It was a volatile day for financial markets despite the shortened holiday trading as stocks opened lower before briefly surging on a rebound in the EUR-USD on rumors that the EUR-CHF peg could be adjusted. Gold and silver also rose on the news, but the rationale for the gains was thin, and market's spent the balance of the day meandering toward session lows. The Dow ended the week off 4.8%, the S&P lost 4.7%, and the NASDAQ underperformed, off 5.1%.
In the realm of news and not rumors, the European sovereign debt crisis continues to generate worrisome headlines as the situation degenerates day by day. Belgium's credit rating was lowered one notch to AA by S&P who cited "renewed funding and market risk pressures are increasing the likelihood that the belgian financial sector will require more sovereign support." In a news conference between Sarkozy, Merkel, and new Italian PM Monti, Merkel poured cold water on a joint Eurobond, seen as one of the potential solutions to the soaring yields in weaker member states. At an Italian six-month bill auction, Italy was forced to pay 6.5% on EUR 8 billion, almost twice what it paid just one month ago. In the wake of the poor results, yields across the curve rose, with Italian two-year debt rising to 7.82% - clearly unsustainable. Ratings agencies added to the gloom with Moody's downgrading Hungary's credit rating to junk at Ba1 from Baa3. Fitch downgraded Portugal's credit rating to junk status at BB+ from BBB-.
Precious metals tracked the USD, and finished the day decidedly weak. Despite indications that physical demand for gold remains elevated, prices continue to retreat. Bloomberg had a piece today on the Biggest Gold Hoard Ever Bolstering Bullish Bests From Traders. It seems highly likely that the current downturn in precious metal prices is being exacerbated by funds that are seeking to offset losses elsewhere, and due to the strong negative correlation that gold has with the USD. The European debt crisis will utlimately reach some sort of sustainable situation. While it is clear we are not there yet, ongoing demand from precious metals should not be dismissed.
Spot gold prices finished down $13.28 to trade at $1,683.14 per troy ounce. Spot silver prices were down $0.71 to trade at $31.18 per troy ounce. Platinum and palladium both ended lower. The gold-silver ratio currently stands at 54.06.
Commodities outside precious metals finished mixed amid the day's many cross currents. WTI crude futures were up $0.32 to trade at $96.49 per barrel. Copper futures were down modestly, dropping $0.009 at $3.2835 per pound.
Treasuries were notably lower, with the yield on the 10-year Treasury rising to 1.96%. The USD was broadly higher.
The Japanese Yen and JGB's have been a standout safe haven amid the turmoil surrounding Europe. However, comments from a S&P official, and report by the IMF indicate that Japan's massive debt, amounting to 200% debt to GDP could prove to be another destabilizing factor for the global economy. Specifically, S&P sovereign ratings Director Takahira Ogawa said Japan's finances are "getting worse and worse." S&P currently rates Japan at AA- with a negative outlook. Meanwhile the IMF in a report released November 23 said that concerns over Japan's finances could result in a "sudden spike" in bond yields.
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