Fed Rate Hike & Gold Prices: June Is Heating Up, But The Loonie Is Catching A Chill
Contributors: C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata – @connectedwealth
Fed Rate Hike & Gold Prices: Today
Following the big Fed announcement yesterday, and the BoJ overnight markets are lower globally. Gold is making a new near term high, as volatility is on the rise. Given the escalating uncertainty, yields are only slightly lower this morning. Have they reached the lower bound? U.S. 10 years are at 1.5549, the lowest level since August 2012,
Japanese markets are lower, offset by a strengthening Yen as the BoJ leaves monetary policy unchanged. The BoJ noted that they will continue to monitor the impact of negative rates, and also want to keep an eye on the increasingly uncertain global markets before moving forward with additional stimulus. There is also an upper house election on July 10th in Japan which may be complicating the situation for the central bank.
The USD is up against most G10 currencies, except the Yen. The loonie is falling again today, tracking crude lower. This after the BoC’s Poloz downgrades 2Q GDP, in a speech yesterday. Though he asks for patience, he noted that we have the right to be optimistic. Quite vague. He finally quantified their estimated impact of the wildfires, and that it will shave between one and 1.25 percentage points from 2Q growth, which could cause a temporary contraction. The next big data release is inflation data tomorrow morning.
June is heating up, a lot, and it is not only because La Nina is coming. For some context please see our “Expecting a Hot June?” report HERE, or “A Hot June” YouTube HERE. So we highlighted OPEC, the Fed, the other Central Banks and finally Brexit. We are past OPEC, the Fed and this morning all the other big central banks pretty much kept QE the same (aka no big changes). That leaves Brexit and it is becoming the big event. A leave vote will likely cause a market gyration, which won’t be to the upside. A stay vote, gold will plummet, everyone else goes home happy. We are seeing volatility measures spike over the past few days as investors are clearly buying insurance or becoming increasingly worried. Worth noting it is nothing like we saw last summer nor in January of this year, but on the rise nonetheless. Perhaps the quest for safety can be seen best in the government bonds. The German 10-year has dipped back below 0% again. The 30-year Swiss bond is now below 0% yield (those bonds mature in 2046). The US 10 year is 1.55% and gold is higher. Oh, and then there is China (we added China in the YouTube as a risk not really an event). Money flows out continue to accelerate and the yuan continues to weaken. The positive is with a hot June, summer has certainly arrived.
China Outflows
The PBOC has burned through 20% of its FX reserves since 2014, “dumping about $250 billion of US government debt and using the funds to support the yuan and stem capital outflows.” Now, it seems as though China is moving away from selling Treasuries and towards selling stocks. According to Bloomberg, China has sold 38% (~$126 billion) of its US equity holdings since the end of July 2015.
China’s US stock portfolio amounts to ~$201 billion, which isn’t much in the grand scheme of things. Even so, the outflows have been notable. USD strength and CNY weakness have forced the PBOC to sell assets to “smooth the yuan’s depreciation.” It is interesting that China is favoring bonds over stocks. This speaks to its attempts to de-risk its portfolio. More from Bloomberg here.
Here is a good read from Ben Carlson on the relationship between the job market and future stock returns. Just reinforces the idea that you should be buying when others are fearful, and fearful when others are fully employed.
Diversion: Amazing new AA powered car by Mercedes. The future has never been so convenient.
Company News
The Ford F-150 which underwent a $1bb overhaul to revamp the entire truck may have all been for not. There are already certain models that do not meet the emission and fuel-economy mandates. These rules become even more stringent in 2025, which could require another overhaul. Silver Wheaton said that they expect their trail for income taxes beginning in 2017. The investigation is surrounding their tax reporting during 2011-2013. CAE is developing a naval training facility for the UAE Navy. The project is expected to cost $450mm spread out over the next 15 years.
Commodities
Gold prices have risen to the highest level in two years after the U.S. Fed delayed their rate hike expectations and fears of a Brexit continue to mount. If we do see a vote for the UK to leave the Eurozone next week we could see another leg higher for gold as the uncertainty will likely heighten volatility and see a flight to safety in gold. Oil prices are down nearly 2% this morning, heading for the sixth straight session of loses. This comes expectations for supply disruptions are easing in both Canada and Nigeria. Gains were made yesterday after inventory data showed that U.S. supplies and production was lower last week.
Fixed Income And Economics
We’ve had an extremely busy 24 hours in the financial marketplace that was punctuated by the (lack of) moves from three prominent central banks around the globe. The FOMC kicked festivities off yesterday by announcing no changes to their current overnight lending regime that came as no surprise to observers. What was more interesting however lied in the details and mindset of the policy voters. There were no dissenters this time around (Esther George had been in the prior two meetings) and six members of the Committee felt that there would be only one rate hike in 2016. However, the infamous dot plots painted a different tone with the path still projecting two increases before year’s end. Who to believe? Are markets making too big of a deal by following the dots? There were as many as three possible hikes back at the March meeting, which went to two in April, and now the risk tilts the possibility to just one now. Nine Committee members expect two hikes, one person expects three and yet another voter still thinks the Fed can hike four times over the remaining four meetings this year (yes, you’re not the only one confused by this!). The muddled mess that is the dot plot has your’s truly yearning for the good old days when policymakers didn’t bother forecasting their intentions to the market and instead acted on their own merit as they deemed necessary (even going as far as announcing in- between meeting rate hikes and cuts). Immediate reaction saw short Treasuries rally with the two year benchmark falling by six basis points.
The aftermath of the FOMC caused a sharp sell-off in the USD/JPY cross which had implications because the Bank of Japan was ending their two day policy meeting shortly afterwards. In the end, the BoJ decided against further stimulus measures and will continue to conduct money market operations so the monetary base increases at an annual pace of 80 trillion yen ($760 billion) and maintain a negative interest rate of -0.1%. This was naturally viewed as a negative with the Nikkei selling off by 3% and JGB’s rallying a tick. The Yen rose 1.5% against the greenback to push 2016 gains up to 13.8% and effectively moving in the opposite direction of what BoJ Governor Kuroda wants to see. You’ve got to feel for the poor guy who implemented a negative interest rate policy for the first time ever back in March — he tries to stimulate the economy by weakening the Yen but the FOMC keeps screwing him over with continually soft monetary policy and commentary. What else could possibly go wrong for him (oh right, government revenue in the form of a higher sales tax has been postponed until 2018).
Lastly, the Bank of England updated their monetary policy this morning and as expected voted unanimously (9-0) to keep the official bank rate at 0.50% and asset purchase target at £375 billion exactly one-week ahead of the EU referendum vote. While no change was anticipated, pound sterling threatened to break through $1.41 on the downside for the third day in a row but has since recovered to pre-announcement levels ($1.4140). The Monetary Policy Committee (MPC) statement warned once again about the negative impact leaving the EU would have on the U.K. economy and its currency by stating that “A vote to leave the European Union could materially affect the outlook for output and inflation. In the face of greater uncertainty about the U.K.’s trading arrangements, sterling was likely to depreciate further, perhaps sharply.” Risks remain to the downside for the GBP over the course of the next week especially if the momentum in the “Leave” campaign picks up (Bloomberg currently sees a 39% likelihood).
Chart Of The Day
Quote Of The Day
To accomplish great things, we must not only act, but also dream; not only plan, but also believe. – Anatole France (1844 – 1924)
