There is a new sense of energy in the FX markets today but the rally has been contained to only a few major currency pairs. The biggest gains are being enjoyed by USD/JPY and USD/CHF but AUD/USD and NZD/USD also recovered nicely. Euro and sterling on the other hand are struggling to gain any type of momentum – upside or downside as the lack of market moving Eurozone data keep movements in these currencies limited.
At a time when the rest of the world economies are on shaky ground, U.S. economic data continues to surprise to the upside, making the dollar extremely attractive to global investors. Consumer confidence surged to its highest level in 5 years. Thanks to the improvement in the labor market and the persistent rise in stocks, the Conference Board’s measure of consumer sentiment rose to 76.2 in May, up from 69. Greater consumer optimism should hopefully translate into stronger consumer spending in the second quarter. The Richmond Fed manufacturing index also rebounded to -2 from -6. While this was the second month in a row that manufacturing activity contracted, the improvements is a breath of fresh air for the sector. Finally, house prices increased 1.12% in March after rising 1.32% in February. This represents deterioration but for the first quarter, house prices are up 10.17% vs. 7.25% in Q4. As U.S. economic data continues to improve, expectations for tapering asset purchases by the Fed will continue to build and this sentiment should fuel further gains in the dollar.
Meanwhile, the IMF’s report on central bank purchases of gold is getting some attention this morning and even though gold is lower, it is lending support to the beleaguered AUD and NZD. Investors have been eager to see whether the 18% decline in gold prices year to date attracted central bank buying and according to the International Monetary Fund, aside from Canada and Mexico, every major central bank has been hunting for bargains. Russia, Kazakhstan and Azerbajian collectively increased their gold holdings by 75%, cementing Russia’s status as the world’s number one buyer of gold. These 3 former Soviet Republics have been buying all the way down and while their demand has limited the slide in gold, it has not stopped it.
For most central banks, buying gold is part of their overall forex portfolio diversification strategy and the further gold declines, the more demand we expect because central banks are not as sensitive to short or medium term swings as traders or even investors. The outlook for gold hinges on the outlook for the U.S. dollar and for the time being, expectations for a reduction in asset purchases by the Fed should keep the dollar bid. According to the CFTC’s latest positioning data, fund managers and speculators are grossly short gold and we believe that the prices could head lower.
U.S. Stocks Tumble as S&P 500 Extends Monthly Decline
U.S. stocks retreated, sending the Standard & Poor’s 500 Index to a nine-week low, as Chinese equities entered a bear market amid concern a cash crunch will hurt the world’s second-largest economy and speculation increased that the U.S. will begin curbing stimulus.
Bank of America Corp. and Citigroup Inc. slid more than 2.8 percent as banks tumbled. Barrick Gold Corp. led gold producers lower as the precious metal traded near a 2 1/2-year low. Deere & Co. lost 3.2 percent as JPMorgan Chase & Co. recommended selling the shares. Vanguard Health Systems Inc. surged 67 percent after agreeing to be bought by Tenet Healthcare Corp. for about $1.8 billion.
The S&P 500 (SPX) fell 1.7 percent to 1,565.07 at 10:01 a.m. inNew York, the lowest level on a closing basis since April 22. The Dow Jones Industrial Average slipped 239.03 points, or 1.6 percent, to 14,560.37. Trading in S&P 500 stocks was 33 percent above the 30-day average during this time of day.
“Investors have been shaken by the concept of rising interest rates and a reduction in stimulus from the Federal Reserve, coupled with the uncertainty regarding effectively how robust the Chinese central banking system is,” Ethan Anderson, senior portfolio manager for Rehmann Financial in Grand Rapids, Michigan, said by phone. His firm manages about $1.5 billion. “We found ourselves in a headline-dependent environment, which is difficult for investors to function.”
The CSI 300 Index (SHSZ300) of China’s biggest companies tumbled 6.3 percent, the most since August 2009 and taking its decline from this year’s peak to more than 20 percent. China’s central bank said there’s a reasonable amount of liquidity in the financial system and urged banks to control risks from credit expansion, signaling no relief from a cash squeeze.
China Rates
China’s benchmark money-market rates last week climbed to a record as the central bank refrained from using open-market operations to ease the cash crunch. The rates still fell for a second day today.
The S&P 500 (SPX) sank 2.1 percent last week, the most since April 19, after the Federal Reserve said it may start paring stimulus measures as soon as September if the economy improves in line with its forecasts.
The benchmark index is down 3.9 percent in June, on course for the biggest monthly drop since May 2012. The gauge has declined 6.2 percent since its May 21 high amid speculation the Fed will scale back quantitative easing that helped fuel a rally in stocks worldwide. The index has stillrallied 132 percent from its March 2009 low.
‘Great Performance’
“We’ve had this great performance in stocks without great economic growth,” Larry Kantor, the New York-based head of research at Barclays Plc, told Anna Edwards on Bloomberg Television. “Those days are over. I suspect over the next couple of months U.S. growth is going to be a little weaker than people are anticipating.”
Treasuries slumped today, pushing the 10-year yield as high as 2.66 percent, a level not seen since August 2011, before data this week that may add to the case for the Fed to slow bond purchases. Reports tomorrow may show U.S. durable-goods orders rose and house pricescontinued to recover, according to Bloomberg surveys of economists.
While U.S. equity volatility reached a six-month high last week, expected stock swings are less than half as much as peaks in the last four years and traders are pricing in little increase for the rest of the year.
Volatility Index
The Chicago Board Options Exchange Volatility Index (VIX) jumped 10 percent to 18.9 for the week. Even after the gauge of options prices on the S&P 500 increased 67 percent since March, it would have to rise 134 percent more to reach its average high of 44 from 2009 to 2012, according to data compiled by Bloomberg. VIX futures expiring in six months trade only 10 percent higher than the index. The gauge jumped 13 percent to 21.45 today.
Financial shares tumbled. Bank of America dropped 3.2 percent to $12.29. Citigroup slipped 2.8 percent to $45.56.
Barrick Gold declined 4.9 percent to $16.06. The precious metal dropped to the lowest since September 2010.
Deere lost 3.2 percent to $79.82 as JPMorgan cut its rating on the world’s largest agricultural-equipment maker to underweight, similar to a sell recommendation, from neutral. Lower crop prices and higher land rent costs may drive profit-per-acre lower, analysts led by Ann Duignanwrote.
Allergan (AGN) Inc. slipped 8.1 percent to $85.15. Deutsche Bank AG downgraded the maker of the Botox wrinkle treatment to hold from buy and Leerink Swann LLC trimmed its recommendation to market perform from outperform.
Vanguard Health Systems jumped 67 percent to $20.61. Tenet will pay $21 a share in cash for the Nashville, Tennessee-based hospital operator and will assume $2.5 billion of Vanguard debt, the companies said in a joint statement
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