A second day of bad economic news out of Germany has stocks on both sides of the Atlantic sharply lower this morning. Factory output in Germany dropped 4%, against expectations of a 1.5% drop, as EU sanctions against Germany's major trading partner Russia continue to bite.
The dollar is porpoising over and under unchanged this morning, after giving up a little over 1% yesterday. The yen is staging something of a comeback, as the Bank of Japan announced that it believes it will hit its target of 2% inflation in two years without enlarging its QE program.
Gold is up slightly this morning in New York after gaining a whopping $16 on Monday. Gold was steady in Asia overnight, seeing a pop early in London trading, that eased back to near unchanged. A second pop early in New York had gold up slightly. Silver also caught the London pop, but missed the second boost in New York to trade near unchanged.
The platinum group metals are popping after gains on Monday. Platinum is up $16 in early New York trading after gaining $18 yesterday. Palladium, which has seen something of a sell-off after leading precious metals and stocks for most of the year, is up almost 2% in New York to $775/oz.
Yesterday in the Markets
Wall St. opened higher on Monday, but immediately assumed a glide path that put it in the red before noon. Despite attempts to regain positive territory, all indices closed slightly down. The dollar dropped .9280 (1.07%) to fall well below 86 on the DXY, while moderate demand for Treasuries saw the yield on the 10-yr T-note fall one basis point to 2.42%.
Precious metals saw healthy gains, as gold jumped $16.10 to close at $1206.80, up 1.35%. Silver gained 49 cents, nearly 3%, to close at $17.35, while platinum closed up a substantial $18 to close at $1241, and palladium gained modestly to finished up $7 (.93%) to close at $760.
Economic News Affecting Gold
The big economic news is the worsening economic situation in Germany, which is the largest economy of the EU. As industrial orders and factory output fall, the spillover is weighing on the other EU member nations. The only near-term hope for the European economy is that the drastically weaker euro will help boost exports.
As we mentioned above, a good portion of the economic slowdown in the EU is due to economic sanctions against Russia over its seizure of the Crimea, as well as supplying arms, munitions and even soldiers to assist the rebellion in eastern Ukraine.
Russia has responded with punitive sanctions of its own, and is paying a heavy price for attempting to keep the West out of Ukraine. Cut off from Western debt markets and facing billions in capital flight, the Russian Central Bank has spent $1.68 billion of its dollar and euro reserves just in the last two day to keep the ruble from collapsing. The Russian currency has plunged to all-time lows four times in the last week.
Exacerbating Russia's troubles are oils prices at a nearly two-year low. Russia gets 70% of its income from energy exports by state-owned oil companies, as well as taxing exports from privately-owned energy companies. Executives of the state-run companies are spearheading a movement to seize private energy companies, whose assets were purchased from the State during the 1990s push towards privatization.
Geopolitical News Affecting Gold
Fighting in Ukraine around Donetsk is being ignored by all sides for the most part, as everyone wants to pretend the ceasefire is still holding. Putin has pulled back Russian troops, tanks, and artillery from the coastal areas of eastern Ukraine, and is apparently now playing a waiting game. The Russians are famous for enduring hardship when their nation is threatened, and Putin is banking on that patriotism to help him wait out the EU, and especially Ukraine. With their industrial and coal heartland in the hands of rebels, the pro-Western government in Kiev is looking at a cold winter and a hamstrung economy.
This situation may come down to how long Ukraine can hold out, as the EU subtly puts pressure on them to make a deal with Putin.
Airstrikes continue against the terrorist army of ISIS, with the US now flying Apache attack helicopters in close air support of Kurdish and Iraqi troops. This leaves American pilots and crews exposed to the American-made anti-aircraft defenses ISIS captured from overrun Iraqi army bases.
Lower oil prices aren't a problem just for Russia. Many governments in the Middle East rely on oil income to keep their populations pacified. If export income continues to drop, the people will take more notice of the opulence of their rulers, which could set off another round of "Arab Spring" revolts.
Demonstrations in Hong Kong, which kept Chinese tourists away from the gold and jewelry shops during a major holiday season, seem to be losing support. While well-intended, and technically in the right for wanting China to live up to the agreement it signed with the UK for handing over Hong Kong, there is absolutely no way that Beijing would give in. The result would have been rebellions in Tibet and Xinjiang.
The big economic news tomorrow will be the release of the FOMC minutes from the September meeting. Analysts will be frantically tearing every sentence apart for clues to when the Fed will raise the benchmark interest rates. On the economic front, we have the Mortgage Bankers Assoc mortgage applications report, as well as the state of US petroleum reserves.
China returns to the world markets tomorrow (tonight, US time) as the Golden Week holiday comes to a close.