Falling Gold, Silver and Oil Heighten Risk Aversion
The lull in risk aversion seen yesterday was broken today as we had renewed selling in commodity and equity markets. Last night, data from China showing the need for more tightening from the central bank weighed on commodities, and when more sovereign debt concerns crept up in the European session we saw a strong move towards safety and away from riskier, higher-yielding assets. Traders sold the EUR, AUD, CAD, NZD and other higher yielders and bough safe haven currencies like the USD, JPY, and CHF.
Gold was down 1% or around $15 to $1,500, while silver plunged 7.7% to settle at $35.50 an ounce. We saw these two commodities suffer steep losses in the first half of last week, and it seems that gold and silver bulls have lost momentum after silver saw a close to 25% drop following the CME hiking margin requirements to trade silver.
See Technical Update: Gold and Silver Resuming Bear Runs
Oil prices slid sharply as well, as US showed a bigger-than-expected increase in oil inventories, and general risk aversion created a retreat from oil. Oil was down 5.5% to $98.17 a barrel. Margin requirement changes in oil contracts likely helped drive some of the declines as well.
From Marketwatch: “The change to margin requirements were effective Tuesday, the CME said in a press release. Under the changes, the requirement for a new position in benchmark Nymex crude contracts rises to $8,438 from $6,750 previously. The maintenance margin for benchmark Nymex crude rose to $6,250 from $5,000.
CME also raised margins for contracts in benchmark Brent crude, gasoline and other products. The hike was the first of its kind since March 4, and the third such move this year.”
US Equities Slide, Chances of Fed Rate Hike in Spring 2012 Lessen
US stocks sold off sharply with the mix of risk aversion on display in commodities. The crux of the concern is that interest rates around the world will continue to go higher, as inflation data in China, UK, Germany all showed inflation climbing. That means central banks will continue to raise rates, pressuring the environment for metals and oil. Commodity currencies were most affected by this sentiment.
The USD gained on this move away from commodity currencies and towards safety even as futures traders cut their bets that the Fed would raise rates in the spring of 2012, and 10-year yields hit a 6-month low.
Via Dow Jones Newswire: “Plummeting stocks and commodity values suggest the Fed will be in less than a rush to lift the fed-funds rate next spring, based on current fed-funds futures pricing. May 2012 contract, measuring expectations for late April’s FOMC meeting, recently priced in a 62% chance for the committee to raise the rate to 0.5%, down from 78% early today and 70% at Tuesday’s settlement.”
Today’s trading has a strong sense of similarity to the events unfolding last week as falling commodities pushed down equities, creating risk aversion which boosted safe haven currencies. Will oil prices and other commodities continue to tumble this week, continuing the sentiment we saw in today’s session? If so, we could see further gains in the USD, into the Asian and European sessions.
Sovereign Debt Concerns, Risk Aversion Sink Euro
Earlier in the session, Greek anti-austerity protests and Standard & Poor’s warning that Portuguese banks may need additional government support weighed on the Euro and the decline in oil prices accentuated an aversion to riskier assets, like the euro.
EU member states also tried to slow talk of more aid flowing to Greece, as Germany wanted to make sure the Greeks were doing everything within their power to bring their deficit into target, before offering more possible aid.
From Bloomberg: “European leaders slowed debt-wracked Greece’s drive for extra aid, saying the Athens government must first make good on pledges to overhaul an economy mired in a three-year recession.
“We can offer solidarity only if Greece’s stability and eagerness to reform is proven,” Merkel told reporters in Berlin yesterday. “We can get out of this difficult situation only if we properly rebuild that foundation, not just help without Greece doing anything.”
Wednesday also brought the details on the Portugal bailout, as the Finnish said they would not scuttle the bailout agreement. S&P, following the announcement, warned Portugal of a possible downgrade:
The main concern for the S&P is that the state will have to foot the bill for more bank bailouts:
From imarketnews: “The possibility that Portuguese banks might require more significant government support (more than 3% of GDP) could place downward pressure on Portugal’s sovereign ratings. We see certain conditions that could lead to greater capital support from public funds for the Portuguese banking system. First, the capital needs of the banks may be higher than expected, because of weaker-than-anticipated domestic profitability or higher pension deficit deductions from regulatory capital due to a weaker equity market. Second, it remains unclear whether Portuguese banks will be able to reach the Bank of Portugal’s new capital adequacy requirements (in particular the 10% core capital requirement) by year-end 2012 using only their own means.”
While events in the sovereign debt crisis continue to develop, and see-saw back and forth, today’s developments created further anxiety and caused a flow out of the EUR. With risk aversion picking up as a result of falling oil and other commodities, as well as a plunge in US equities, the EUR/USD extended its losses from earlier in the session.
See Technical Update: EUR/USD Maintains Bearish Momentum in the US Session
Chief Market Analyst