would like to avoid any such speculative shenanigans this time around.

You see, the Federal Reserve and its governors are not averse to manipulating the markets–they simply insist upon being the ones to pull the levers. Without justifying Wall Street’s propensity to speculate and inhibit healthy price discovery in the markets, it is undeniable that the metered tenor of the Fed’s statement was intended to resuscitate an equities market finally beginning to wobble. They essentially reinflated the current bubble in stocks, at least for now.

Irrespective of the supposed necessity or merit of the Fed’s actions, it’s clear what happened; this week’s dramatic reversal of the securities fire sale was decidedly not–as some in the media have suggested–a serendipitous “Santa Claus rally” heading into the last weekend before Christmas. This was not some whimsical outpour of turtledovish sentiment in the name of holiday cheer; to characterize it as such is no less naive than our children’s wide-eyed belief that gleeful elves conjure up their toys year after year, free of charge.

So please, let’s be realistic and call a spade a spade. If anything, you can call it the “Yellen Claus rally.”

MARKETS

The Volatile and the Restless

The past two weeks saw renewed turbulence in U.S. stock markets, continuing a trend that began in October. The major indices were each in the red on Monday, as the S&P 500 fell below 2,000 and the Dow Jones approached 17,000 just weeks after being a hair below 18,000. Treasuries rose in response to the flight from stocks, as the yield on the 10-year T-note closed at just 2.07% on Tuesday, its lowest yield since May 2013. Tuesday also saw major airlines Southwest and Delta drop by about 5% on a security glitch that interfered with passengers’ boarding arrangements. Tech titan Microsoft shed 1.8% as the Dow lost another 110 points and the Nasdaq fell by 1.2%.

The pendulum swung back swiftly in late trading Wednesday following the FOMC meeting. The Fed’s forecast of “patience” in waiting to raise interest rates propelled the markets to their best showing in 2014: all U.S. indices rose by at least 1.5%, with the Dow climbing almost 300 points and the S&P logging its largest single-day percentage gain of the year. Even crude oil was up nearly 3% before quickly falling back to unchanged. Momentum continued to build as jobless claims came in at a six-week low, consumer prices fell with cheaper gasoline, and home builder confidence hovered near a nine-year high.

Thursday picked up right where Wednesday afternoon left off, as stocks again soared. All three benchmark indices posted gains well above 2%, and the Dow Jones index posted its biggest one-day percentage gain (2.4%) in over three years. In total, the index rose by more than 700 points in the matter of two days, its best nominal rally in six years. It also lifted the Dow to a 7% gain year-to-date.

Precious metals had a tough time gaining ground amid the massive transfer of investment funds from stocks to bonds and then back again, but the fundamentals for gold appear to be relatively strong. Not only has the yellow metal repeatedly bounced when it nears its support level around $1,186.40, we are also seeing an increase in long positions on COMEX gold at the same time that China is expected to take the reins from India and drive strong seasonal demand for gold during the Lunar New Year, which falls on February 19 next year.

A strong dollar held back the precious metals’ moderate recovery throughout the week. This came after a consolidation on Monday that saw gold and silver erase the previous week’s advances, and brought platinum below the $1,200 threshold. This places the gold price in just about perfect parity with the platinum price, offering some speculative opportunities for traders who expect the two metals to eventually move closer to their historical ratio. Even Forbes recently called the short-term outlook for gold “bullish.” After easing back above 2.20%, 10-year bond yields shed two basis points on Friday to 2.18%.

While gold mostly traded sideways and silver crossed back onto the positive side of $16 per ounce, crude oil prices again made an attempt at a bona fide reversal on Friday. Both leading global benchmarks were up sharply in afternoon trading, with the Brent crude up almost 4% and West Texas Intermediate up about 4.5%. Meantime, stocks calmed down and rose modestly during Friday’s session.

GEOPOLITICS & WORLD EVENTS

Putin Plays an Unconvincing Papa Bear

Of all the emerging markets, Russia has undoubtedly been hit the hardest by the twofold risks of plummeting energy prices and a global economic slowdown. While other export-driven economies are experiencing similar squeezes, Moscow has the added burden of ongoing Western sanctions against the country. This tripartite pressure on the stability of the Russian economy and political system has already knocked three legs out from that table, leaving only one, wobbly column for the whole apparatus to balance on: Vladimir Putin.

The Russian president–or whatever title he most recently decided to assume–gave an impassioned, and at times bizarre, end-of-the-year speech this week. Although he acknowledged that the Russian Central Bank took the emergency measure of raising the country’s key interest rate from 10.5% to a whopping 17%, the majority of the speech was astoundingly bullish.

Putin vowed that the economy could be “fixed” in about two years, blaming Russia’s woes almost entirely on the hindrance caused by malicious Western sanctions. Short on convincing evidence and–apparently–long on poetic metaphor, Putin accused the West of trying to cut off the claws and remove the fangs of the Russian bear, and asserted that they would not succeed.

Putin can’t do a great deal to “fix” Russia’s problems, so he must amplify and maximize his strongest remaining tool, blind jingoism. Forget that the “ruble is rubble” after falling 35% thus far this quarter, briefly touching an all-time low of 80 to the dollar; lie to yourself about Russian citizens flocking to buy automobiles, furniture, and other durable goods to desperately get their money out of rubles and into something tangible; ignore that the only stock market in the world as fragile as Russia’s is in Greece. Only worry that your country appears confident in its purely ethereal might.

Oddly enough, this tactic is not so different from the kinds that central planners (under various banners) in the U.S. have employed of late. The markets no longer respond to fundamentals, they merely react to sentiment gauges and biased perceptions of economic conditions, and even march to the beat of the semantics of Federal Reserve Open Market Committee statements. In some ways, we must wonder if Putin is simply noting what forms of misdirection work in America and Europe, and adapting the same strategies to his own circumstances. Then again, Russia has a distinguished history of political posturing.

As signs of the economic slowdown, particularly a decline in manufacturing growth in China, become more and more clear, and as oil continues to add to its 45% drop over the last 6 months, Russia must come to grips with its grim outlook, lest a confluence of economic sanctions and unfavorable market conditions threaten to topple the current regime. In an highly integrated, interdependent global economy, it seems Russia will suffer in exile so long as other world powers are insulated from a contagion.

News & Notes

President Obama and Raul Castro heed Pope Francis’ calls for normalization of relations, paving the way toward ending a 50-year embargo on trade and travel between the U.S. and Cuba.

An Australian hostage situation tragically leaves three, including the gunman, dead.

Dubai’s stock market rose 13% on Thursday after plunging by 33% over the month previous.

The first of three Greek votes in the Hellenic Parliament to elect a new president failed, following a 20% drop in the Athens Stock Exchange index last week.

A LOOK AHEAD: 4Q GDP numbers will be released on Tuesday, along with a slew of other important economic indicators: new home sales, personal incomes and outlays, consumer sentiment, and durable goods orders are all on the docket Tuesday, December 23, providing investors with data on both tangible productivity within the real economy as well as more ethereal gauges for the consumer spending outlook.

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.