The day after a release of somewhat controversial Federal Reserve meeting minutes finds us with markets in reconnoitering mode.
Although gold is of primary interest today to our subscribers, we need to start with the U.S. dollar to explain what is going on fundamentally in the markets. The dollar is up by a whisker against the euro as we move deeper into afternoon trading. We are not sure if the small gain will hold.
The greenback is down against the yen. Since the yen is considered the “safest of safe havens,” this is understandable on the surface. Scratch a little deeper, though, and you have to wonder why, if there seems to be a latent threat of the Fed’s raising interest rates and with Japan mired in negative rate territory, the dollar should not be losing ground to the yen.
It also seems relatively logical that investors will attempt to flip on their dollar/yen trading as soon as they are convinced that there will be no rate rise during the June FOMC meeting.
Our further belief is that U.S. equities markets are concerned about volatility and yet are not entirely convinced of gold’s usefulness at the moment. We stress – at the moment. That sentiment can and probably will shift quickly.
Right now, the VIX “fear gauge” is a touch below 17, or 25% below its recent bull market average. It is also well up off the stability-induced closing low on May 10 of 13.6. Here comes a big “but,” though regarding what we are seeing today versus the future on the VIX.
Investors have bid up VIX November contracts to 20.5, an indication that plenty more volatility can be expected. That is good for gold and possibly for crude. It is not so good, as you probably have already reckoned, for stocks until a bull fully reemerges.
We have U.S. presidential elections, jumpy oil markets, the (diminishing) possibility of the Brexit, and the very real worry of a cyclical downturn, which is going to come sooner or later. On top of that, we have an implied up direction for Fed rates, which will become more crucial as the year draws to a close. A lot of fundamental compression, in other words.
Ten-year U.S. Treasury bonds saw their yields slip a bit while the face price ticked up. This highlights two things.
First, the bond market, often enough the leader on interest rate predictions, is skeptical of the chatter about higher rates that some tealeaf readers see in the FOMC minutes released yesterday. Indeed, since peaking on April 26, the 10-year yield has fallen slightly.
Second, there is no rush to the trading desk to use bonds as a haven play. It is more likely bonds are being utilized as portfolio balancers.
Yes, there are a lot of moving parts at the moment. And yes, we expect volatility to rise. (Note losses in the equities markets across the world today.)
But we do not expect a lot of rushing around as in a silent movie comedy. We expect a slow migration toward safety. More tomorrow on what that means for our macro outlooks.
Wishing you as always, good trading,