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Thursday 14.30 BST. Gold is again under pressure, encouraging those equity bulls who consider the yellow metal’s slump an indicator of improving risk appetite. But trading is somewhat cautious a day before an important policy speech by Ben Bernanke, Federal Reserve chairman.
Wall Street’s S&P 500 has started the session with a gain of 0.8 per cent, boosted by news that Warren Buffett is investing $5bn in Bank of America, a move that has helped reduce concerns about the health of the US banking sector.
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The investment by Mr Buffett’s Berkshire Hathaway group has also lifted European bourses back into the black – the FTSE Eurofirst 300 is up 0.4 per cent – and has counteracted the negative impacts of a bigger than forecast weekly US initial jobless claims number and a fall in Apple shares following news of chief executive Steve Jobs’ resignation.
The FTSE All-World index is up 0.8 per cent, further supported by a 0.6 per cent gain in Asia, where strong earnings reports boosted Shanghai by 2.9 per cent.
The broader market is generally more stable than seen for much of August, with a notable contraction in indices tracking European corporate and sovereign credit spreads indicating a less fearful mood.
Currencies are displaying a mild form of “risk-on” action, with the dollar index down 0.1 per cent and the euro up 0.1 per cent to $1.4431. Commodities are firmer, with copper up 2.5 per cent to $4.10 a pound and Brent crude higher by 1.1 per cent to $111.32 a barrel.
Putting aside Mr Buffett’s statement of confidence in the US banking system – and by extension the world’s biggest economy – the other big feature of the session is gold, which is down another 2.1 per cent to trade at $1,715 an ounce.
On Tuesday, the bullion had reached a record price of $1,911 but finished lower on the session, a reversal that piqued the interest of technical analysts who suggested such action was a bearish sign.
Sure enough, additional selling has ensued and the precious metal has now shed nearly $200, or more than 10 per cent peak to trough, over the past couple of days.
The latest slide has doubtless been exacerbated by a roughly 27 per cent rise in margin requirements by the Chicago Mercantile Exchange, which came after Shanghai also raised margins on bullion futures – moves designed to reflect the chances of larger nominal price moves as the cost of gold soared. Margin hikes can force some traders to liquidate positions.
However, contained within gold’s fall is a possible conundrum for the wider market.
For some, the acceleration of the advance in bullion prices over the past week or so was being partly powered by hopes that Mr Bernanke would establish a road map for more quantitative easing when he makes his speech at Friday’s central bankers’ symposium in Jackson Hole, Wyoming.
Such largesse is considered bullish for precious metals because it is seen as debasing the dollar and leaving alternative “currencies” such as gold more attractive.
Other concerns that have powered gold over recent years, such as lingering eurozone fiscal woes, clearly remain, but if the metal’s current retreat is the result of a paring back of QE3 expectations then that may have implications for the stocks.
This is because many operators cannot shake off the view that this week’s mini-bounce in equities has the smell of a year ago, when talk of QE2 fostered a strong six-month bull run for the S&P 500.
Others will point to Wednesday’s better than expected US durable goods orders as a reason for the improved mood. But that’s a tough sell, argue the bears, given the report was an island in a sea of otherwise downbeat global data, such as a larger than expected fall in German business confidence and poor eurozone industrial orders data for June.
Perhaps gold’s current weakness does simply represent the start of a shift in investors’ psyche – where perceived havens (how can gold be a haven when it falls so precipitously?) are becoming less attractive as traders believe a global slowdown has been discounted by the market and “risk” assets offer good value.
Support for that theory may be stirring in an important sector: the usually erudite core sovereign bond complex that has rallied so forcefully of late as economic worries mounted.
Yields on US Treasuries were higher on Wednesday, with the 10-year note up 14 basis points to 2.29 per cent, moving sharply upward for the first time since it hit its 30-year low below 2 per cent in mid-August, and lifting above 2.20 per cent for the first time in a week. On Thursday, the yield is down 2 basis points at 2.27 per cent.
Or, conversely, the recent yield rise may also mean expectations of Fed bond buying are being pared back in this asset class too.
Perhaps all will be clear once the markets have digested Mr Bernanke’s comments on Friday.
Trading Post
Equity traders appear to have convinced themselves that some form of “QE3” is going to arrive on Friday, rallying in the absence of much economic news, writes Telis Demos in New York.
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But bond traders are offering a dissent. While the S&P 500 has tested but refused to cross below its low close for August at 1,120, so-called “break-even” rates are failing to move above their resistance levels.
Those rates measure the spread between cash Treasuries and inflation-protected securities. When it falls, it generally means that traders do not expect more cash to flood the system.
But the rate did not rise as equities rallied, a move Chris McReynolds, head of US inflation trading at Barclays Capital, calls “incongruous”. The forward five-year spread fell from 280 basis points last week to 240bp, he notes.
Despite nudges, those rates have failed to cross 250bp, their 50 per cent extension from lows before last year’s QE2 revealed a year ago at Jackson Hole.
Are bond traders better forecasters? Not last year. Break-evens fell in August, alongside equities. No one expected the Bernanke intervention.
At least this time round, you can choose a market that suits your view.
