Plenty Of Pain To Go Around – Gold, Stocks, Oil, Yields Are All Down

Traders, weighing up what tomorrow’s jobs report will bring in the U.S., were busy today squaring their positions. When in doubt, hedge. And there is plenty of doubt out there.

The tipping point for stocks will arrive soon if yields on U.S. paper (like the 10-year benchmark bond), sustain their rise much longer. They happen to be off today but their march this year has been inexorable, moving from 1.65% to 2.3%+. Yields are nearing the red zone on the overheat dial.

As yields rise, money shifts from less assured instruments like stocks to bonds, which have a guaranteed yield. Of course, this also spells bad news for gold bulls. Higher bond yields make gold less attractive as an asset.

Where is the incendiary price level for bond yields? We’ll make an educated estimate and say that once the yield hits 2.75%, we’re looking at major investment shifts. If it should hit 3.00%, we’re probably looking at a stock market price deflation, though not a crash, and we’re certainly going to have to consider a mini-recession.

This is why everyone has such a keen eye on the Federal Reserve. In turn, that’s why everyone is keeping a close watch on tomorrow’s Labor Department numbers.

If we get solid job growth for May and decent wage growth, it is more likely the Fed will raise rates in September. If we get job growth but see flat lining in wages, look for December as a likely date. If we get lower-than-expected employment growth and low or no wage growth… well, don’t hold your breath for a Federal Reserve rate increase.

The entire energy sector is off today, with West Texas Intermediate leading the pack, falling about 2.75%. Brent North Sea is close behind, also off in the 2.7% range.

Oil has been getting some support from the declining U.S. dollar, but today it isn’t enough to counter the OPEC ministers meeting tomorrow during which they are expected to agree to keep production at 30 million barrels a day. (In reality, the level of production regularly reaches 32 to 33 million barrels per day.) Saudi Arabia is leading this charge, hoping that by pumping like maniacs the cartel will maintain OPEC’s market share.

The price of crude has weighed heavily on equities prices for months now. Oil can’t seem to make up its mind to cross and remain above $60 per barrel. This especially hurts the DJIA. That effect though does bleed over to the S&P 500.

Let’s go back and look at another aspect of the possibilities surrounding a rate hike. As the economy stands now in the U.S. – and the world – our opinion comes firmly down on the side of dovishness. We have been doing everything but swing noisemakers above our head, wear funny hats and whistle “Dixie” to proclaim this stand.

Now we have a heavy hitter in the dugout with us: the IMF.

"Inflation is not progressing at a rate that would warrant, without risk, a rate hike in the next few months," IMF Managing Director Christine Lagarde said at a news conference early today in Washington. "The economy will the better off with a rate hike in early 2016."

"Raising rates too soon could trigger a greater than expected tightening of financial conditions or a bout of financial instability, causing the economy to stall," the general IMF statement added. "This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility."

Credibility equals security when trading any market. We have to believe that what the leaders put in place – both political and private – will be beneficial before it can become beneficial. That may sound like doubletalk, but what it means is that you have to have leaders who make credible decisions that convince the people in the trenches to comfortably invest in whatever markets they find appealing.

Uncertainty breeds volatility, or financial loss.

Wishing you as always, good trading,