Gold is rallying this morning after being caught in the downdraft yesterday that pulled equities, bonds and precious metals, all down. The dollar was the only winner yesterday, keeping its rally intact by closing slightly above unchanged after a morning spike to 11-week highs.
Gold rose $15 an ounce today from early morning lows, as the non-farm payrolls report came in under estimates. Silver gained 20 cents an ounce from its early morning lows, with the PGMs also mimicking gold's movements.
The U.S. non-farm payroll report came in this morning showing 209,000 new jobs were created for the month of July. This was far below the 230,000 analysts had projected, but the news was softened somewhat by June's report being revised upward by 15,000 to 298,000.
The unemployment rate rose slightly to 6.2%, and the labor participation rate rose, as more of the long-term unemployed begin looking for jobs once again. This is the sixth month that non-farm payrolls, which include government jobs as well as private sector jobs, has increased by 200,000 or more.
Personal income for June was reported up by 0.4%, and consumer spending was also up by 0.4%. Before you think badly that America spent all their extra income, consider that it may have been spent on necessary purchases that had been deferred, or perhaps spent on assets to protect them from the growing inflation that they see coming.
The news has caused the dollar to drop and precious metals to gain. The 10-year T-note yield eased to 2.56% from 2.58% before the report. Wall St. is whip-sawing back and forth in morning trading, as it tries to break yesterdays big decline. An initial rally was killed when the ISM manufacturing index came in higher than expected, showing the fasting increase in factory activity in three years.
This scared the markets into expecting inflation to rise faster than expected, and the Fed to raise benchmark interest rates faster than expected, and back into the red they go! The days of the markets ignoring risks and threats, with abnormally low volatility may be over. With stocks and bonds showing a +.6 positive correlation, moving together a large percentage of the time, where can you go to hedge your exposure? (Hint: it's yellow and shiny.)
Yesterday in the Markets
Thursday was a bad day for just about everyone. Stocks saw heavy losses, with the Dow down 317 points (1.8%), the NASDAQ down 93 points (2%), and the S&P dropping to a loss for the year, down 2% after shedding 39 points. Bonds were down, with the yield on the 10-year Treasury climbing to 2.56% after spiking to 2.625%.
Spot gold was down nearly $14, platinum was $19, and palladium was down $6. Spot silver was down 24 cents. The dollar closed slightly up.
One reason the dollar weathered the storm was that cautious investors and fund managers are pulling out of stocks and going into the dollar, until they see which way the market is headed. The meltdown in stocks,bonds, and PMs was blamed on several factors:
- Outlook on the European economy: Between the seemingly imminent collapse of one of Portugal's largest banks, sanctions against Russia, and retaliation by Moscow against European exports, more are believing that the European Central Bank will be unable to stave off either recession or deflation.
- Bond Default by Argentina: All of a sudden, bond investors' eyes have been opened to just how much risk they are taking on, for such little gain. This is Argentina's second sovereign default in 12 years.
- Economic News in U.S.: First-time jobless claims were higher than expected, employment costs are rising, the Chicago PMI report shows industry slowing in the Midwest, and corporate earnings disappointed.
- Interest Rate Fears: After the GDP report and ADP private sector payrolls, markets became alarmed at the thought that the Fed would raise the overnight lending rate before next summer.
All were reasons to step back and take a fresh look at risk/reward ratios, and grab some profits in case this was the start of a market downturn. More U.S. fund managers have been recommending that investors increase their dollar holdings in the present market.
Geopolitics are intruding more into the marketplace. as sanctions against Russia for supporting separatists in eastern Ukraine have advanced to the point where they are actually having an effect on the Russian economy. In retaliation, Russia is banning food imports from Europe, which is disproportionately affecting former Warsaw Pact nations in Eastern Europe. Since these people actually lived for decades under Soviet domination, and have the most to fear from a resurgent Russia, they have been the most vocal about the need for sanctions over Russia's annexation of Crimea and involvement in the Ukrainian civil war.