Fed-Induced Rally Makes Riskiest Debt Priciest: Credit Markets
Bloomberg
Brian Keogh
The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve- induced rally in high-risk assets, adding to concern fixed- income securities are overvalued.
The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.1 percentage points, or 3.4 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average.
Record-low interest rates in the U.S. and Europe, and speculation the Fed will purchase more bonds to keep the economy from faltering, are encouraging debt investors to take on riskier securities and stoking concern prices are rising to unsustainable levels. Goldman Sachs Group Inc. advised its clients to avoid adding CCC rated debt in a report published Oct. 22 because of slower economic growth.
“With CCCs even more richly valued than historically, the risk of poor relative returns in the future would appear to be high,” said Martin Fridson, a global credit strategist in New York at BNP Paribas Asset Management, who began his career as a corporate debt trader in 1976. “You have to be conscious of that risk of underperformance. Having relatively rich valuations puts investors at a handicap.”
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Gold Soars as the Fed Contemplates More QE
Seeking Alpha
It's obvious after looking at yesterday's trade that the market is obsessed with the Fed's QE2. The market violently responded to Wednesday night's news that the Fed was asking the primary dealers about what they feel the demand for treasuries will be moving forward.
The market responded to the news by crushing the dollar thinking that a larger QE2 is now on the table.
I read it the same way. You know the banks' answer to the Fed's inquiry: "Umm...Mr. Bernanke, we don't think the demand is going to be very high at all. We think you need to increase the QE."
Why would they say anything else? The banks are all insolvent and dying for more QE because it fills up their empty coffers.
The market read it the same way. The dollar got crushed following the news
Gold then soared
The 10 year bond then soared as the market speculated that the Fed may increase QE2
What I find interesting is the market sold off on this news. The consensus thinking has been that the larger the QE the better it will be for stocks.
From the looks of things, so far it's had the opposite effect.
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Gold Soars as ECB Policymakers Warn about Currency War. USD Resumes Weakness
International Business Times
Expectations of Fed's QE continued to dominate movements of asset prices. While it's almost certain that the Fed will announce new easing measures at the upcoming FOMC meeting, the size and the timing have spurred rigorous debates in recent days. The dollar resumed weakness yesterday as the New York Fed surveyed bond dealers' expectations of asset purchases over the next 6 months. Losses were pared later in the day but mixed economic data failed to depict a clearer outlook for Fed's move. Commodities rebounded as USD fell. The front-month contract for WTI crude oil climbed higher and settled at 82.18, up +0.29% while gold rose strongly to a 3-day high before closing at 1342.5, up +1.50%.
BOJ's decision to bring forward the next meeting to November 4-5 signaled that the Fed will very likely to announce QE2 next week. While the dollar had rebounded amid worries that the program may be smaller than previously expected, renewed selling pressure was seen after a Fed's survey. The New York Fed asked bond dealers about their expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asked companies how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. Questions such as estimated changes in nominal and Treasury yields 'if the purchases were announced and completed over a 6-month period', with amounts ranging from zero, 250B, 500B and 1 trillion induced speculations that the Fed's measures may be aggressive.
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Gold Up On Dollar Weakness, Inflation Fears
Wall Street Journal
Tatyana Shumsky
Comex gold futures rallied 1% in Thursday morning trade, supported by a weaker dollar and renewed concerns about inflation.
The most actively traded contract, for December delivery, was recently up 1%, or $13.70, at $1,336.30 per troy ounce on the Comex division of the New York Mercantile Exchange.
A weaker dollar helped gold futures rally from the previous day's lows. Dollar-denominated gold attracts buyers using foreign currencies when the dollar weakens, the contract appears cheaper. The ICE Dollar Index was recently down 0.8% at 77.508.
"Certainly the weakness in the dollar is buoying metals today," said Dave Meger, director of metals trading at Vision Financial Markets.
A return of long-term inflation concerns also had investors re-establish long-positions in gold. While reports indicate that the long-awaited Federal Reserve stimulus will be less aggressive than expected, traders worry that the program will bring much higher inflation and do little to improve economic growth.
Gold is often seen as an alternative currency and an inflation hedge, and a safe harbor asset amid global economic uncertainty.
"Gold is still in favor for many factors, we still expect continued liquidity to be added and the currency hedge and the safe haven aspect are going to continue to play out," Meger said.
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Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway
Bloomberg
John Hathaway
The world’s monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications.
The only questions are how long the denouement of the dollar reserve system will last, and how much more damage will be inflicted by new rounds of quantitative easing or more radical monetary measures to prop up the system.
Whether prolonged or sudden, the transition to a stable monetary system will become possible only when the shortcomings of the status quo become unbearable. Such a transition is, by definition, nonlinear. So central-bank soothsaying based on the extrapolation of historical data and the repetition of conventional wisdom offers no guidance on what lies ahead.
It’s amazing that there is no intelligent discourse among policy leaders on the subject of monetary rot and its implications for the future economic and political landscape. Until there is fundamental monetary reform on an international scale, most economic forecasts aren’t worth the paper on which they are written.
Telltale signs of future trouble aren’t hard to spot. Only a few months ago, Federal Reserve Chairman Ben Bernanke and a chorus of other high-ranking Fed officials were talking about exit strategies from the U.S. central bank’s bloated balance sheet and the financial system’s unprecedented excess liquidity. Now, those same officials are talking about pumping more money into the system to stimulate growth.
Risky Targets
And they’re not alone: Six months ago, the chief economist of the International Monetary Fund, Olivier Blanchard, suggested that raising inflation targets to 4 percent from 2 percent wouldn’t be too risky.
This sort of talk must grate on the nerves of our trading partners, China, India, Russia and others, who have accumulated pyramids of non-yielding Treasury debt. No haven there. Return- free risk may be a better way to put it. And bickering among central bankers over currency manipulation and rising trade tensions doesn’t exactly reinforce one’s confidence in a scenario of sustained economic growth and a return to prosperity.
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Goldman: “The Dollar Needs To Fall A Lot Further From Here”
Zero Hedge
In today's note by Goldman's Robin Brook, the analyst takes an inverse approach of looking at what a dollar drop implies for CPI and general prices, in an attempt to settle a debate whether the expected drop in the USD as a result of QE2 will have a meaningful impact on both inflation, currency wars, and other derivatives of monetary policy. As Goldman concludes: "the ‘pass-through’ from Dollar declines to US consumer price inflation is small. This in turn means that – if indeed the Fed sees the Dollar as one of its key policy levers for preventing inflation from staying below its mandate for a prolonged period – the Dollar needs to fall a lot further from here." The quantification of "lot" is not provided but is sufficiently indicative from a qualitative standpoint. Of course, the biggest issue here is with the construction of CPI itself, which is driven far more by a collapse in leveraged input prices specifically as pertains to shelter, then spiking prices in items most see as critical in day to day use. Nonetheless, as Goldman is one of the Primary Dealers whose opinion is now a part of the "reverse inquiry" methodology in determining monetary policy, the fact that the hedge fund is comfortable with a substantial drop in the USD implies that the Fed should be just as comfortable with a shock and awe approach to QE2, as a pronounced effect on the dollar would likely have to come from a stepwise drop as opposed to a gradual wear down which would be intercepted by other central banks. The key question remains: what level on the DXY is Goldman, and thus the Fed comfortable with as ""modestly inflation stimulating, and what will the price of jeans be, gold, and other commodities be, not to mention what the final level of excess reserves and margins for Chinese exporters, once that level is finally attained.
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Gold Prices Recover as Dollar Drops
The Street
Shanthi Venkataraman
Gold prices strengthened in mid-day trading Thursday as the dollar buckled under selling pressure on quantitative easing concerns.
Gold for December delivery settled $19.90 higher to $1,342.50 an ounce on Thursday at the Comex division of the New York Mercantile Exchange.
The U.S. dollar index was down 1.1% to $77.28, while the euro was up 1.1% to $1.39 against the dollar. The spot gold price was gaining $17, according to Kitco's gold index.
"The dollar is the number one factor driving the rise in gold. There are also concerns about inflation emerging right now," said Toon Van Beeck of Ibisworld. He said gold will be vulnerable to shifts in news at this point and be very volatile ahead of the Federal Reserve's move next week.
Gold prices came under pressure on Wednesday after the Wall Street Journal reported that the Federal Reserve could be more cautious than previously expected in its stance on quantitative easing.
Uncertainty about the size and structure of the monetary stimulus has led to a more volatile dollar in recent days. Some sections of the market argue that a measured move may have a more muted impact on the dollar, while others suggest that further easing would weaken the dollar irrespective of the size as investors chase higher yielding assets in other countries.
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Gold vs Bonds
GoldSeek
Nick Barisheff
Most investors have a deep-seated belief that bonds are a safe investment while gold is risky and volatile. If we explore this belief with an open mind, however, we will find that gold, not bonds, offers vastly superior wealth protection.
The 2008 financial crisis saw an unprecedented move out of equities and into bonds as investors looked for a safe haven, one that would protect their portfolios. Relatively few investors chose to move into gold. This is curious because gold, unlike bonds, is an asset class that has a negative correlation to financial assets, thus providing the greatest diversification as well as protection from inflation and currency crises.
This is illustrated in Figure 1, which shows how gold has outperformed all major asset classes.
In addition, gold has outperformed all major currencies, as illustrated in Figure 2.
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The US government’s response to the 2008 financial crisis was to embark on and continue with policies of extreme stimulus and bailout packages. These policies will provide only a temporary reprieve, a Band-Aid solution to America’s dire situation. Since the financial crisis was caused by excess debt, issuing more debt can hardly be the cure. The US Treasury, with help from the Federal Reserve, essentially flooded the economy with excess dollars, driving the money supply to unparalleled levels and inviting the very serious threat of future inflation.
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Gold Futures Gain in New York as Dollar’s Decline Spurs Investor Demand
Bloomberg
Pham-Duy Nguyen and Nicholas Larkin
Gold gained for the first time in three days in New York as a sliding dollar spurred demand for the metal as an alternative asset.
The dollar fell as much as 1.3 percent against a basket of six currencies on speculation that any Federal Reserve program to buy back government assets will debase the U.S. currency. Gold has climbed 7.6 percent since Sept. 1, reaching a record $1,388.10 an ounce on Oct. 14, while the greenback has dropped 6.4 percent.
“How much the Fed eases will matter to the dollar,” said Frank Lesh, a trader at FuturePath Trading in Chicago. “The dollar’s important to metals, and it’s the currency value of the gold that’s driving this market.”
Gold futures for December delivery rose $19.90, or 1.5 percent, to settle at $1,342.50 an ounce at 1:59 p.m. on the Comex in New York. The metal fell 1.2 percent in the previous two sessions.
Estimates for the size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch to $2 trillion at Goldman Sachs Group Inc. Economists at both firms agree the Fed will likely start by announcing a $500 billion plan after policy makers meet on Nov. 2.
Gold has gained 2.5 percent in October and 22 percent in 2010, heading for the 10th straight annual gain.
Silver futures for December delivery rose 47.1 cents, or 2 percent, to $23.875 an ounce on the Comex. The metal has gained 9.4 percent in October and 42 percent in 2010.
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Gold Rises as Dollar Weakens Ahead of Fed Meet
Reuters
Jan Harvey
Gold rose back above $1,345 an ounce on Thursday as rising uncertainty over the scope and impact of potential U.S. monetary easing to be announced by the Federal Reserve next week knocked the dollar sharply lower.
Spot gold touched a high of $1,345.50 an ounce and was bid at $1,341.94 an ounce at 11:40 a.m. EDT, against $1,324.70 late in New York on Wednesday. U.S. gold futures for December delivery rose $20.00 to $1,342.60.
Spot prices quickly retreated after hitting a record high at $1,387.10 an ounce earlier this month, as concerns that potential U.S. quantitative easing was too heavily priced into the financial markets led to a bounce in the dollar.
Support came for gold on Thursday, however, as the dollar fell 1 percent against the euro and slipped against a currency basket. All eyes are on the Fed meeting on November 2-3.
"(Gold) is just tracking the dollar now until next Wednesday," said Deutsche Bank trader Michael Blumenroth. "Everything is dependent on the Fed meeting... but in general, I would think we have seen a large part of the correction.
"In the medium term gold should trade higher because the fundamentals are strong regardless of what the Fed will do," he said. "This is a time of the year when physical demand is pretty good, and at the end of the day we should trade higher again."
A Reuters poll showed Wall Street analysts expected the Federal Reserve to buy $80-$100 billion worth of assets per month under a new program widely expected to be unveiled after next week's two-day Fed meeting.
The precious metal is likely to stick to a relatively narrow range ahead of further information about the size and impact of any further U.S. monetary easing, analysts said.
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