Gold edged slightly higher in early morning trading on Friday while the stock markets opened mostly flat before again venturing into the green. Crude oil benchmarks climbed well over 2% each after yesterday's continued declines left both WTI and Brent below $60 at close. With the dramatic midweek rally in stocks, it seems the markets have calmed down a bit heading into the last weekend before Christmas. Friday may be characterized by volatility on the "quadruple witching session," which is the simultaneous expiry of stock index futures, stock index options, individual stock futures and individual stock options. This confluence of events only occurs four Fridays each year.
Yesterday in the Markets
The response to ultimately dovish signals from Janet Yellen and the Fed on Wednesday continued to spillover into market activity on Thursday, as each of the U.S. stock indices posted single-day gains over 2%. The S&P 500 saw its biggest percent gain of the calendar year, while the Dow Jones rose by the largest proportion since the last day of November in 2011, capping a 700-point rally over the past two days that marks the best two-day point increase for the index in six years. The S&P's 4.5% jump over those two trading days was its strongest single-day showing in three years. Tech sector growth fueled the Nasdaq's 2.24% gain Thursday. In total, U.S. stocks erased last week's $1 trillion sell-off with the rally that kicked off late on Wednesday afternoon.
Treasuries finally eased up, as 10-year yields rose 7 basis points to 2.21% after touching as low as 2.06% during the recent slide in U.S. equities. This was a clear indicator of how investor funds fled from securities and poured into bonds last week, while the exact opposite has happened at the end of this week. Predictably, the dollar firmed up, rising about 0.09% on the DXY index to 89.209. This exacerbated crude oil's struggle to reverse direction, as both benchmarks have continually failed to bounce back from recent lows. As they say, the bottom is not in yet: Brent crude lost more than $1, closing at $59.85, while West Texas Intermediate sank nearly 3% to $54.87.
The precious metals all posted gains by Thursday's close, riding along with the waves rather than against them. Palladium saw the steepest gains, rising $15, or nearly 2%. Silver added 13 cents, or 0.79%, to close at $15.88 as it again attempts to find its footing above $16. Although platinum added 1%, it still sat below $1,200. Platinum's price parity with gold is now nearly 1-to-1, as gold closed only 10 cents below the platinum price. The lack of a spread between the two metals does create opportunities for speculators to exploit the expected return to recent historical ratios, as gold and platinum have reached matching price levels in the past only to again diverge afterward.
Factors Affecting Gold Today
If Thursday is any indication, the metals may track higher with stocks again following the Fed-induced reversal of last week's massive sell-off in equities. Though many are touting this development as the long-awaited "Santa Claus rally," it is more closely connected to the FOMC's promise of "patience" in raising the federal funds rate (while also sneakily retaining the "considerable time" language elsewhere in the statement).
In essence, Yellen and the gang reflated the stock bubble after the previous week's minor correction, sparking the biggest Treasury sell-off in 17 months. This was in no small measure driven by the $16 billion auction of special 5-year notes. Yields on 5-year Treasury Inflation-Protected Securities (TIPS) are at their highest since April 2010, which was also the last time that yields for these such 4- or 5-year securities have been in positive territory at all. This drew considerable foreign demand for the bonds, partly due to inflationary fears in parts of the globe and partly because of the first positive yields in over 4 and 1/2 years.
The Philadelphia Fed factory index pulled back significantly to 24.5 after November saw a staggering reading of 40.8, the highest in 20 years. This month's gauge still falls well onto the sunny side of expansion, but any drop in manufacturing of this magnitude--even when seasonal influences are accounted for--is still something to keep an eye on.
Next week will be filled with important economic data for December that will create a nice year-end picture heading into 2015. Tuesday sees the release of 4Q GDP numbers, as well as durable goods orders, the personal incomes report, new home sales figures, as well as the consumer sentiment gauge.