PM Daily Market Commentary – 1/8/2015
Gold fell -2.20 to 1208.90 on moderate volume, while silver dropped -0.16 to 16.38. Gold tracked sideways for most of the day. Silver was more volatile: it tried to rally through a previous high, failed, and sold off into the close.
The relatively positive Jobless Claims report released at 0830 EST had no effect on any markets I could see.
Once again the USD rallied strongly for much of the day hitting a new high of 92.76 in London, finally closing up +0.36 at 92.57. The new high today erased the possibility of a swing high from yesterday's hammer candle. The Euro dropped -0.38%, closing at 117.93, a new closing low for the current cycle. Money continues to flee the Eurozone.
Mining shares tried to rally today during the morning session and failed, selling off in the afternoon; GDX was down -1.49% on moderate volume, while GDXJ fell -2.19% also on moderate volume. Right now, traders aren't interested enough in the mining shares to push them higher; I have noticed that when the US equity market rallies strongly, it tends to weaken interest mining shares and gold.
SPX had a strong day today, rallying +36.24 to 2062.14. SPX rose in the overnight futures market, and once the NY session opened, SPX took off and rallied throughout the day, closing at the highs. VIX dropped -2.30 to 17.01. Equities appeared to be supported by a possible floor in oil.
TLT dropped -1.32%, a big move lower. Money looks to be moving from bonds to stocks today, although TLT still remains above its EMA-9 and continues to look strongly bullish.
The overall commodity index ($CRB) managed to rally today, closing up +0.36%. Its way too soon to talk about a rally, but at least it managed to avoid dropping. CRB is still below its EMA-9; it remains in a downtrend. Oil also rallied modestly, up +0.17 to 48.92. This is the second day that oil has managed to rally, although oil still needs a close above 49.50 to mark a low. Oil too is below its EMA-9, and it remains solidly in a downtrend. A low in the CRB and oil should help PM.
WTIC right now is in "contango" – the price for oil in Dec 2015 is about $6.50 higher than it is for Feb 2015. Oil in Feb 2020 is priced $17.40 higher than it is right now. The futures markets are saying they believe oil will recover in five years, but not dramatically. If you don't mind riding out the volatility, you could theoretically pick up a Jan 2020 oil contract (1000 bbls) for only $66.14/bbl. Unless we have a major worldwide deflationary accident, I don't see oil at $66 5 years from now.
The dollar is continuing its relentless move higher; so far reductions in oil capex spending hasn't hit the stats yet, and compared with Europe, the US continues to look awesome. If you are Big Money, you see a US 10-year trading for 2.03%, and a Spanish 10-year for 1.68%. Do you like the thought of your money in Spain for 10 years at 1.68%? I don't. No yield in Europe, talk of a Grexit, so of course you take your money elsewhere. Buck rises, Euro falls, US bonds have a constant bid under them. And perhaps even gold starts to look possibly interesting again…
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It occurs to me to ask how there could not be a major deflationary accident?
The whole world is in deflation right now.
So there is the current deflationary trend – basically a replay of Japan's last 20 years. And then there is a major deflationary accident, where a huge chunk of the money supply vanishes via default and bank collapse in a relatively short period of time (i.e. 2-3 years).
What Europe is going through doesn't qualify (at least by my definition) as a deflationary accident. If the world "does Japan", then I'd say the oil bet is probably a good one.
If, let's say, Greece exited the Eurozone, and then promptly defaulted on their debts, and that triggered Spain leaving the Eurozone and it then defaulted on its debts – that might take down German and French banks, which through bail-ins would result in a huge number of assets (uninsured deposits + bonds) vanishing from the money supply. That would cascade throughout the Eurozone – and perhaps to America – taking down banks everywhere transmitted via derivative losses, resulting in either bail-ins, or failures, both of which are quite deflationary.
If the Central Banks simply decided to buy all bad debt, that would stop the deflation in its tracks. Deflationary accident avoided. If they didn't do this, then a deflationary accident would take place. I'd guess at least 30% and maybe as much as 50% of the money supply would vanish.
If Greece and Spain are smart,they tell the world that they are not going pay the interest back!