It has been a busy week featuring continued earnings, a glut of U.S. data, a Federal Open Market Committee meeting and will conclude tomorrow with the monthly US Jobs data. The Russia/Ukraine conflict appeared to ebb from the forefront of the markets consciousness leaving the door open for a decline in the energy and metals complexes as we have seen several large banks leave the U.S. commodity arena possibly leading prices lower as the void has yet to be filled by other interested parties.
For the most part the data in for the U.S. has been positive with the misses only being in new homes sales and GDP (economic-calendar). The other substantial data was bullish for the U.S. economy though the GDP print is of particular importance as growth is one of the primary components of the FOMC committee’s mandate.
Nonetheless, the committee did opt to continue the tapering of asset purchasing by the Federal Reserve by 10 billion dollars per month reducing the purchasing going forward to $20 billion in mortgages backed securities and $25 billion in US bonds for a total of $45 billion going forward. This decision was in line with expectations and should lead to similar cuts in purchases going forward. The accompanying statement seemed to be relatively positive in regards to the US economic outlook.
However, the fixed income markets have showed strength in price (declines in rate) following the report that is not consistent with this type of positive economic data. One possible explanation is that traders are using the fixed income markets as a hedge against other market exposure with the Jobs data scheduled for release tomorrow morning at 7:30 am with an expectation of 210,000 new jobs for the month.
The markets are somewhat inconsistent in the normal correlation of inter market commodities (i.e. yen lower with bonds higher, metals and energies lower sharply with equities flat to higher, etc.). These ‘broken’ correlations are likely to come back in line as the big data tomorrow morning is revealed. It is telling in the energies and metals that the less liquid commodities appear to be trading sharply lower than their more liquid counterparts (silver down much more than gold; RBOB down much more than Crude (NYMEX:CLM14)).
That would lead me to believe that the declines have more to do with forced price discovery and a lack of institutional buying than with longer term trend development and price location. In fact, we have seen over the past several months many major players in the commodities arena either sell their commodity entities or get out of the business altogether. JP Morgan, Barclays, Duetsche Bank and Morgan Stanley have all made this move possibly leaving a big hole in the demand for commodities. It is expected that other players should be in line to pick up that market share reviving the demand for these products (exit-from-commodities and banks-havent-given-up-on-trading-commodities).
According to Peter Thomas, Senior Vice President of Zaner Precious Metals, this flight from the commodities markets is being fueled by a dramatic increase in U.S. regulation forcing storage and delivery of physical metals offshore. While the initial move could be further decline in the price discovery, the longer term view could be one that shows a rebound in value as demand increases as further difficulties in taking and making deliveries continue to compound.