Just as commodities reached new two year highs during the week after surging to that level the previous Friday, did we see a few cracks emerge last Friday in the commodity/asset price boomlet as the US Federal Reserve seemed to move closer to a decision on a further easing of monetary policy?
It could be, but it could also be the start of profit-taking ahead of the Fed’s meeting on November 2-3.
Complicating matters for the bulls is the continuing escalation of the subprime foreclosure scandal with the US Securities and Exchange Commission opening an inquiry into the way many US financial groups made loans, kept records, sold (or securitised) these loans and then have foreclosed on the failed loans.
This growing scandal threatens to short circuit one of the aims of the Fed’s so-called quantitative easing which is to boost banking lending.
If they are worried about the financial and legal costs of dud foreclosure loan documents, they won’t be doing much new or existing lending until the problem is sorted out.
The growing concerns about the foreclosure problems saw many US banks sold off on Friday with Bank of America down 4.9%, and JPMorgan Chase losing over 4%, despite reporting a solid third quarter profit report midweek.
Yields on US treasury 30 year bonds had their biggest weekly rise in 14 months as inflation concerns returned to bond market sentiment (which is what the Fed wants to see happen).
In fact most markets peaked before or just after a speech from Fed chairman Bern Bernanke Friday morning in which he moved the Fed closer to some sort of new round of spending as early as next month.
As the realisation of what he had said sunk in (and the stronger suggestion the Fed is targeting an inflation rate of 2%), markets sold off.
World stocks slid and commodity markets dropped as the US dollar recovered in the wake of the speech.
Reuters said the growing foreclosure crisis undermined the boost from Bernanke’s speech, while other analysts said the market now regards the new Fed spending as a ‘given’ and is focusing, rightly or wrongly on inflation.
Other commentary said that while Mr Bernanke sent a strong signal that the spending would happen, he also highlighted the costs of such a move, and hinted that the process would emerge cautiously, rather than a so-called ‘shock and awe’ $US500 billion or even a trillion dollar asset-purchase program announced at November 2-3 meeting.
So yields on US Treasury bonds rose as prices fell in the belief that the so-called quantitative easing will boost asset prices by creating inflation.
Even the prices of many commodities have been rallying strong on that belief and supply problems (cotton hit a new 15 year high on Friday, then fell, but oil, gold and copper all fell).
The Shanghai market ignored the problems earlier and is now back roaring ahead, rising sharply last week to be in a bull run.
Oil in fact fell $US1.44 a barrel, or 1.7%, on Friday, wiping out all the week’s gain in a day.
Gold fell 0.4% on Friday, but still ended up 2% for the week, but some of the confidence was knocked out it and other markets.
Mr Bernanke said there was a case for further monetary easing, given America’s high unemployment and very low inflation.
But he offered no details on the Fed’s next move, such as when the easing would start and how it would be done (by buying just short term treasuries, or longer dated bonds, for example).
The dollar rose from more than an eight-month low versus the euro as traders said the currency’s recent declines went too far, too fast even as a sustained rebound seems unlikely.
The euro fell to end at $US1.3968 after earlier climbing to a 10 month high of $US1.4161, which was its highest level since late January.
The dollar on a trade weighted basis dropped 0.7% to a new low for the year after Mr Bernanke spoke, with the Australian dollar reaching parity with the US unit for the first time since it was freely floated in 1983 ($US1.004, closed at 99.07 USc.) and the Canadian dollar moved a bit further above parity.
But then the US dollar turned, the Australian dollar retreated quickly, as did the Canadian loonie. The Aussie fell under 99 USc, and then clawed its way back to close around 99.07.
The loonie finished under parity as well, oil fell and gold prices also eased from record levels, with spot gold in New York at $US1,371 a troy ounce, down from Thursday’s record of $US1,387.35.
The key US 10 year bond yield ticked back over 2.50%, rising to end at 2.58% on Friday.
The yield on 10 year bonds rose 0.8% yesterday, half the 0.16% rise in the past six trading sessions to Friday on the re-emerging inflation concerns.
Weak bond auctions last week also didn’t help sentiment.
US Treasury yields were also rising, with the 30-year yield touching 4% (the first time since August), before closing around 3.97% as traders now price in what Mr Bernanke has deemed a desirable level of inflation, around 2%.
The spread between 10 and 30 year yields further widened, making it the steepest curve of any point during the financial crisis, and at least since the 1970s.
However, two-year yields eased to 0.36% as the short term yield now prices in the belief that the Fed will buy US Treasuries in a second round of easing that could be revealed on November 3.
Mr Bernanke also said in a speech on Friday that while the
