Amid a cacophony of comments and musings by important figures in central banking around the world this week, both the U.S. dollar and gold prices slumped on Thursday morning. Spot gold fell about 0.66% to just above $1,240/oz, ceding all of the ground it had made up over the last five trading days. Meanwhile, silver prices were likewise down 1% to $16.60/oz.
The Hawks That Cried Wolf?
Given the recent action in gold, bonds, and major currencies, it appears that the global markets are beginning to take seriously the idea that financial conditions are inexorably set to tighten. This is based on increasingly hawkish suggestions from prominent central bankers and policymakers on both sides of the Atlantic.
Traders, investors, and big institutions may be more convinced of the slow shift toward less accommodation from monetary policy that has been long in the making (but at a snail's pace). The data du jour conveniently back up this narrative: first-quarter GDP in the U.S. was revised upward from the abysmal initial estimate of 1.2% to 1.4%. Included in this was a sharply higher revision of personal consumption expenditures, which jumped to 1.1% from an initial estimate of 0.6%. Last week's jobless claims numbers were also revised negligibly higher from 240,000 to 244,000 new claims.
Moreover, the results of the recent "stress test" carried out by the Federal Reserve showed that all 34 major U.S. banks that were audited "passed" the test. (Some in the know claim that these tests are conducted with "kid gloves" compared to the past.) As a reward for their bill of good health, the Fed relaxed capital controls on these big banks, approving the use of this freed up capital for dividend payments and share repurchases (stock buybacks). Not surprisingly, as a result, shares in the banking sector skyrocketed, to the tune of adding $40 billion in market cap to the sector collectively.
These recent snippets of the American economy are being juxtaposed with the revelations this week that policymakers in Brussels may soon consider tapering off of the ECB's quantitative easing program. This would follow the normalization path that the Fed has thus far pursued, but perhaps far sooner than anyone expected. The Bank of England has appeared to be charting a similar course, with a surprising number of governors—though still a minority—voting to tighten monetary policy at the last BoE meeting.
Of course, ECB President Mario Draghi could simply be doing his best Janet Yellen impression by trying to juke investors with the weight of his words. Pair this with the overstated perception that the U.S. outlook is improving, and the barrage of signals that point toward "higher interest rates ahead" may be the first concern in the minds of market participants at the moment.
The point is that markets are often prisoners of the moment. In two weeks, we could be talking about how all rate hikes are likely to be put on hold for such-and-such reason, and all of the logic above is turned on its head. In the meantime, gold will appear to many to be a bargain at under $1,250 per ounce.
Stocks were up overnight in Asia but were about 0.75% lower in Europe, including 1% lower in Paris. London's FTSE 100 was modestly higher. U.S. indices were down sharply again in early trading, with the Nasdaq leading the way 0.9% lower.
Although European markets aren't especially pleased with the idea of an ECB QE taper, the euro has responded enthusiastically to the notion. The common currency was at its strongest against the dollar in over two years, trading above $1.14. Sterling hasn't been far behind, rallying to $1.30 for the first time in six weeks. This brisk turnaround for both currencies has taken place in less than a week's time.
Naturally, the dramatic gains for the euro and pound sterling have dragged an already soft dollar even farther into the red. The greenback was down another 0.2% on the DXY index this morning to just 95.8—its lowest since early October, well before Donald Trump was elected president. Bonds have plummeted the past two trading sessions with all of the expectations for rising interest rates, pushing the 10-year Treasury yield all the way up to 2.28%. This is 14 basis points higher than where the 10-year yield was to begin the week.
In a somewhat surprising political gesture, it also appears that the new French leader, President Macron, has invited President Trump to the Bastille Day celebration in France. (The holiday is essentially the country's equivalent of the 4th of July, commemorating the "Storming of the Bastille," when revolutionaries took control of an old armory in 1789 in one of the first steps toward the overthrow of the monarchy.)
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