Tuesday, 18 December, 2018

Gold Sinks To 4-Week Low As US Dollar Resumes Rally

Gold Sinks To 4-Week Low As US Dollar Resumes Rally Gold Sinks To 4-Week Low As US Dollar Resumes Rally
Jean Garcia | 26 April, 2018, 12:33

Earlier this month, a Bank of America Merrill Lynch Global Research survey of fund managers concluded that if the 10-year yield rises to 3.50 percent, investors will start buying bonds while selling stocks. NY time, the highest in more than 11 weeks.

Is this another head fake?

The yen retreated, helping spur Japan's Topix index to the highest in nearly two months, and Chinese shares rallied on signs the government may ease off tightening measures if warranted.

While bond yields in the Eurozone and United Kingdom also rose on Monday, the concern among investors is that inflation is rising without an increase in the pace of economic growth. There is also an increased demand for higher risk assets, which has helped support the USA dollar as investors are more reassured as geopolitical tensions ease. Optimists predict that a rebound will arrive later in the year.

And so, to answer the first question, I believe the 10-year yield is telling us several different things.

Is inflation finally trending up?

"Gold is up. That's certainly helping the market to stay afloat a bit better than in the USA", said de la Durantaye. In addition, large companies such as Caterpillar (Euronext: CATR.NX - news) have warned about increased costs from rising metals prices. "But if we have a slow drift higher, I don't see any reason why it has to be a headwind". A game-changer would be if core CPI reaches a 2.4% annual pace, which would mark a new peak for the current expansion. But that will likely lead to even higher rates on longer-term Treasuries.

Stock markets are not showing nervousness. The Fed Reserve will be forced to raise interest rates to prevent the economy from overheating. Wall Street is hardly the only factor for setting monetary policy. "For many who have had variable rate products for a while and who didn't see much change, they could be in for a shock, especially if the Fed keeps raising rates, as expected". Regardless, Fed funds futures are now pricing in another rate hike for the June FOMC meeting, according to CME data.

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How will geopolitical risk influence Treasury yields?

"The 10-year Treasury would need to move over 4 percent before it became serious competition for the stock market, given the level of earnings per share we are now seeing for the S&P 500 companies", said Daniel P. Wiener of Adviser Investments, based in Newton, Mass. US stocks are mixed Monday morning as health care and industrial companies make gains and energy companies slip with oil prices.

Also, explore our Market Compass investment guide, which provides a look at three macro issues -disruption, divergence and demographics - using clear, compelling charts.

Investors have been weighing the implications of climbing bond yields that were in part spurred by higher commodity prices and concern surrounding their inflationary impact on the wider economy.

Frick agrees that rising interest rates may be the effect consumers feel most.

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