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Precious metals surge on doveish FOMC

Last updated 1/26/2012 12:40 PM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Derivatives Market Strategist, U.K.

Thursday 26th January 2012

Headlines

Chart To Watch - Netflix

Our chart of the day is Netflix. The US DVD rental/streaming company has seen some remarkable moves in its share price over the past couple of years. After skyrocketing between the years 2009 to mid-2011, there has been a spectacular drop in its prices since. This was mainly caused by Netflix’s decision to increase its prices in the summer and then after it aborted a plan to split itself into two. But there has been yet another turn of fortune for the stock as it is currently one of the best performers around.  So far in 2012, Netflix has risen some 70%. Much of the gains were contributed by robust quarterly earnings that came out last night. It posted an EPS of $0.73 and revenues of $876 million, easily topping expectations of $0.55 and $858 million.

GFT Inflation Indices

Most Actively Traded Instruments

Index	Commodity	Equity
UK 100 (.UK100)	Spot Gold (.GOLD)	Barclays (BARC.L)
Germany 30 (.DE30)	Spot Silver (.SILVER)	Apple (.AAPL)
US Wall Street (.US30)	High Grade Copper (HGH2)	Fresnillo (FRES.L)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5795.0	+ 72.0	+ 1.26
Germany 30 Cash	.DE30	6540.0	+ 118.0	+ 1.84
France 40 Cash	.F40	3363.0	+ 51.0	+ 1.53

UK Market News

Most of the Asian Pacific markets were closed on Thursday due to public holidays in several countries including Australia and China. But Tokyo was open as usual where the Nikkei average fell 0.4%. Japanese investors shrugged off overnight news that the US Federal Reserve was keeping interest rates at record lows until late 2014. They were probably more concerned about the impact of the eurozone debt crisis on its exports, after earnings of a leading robot-maker, Fanuc, disappointed while South Korea’s economy expanded far less than what the economists had hoped for.

But European equities rallied strongly at the open, tracking the gains seen on Wall Street last night. Sentiment was boosted by the FOMC’s decision to keep rates at "exceptionally low levels" until late 2014 or beyond. But while this appears to bring certainty for the US interest rate outlook, some analysts are concerned that the Fed has painted itself into a corner, and will find it difficult to alter course if economic conditions change. In addition, some investors are worried that the FOMC is unconvinced by the recent improvement in US economic data and is still concerned about the outlook for Europe.  The Fed also opened the door to the possibility of additional stimulus and expects inflation to undershoot its target rate. The dollar fell sharply while the euro and equities soared.

The leading European stock indices were all up around 1% this morning. But following its initial move higher, the FTSE 100 was struggling to hold above 5780/90, a key resistance area. It drifted lower from here as we headed into midsession, although it was still managing to hold on to most of its earlier gains. Germany’s DAX meanwhile had managed to take out the 6450 resistance level in the initial leg of the rally this morning. It was now consolidating around 6500, with 6600 being the next target to the upside.

In the afternoon, the FTSE managed to break above that resistance range, although it was quickly rejected as poor data from the US induced a bout of profit taking. Meanwhile it was another mixed day for European data releases today. Sales across UK retail and wholesale sectors plunged in January as shoppers cut back on their spending after taking advantage of heavy discounting in December. The CBI Realized Sales index fell to -22 in January, disappointing forecasts of -2. It was down sharply from 9 in December. A reading below 0 indicates lower sales volume. This is yet another piece of gloomy UK data following yesterday’s dismal GDP number, underlining raised fears of a mild double dip recession. Ratings agency Moody’s now predicts the UK economy will grow only by 0.7% in 2012. Meanwhile consumer sentiment in Germany improved more than expected in January: the GfK Consumer Climate printed 5.9, which was higher than December’s reading of 5.7 and forecasts of 5.6.

Big Winners

Big Losers

US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,768	+ 18	+ 0.14
US 500 Cash	.US500	1,322.0	- 3.50	- 0.26
US Tech 100 Cash	.USTECH	2,458.0	- 4.50	- 0.18

US stock indices recovered from early weakness to close sharply higher yesterday. Investors rushed to pile into equities after the Federal Reserve's FOMC said it will keep rates "at exceptionally low levels" until late 2014 or beyond, rather than mid-2013. The FOMC also downgraded its estimate of growth in the coming quarters to “modest” from “moderate” and Bernanke said another round of quantitative easing remained an option. Apple (AAPL) was one of the star performers yesterday as it traded at a fresh record higher after it posted robust earnings result. But the day’s other earnings were mixed, and the only other data release, pending home sales, was disappointing. Nevertheless the Dow closed 0.7% higher while the S&P gained 0.9% and Nasdaq put on 1.1%.

Meanwhile the Fed has also adopted a 2% inflation target. Not only is this an historic move but an important one as well. That is because the Fed’s inflation forecast for 2014 is between 1.6 and 2 percent, which means it can easily justify further monetary easing going forward. This explains part of the reason why European stocks and the EURUSD rallied sharply this morning. US index futures also recovered from early weakness, leading to a higher open on Wall Street today.

In the early minutes, the three leading indices were up around 0.3 percent each.  However the indices turned flat following some poor economic data. The biggest disappointment was the fall in the number of newly built US homes, which dropped 2.2% in December against an expected 2% increase. Unemployment claims jumped by 21,000 last week to 377,000 from 356,000 (initially reported as 352,000). Economists were expecting a modest increase. Leading Indicators rose 0.4% in December, disappointing expectations of a 0.7% increase. However Durable Goods Orders rose strongly on the month, signalling that manufacturers may see an increase in future activity as they work to fill the orders. They showed a month-on-month gain of 3% in December and the figure for November was revised up to 4.3% from 3.8%. Core orders, which exclude autos, were up 2.1% on the month following a gain of 0.5% in October. Both measures topped economists’ forecasts.

A batch of quarterly earnings results were released this morning, which were mostly positive. Caterpillar (CAT) posted a 58% jump in profit, boosted by a rise in global demand for construction machinery. Earnings from 3M (MMM) and Nokia (NOK) also topped expectations while AT&T (T) disappointed. Netflix (NFLX) jumped 25% following the release of its forecast-beating numbers last night. We will have a host of earnings reports after the bell tonight, including Motorola, Starbucks and Juniper Networks.

Technical Outlook - Australia 200 (.AUS200)

Here is a daily chart of Australia 200 cash index. We looked at this on Monday when it was consolidating below the trend line. It has now broken through the trend line, suggesting the phase of weakness may now be over. Still, keep an eye on 4350 which corresponds with the previous high and the 200-day moving average. An eventual break above that level would confirm a change of trend.

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1724.0	+ 13.0	+ 0.77
Spot Silver	.SILVER	3340.0	+ 23.0	+ 0.70

Precious metals soared yesterday following the release of the US Federal Reserve’s FOMC statement and Ben Bernanke’s press conference. The FOMC said that it expects rates to be held at “exceptionally low levels” until late 2014 or beyond. This extends the central bank’s “easy money” policy by around 18 months. In addition, Fed Chairman Bernanke signalled that further stimulus may be forthcoming should employment not “make sufficient progress” and if inflation should fall significantly below its inflation target which has been set at 2%.  Housing and the problems in Europe are also headwinds to future US growth. While the US dollar slumped and equities jumped, it was gold and silver that made the biggest gains. This extended low interest rate environment encourages buyers, as does the possibility of further central bank intervention. Investors head for precious metals as an alternative to the US dollar which is being undermined by the Fed’s loose monetary policies.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11110	+ 114	+ 1.02
WTI Crude Oil Spot	.WTI	100.70	+ 1.22	+ 1.23

Crude oil was another market which rallied following the FOMC’s statement yesterday.  The committee voted to keep interest rates low until the end of 2014, or beyond, and raised the likelihood of additional stimulus measures. The US Federal Reserve seems unimpressed by the recent improvement in US data and is concerned about the outlook for employment, the danger that inflation falls significantly below its new 2% target and the debt crisis in Europe. The US dollar fell sharply as a result and this helped to lift crude prices. Nevertheless, the gains in oil are less impressive than those in precious metals. No doubt traders are worried that the Federal Reserve cut its forecast for 2012 US GDP growth. In addition, Chairman Bernanke said that there were headwinds coming from Europe and the likelihood of a slowing global economy. These factors play into concerns that demand for crude could moderate over the coming months, so potentially capping further gains.

Looking forward - Friday 27th January

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.