LAWRIE WILLIAMS: Carnage in the markets – precious metals and equities crashing
Friday saw a big sell-off in almost all markets with precious metals, apart from rhodium, selling off sharply, alongside a severe equity correction - perhaps not before time. Even bitcoin came off substantially after a strong, and in the writer’s view totally unjustified, upsurge. Is this the start of the much predicted market crash? It is perhaps too early to tell, but the speed and volatility of the market turnaround we are seeing should serve as a warning of what may well be in store. This may only be the beginning! There was a bit of a recovery in later trading with the NASDAQ even returning positive figures, but this index had been hit particularly hard in trading earlier in the week so perhaps was due a small reprieve.
Friday’s carnage seems to have taken its lead from Asian markets with big falls in Japan’s Nikkei and Hong Kong’s Hang Seng indexes overnight. European markets followed suit and although US and Canadian markets were mixed from time to time, they showed substantial overall weakness. Precious metals were hit hard as well with gold falling to levels not seen since the middle of last year – silver also which lost virtually all its recent gains, while platinum seemed a little more resilient, but then its recent performance had been the strongest among all the precious metals being the only one of the main traded metals in the complex to be up significantly (around 10%) so far this year. Palladium fared badly too but has perhaps been the most volatile precious metal over the past couple of years anyway.
The crash in the markets has been put down to a combination of a rise in bond interest rate yields, suggesting that inflation might be returning and the Fed may be forced to raise rates despite its forecast of the current low rate environment until at least 2022. This was coupled with a pretty downbeat statement from Fed chairman Jerome Powell on the state of the U.S. economy. To an extent these two factors would seem to be somewhat contradictory and perhaps not too much should be read into the bond yield situation as yet.
It will be interesting to see market reaction on Monday, given there has also been some positive news on both the economic and vaccine fronts over the weekend. While neither of these will necessarily affect the Fed statement or the rise in bond yields, on recent market performance we may well see a corresponding strong market euphoric pick-up in the U.S., and where the U.S. leads other markets tend to follow. The markets tend to favour seemingly optimistic scenarios – or they have ever since the pandemic hit the U.S. apart from a brief downturn at the very start.
As to the positive news, firstly the Biden administration’s $1.9 trillion stimulus bill passed its first hurdle with its approval in the U.S.’s lower house. While it is probably unlikely to pass unscathed through the U.S. Senate it is anticipated that the bulk of it will gain approval, and this should help prop up the equities markets, and in theory at least boost precious metals prices too with yet more money sloshing around in the markets.
The second piece of positive news was on the vaccine front with the approval, for emergency use, of the new Johnson & Johnson single dose vaccine. This could be something of an immunisation game-changer. Not only is its efficacy said to be high after the administration of just one injection, it also does not need to be stored at the ultra-low temperatures that the Pfizer and Moderna vaccines require. This hugely eases transportation and administration logistics, while the single dose regime may well improve the chances of uptake by the general population. Worries continue though about the apparently high proportion of anti-vaxxers among the Republican-voting sector of the population who seem far more prone to believe de-bunked vaccine conspiracy theories.
Thus markets may be somewhat volatile in the week, or weeks, ahead. Confidence may be dented by the Thursday and Friday market falls, although this may be counterbalanced by the stimulus and vaccine news. The latter may help contribute to the feeling that this could be the beginning of a return to near normal life. But then if and when this actually happens, which may not be for months, or even years, yet, there is the danger that the realisation of how big the hit has actually been on the global and U.S. economies will sink in and negate all the gains we have seen in the past year. Not an entirely pretty picture!
28 Feb 2021