Fed Puts Most Markets In Holding Patterns As Gold Stays Range Bound and U.S. Equities Find New Life

With the June FOMC meeting in focus today, we expect markets to remain somewhat range bound until Chairwoman Janet Yellen’s news conference tomorrow in midafternoon.

Gold seemed to be riding higher briefly this morning but fell over $6.00 by mid-morning. In afternoon trading it has clawed back to regain some of the morning drop. We’re sitting on our fundamentals analysis for gold that says the yellow precious metal has nowhere really to go on news, on macro conditions, or on sentiment.

We know that even coin enthusiasts are either staying away from or dumping gold, which means that they have a hunch it’s going to drop farther. U.S. Mint gold coin sales in ounces have been halved (and then some) since 2010, and are moving lower in 2015.

At the Bullion Trading shop in New York owner Isaac Kahan says sales in May tumbled 35 percent. Purchases of American Eagle gold coins from the U.S. Mint, the world’s largest, were the weakest for the month in eight years. Global coin demand this year probably will slump to the lowest since 2008, TD Securities Inc. predicts.

The S&P 500 is up about half a percent today, an indicator that Wall Street is not worried about a rate hike tomorrow from the Fed, and it’s not terribly worried about Greece, although the probability that Greece will either default or exit the euro system or both is approaching 60%. Apparently the German bourse, the DAX, is not concerned much either. It was up today also by half a percentage point.

Brent North Sea crude was down today, perhaps reflecting a bigger Mid-East supply, or possibly pointing us toward more sluggishness in the European Union. West Texas Intermediate was up, despite dollar strength, which is a drag on price.

We should be watching the FOMC closely and not because of its immediate effect on the U.S. economy.

Asia, from giant China to striving India, from upstarts like Vietnam and Malaysia to industrial mighty mouse powerhouse South Korea all have the jitters over a possible interest rate hike. These economies have been booming because money is being borrowed by American institutions that lend it to other international banks and financial houses that then lend to Asia.

When the rates finally do rise – let’s say 25 to 50 basis points – the rise in borrowing costs in Asia will go up at twice the rate. You may infer that the rise is not arithmetical but multiplicative. For better or worse, U.S. (and British) banks are still the world’s go-to financial institutions.

All three Asian exchanges were down on the fears of a Fed rate hike.

At the same time, U.S. 10-year yields are down in the 2.3% range, having declined from highs near 2.5% not more than 10 days ago.

So, we have two very different viewpoints on what a rate hike may mean (when it finally does happen) and how seriously affected borrowers will be in different regions.

Wall Street shrugged off slow new-home construction for a variety of reasons. The cause isn’t lack of buyers, lack of financing or lack of workers to do the building. There is a shortage of land in the most desirable locations, meaning near city centers or fashionable suburbs. What land is available is extremely expensive and makes it imperative that builders erect large, expensive homes.

Miami, Seattle, Chicago, Charlotte, Raleigh, Denver and Dallas are caught in this conundrum. Older big cities in the Northeast have virtually run out of land. (Take a cruise through any tony New York suburb within 40 miles of Manhattan and see how many half-acre lots you spot.)

While this is bad short term, it may be helpful in spurring development in decayed cities that are close to major business centers. Newark, NJ, comes to mind, as do many satellite cities of Boston, Philly and Chicago. Worcester, Massachusetts, long a declining rust belt city is about 35 miles west of Boston. There is a load of building going on there. The population of people living there and commuting to Boston has quintupled in the last five years.

Wishing you as always, good trading,