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Thursday, May 01, 2008
Bullion gains after Fed cut
Price surge up as soon as Federal Reserve announces a 25 basis point cut in interest rate
Bullion metals finished higher today, Wednesday, 30 April, 2008 after Federal Reserve cut interest rates in US by another quarter percentage point bringing it down to 2%. This was the seventh rate cut by the Fed since last September, 2007. Silver prices also fell for the day. This rate cut weakened the dollar today against its rivals, mainly the euro. Gold prices rise with falling dollar as inflationary concerns boosts the metal's appeal as an inflation hedge.
Comex Gold for June delivery rose $14.9 (1.7%) to close at $880 ounce on the New York Mercantile Exchange. Earlier, the price closed lower by $11.6 at $865.1 just before the Fed announcement. Last week, gold prices lost $20(2.8%) against previous week’s close. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce.
This year, gold prices have gained 3.4% for the till date against a 9% drop for the dollar against the euro. For April, prices closed lower by 6.3%. For first quarter prices gained 10.7%. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices succumbed and fell by 5.5%.
Comex Silver futures for July delivery fell 5 cents (0.3%) to $16.59 an ounce. Silver has gained 10.5% in 2008 till date. For April, it closed lower by 5.5%. Silver gained 16% in Q1. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 13%. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years.
In the currency market today, the dollar fell against major counterparts after the Fed decision. The dollar index, which tracks the performance of the greenback, dropped 0.5% to 72.54.
Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies. On the other hand, a lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies.
The central bank lowered its benchmark interest rate 25 basis points to 2% today. The euro gained as much as 0.3 percent against the dollar after the cut, reversing earlier declines. Prioir to today, the Fed has reduced its benchmark interest rate by 3 percentage points to 2.25 percent since last September as a housing slump and credit squeeze threatened to push the economy into a recession. Since last September, Fed has axed interest rates six times, and seven including today’s. The ECB has kept rates unchanged at 4% since June.
Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007 as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. The Fed reduced federal funds rate three times in FY 2007. In 2006, silver had jumped 46% while gold gained 23%. Gold has tripled in five years as investment demand has soared and mine supplies have remained low.
At the MCX, gold prices for June delivery closed lower by Rs 109 (0.9%) at Rs 11,370 per 10 grams. Prices rose to a high of Rs 11,486 per 10 grams and fell to a low of Rs 11,345 per 10 grams during the day’s trading.
At the MCX, silver prices for May delivery closed Rs 21 (0.09%) lower at Rs 21,945/Kg. Prices opened at Rs 22,050/kg and fell to a low of Rs 21,945/Kg during the day’s trading.
US Market loses steam in the final hour
Market makes a great start after a positive GDP report but drops after Fed rate cuts
US Market started off the day strongly today, Wednesday, 30 April, 2008 but ended the day on a negative note after Federal Reserve decided to slash overnight lending rate and discount by another quarter percentage point to 2% and 2.25% respectively. Market traded in sideways fashion for most part of the ay. A stronger than expected GDP report failed to keep its impact for long on the market. Three of the major economic sectors finished the session in positive ground, ie energy, materials and telecom.
The Federal Open Market Committee announced today that it cut the fed funds and discount rates by 25 basis points. This left the fed funds rate at 2% and the discount rate at 2.25%. The Fed said economic activity remains weak, while inflation expectations are picking up.
The market was up by 176 points at one point in the day. Even, after Fed’s decision, market was trading higher. But it lost all steam in the final hours of trading. At the end, The Dow Jones industrial Average ended with a loss of 11.8 points at 12,820.18. The Nasdaq Composite Index, finished lower by 13.3 points at 2,412.3. S&P 500 finished lower by 5.3 points at 1,385.5.
Sixeen out of thirty Dow components ended in the red today. Citigroup was the main Dow loser. The stock slipped by more than 4% today.
The majority of earnings reports were better than expected. Colgate-Palmolive, General Motors and Procter & Gamble - all topped expectations.
On the economic report front, advance first quarter GDP rose by 0.6%, topping the consensus estimate of 0.5%. Separately, the ADP Employment Report, a measure of nonfarm private employment, showed an increase of 10,000 jobs in April, easily beating the consensus estimate that called for a decline of 60,000.
The April Chicago Purchasing Managers' Index - the regional manufacturing survey came ahead of expectations at 48.3, which were up from the previous reading of 48.2 and also ahead of expected 47.5. Because the number is below 50, it reflects contraction in manufacturing activity in the Chicago region.
Crude prices dropped by more than $2 today as the weekly inventory report by the Energy Department showed that crude supplies rose more than forecast. Crude-oil futures for light sweet crude for June delivery closed at $113.46/barrel (lower by $2.17/barrel or 1.9%) on the New York Mercantile Exchange.
EIA reported today that U.S. crude oil imports averaged 10.2 million barrels per day last week, up 174,000 barrels per day from the previous week. Traders had anticipated that U.S. crude-oil supplies advanced 950,000 barrels in the week ended 25 April. Crude inventories were boosted by increasing imports. U.S. refineries operated at 85.4% of their operable capacity last week, down 0.2% from the last week.
In the currency market today, the dollar fell against major counterparts after the Fed decision. The dollar index, which tracks the performance of the greenback, dropped 0.5% to 72.54.
Volume on the New York Stock Exchange topped 4.4 billion, while nearly 2.2 billion shares were traded on the Nasdaq, with advancing stocks ahead of those declining by 8 to 7 on the NYSE and decliners edging just ahead of advancing issues on the Nasdaq.
For tomorrow, April's vehicle sales data are due tomorrow, as are March's personal income and spending figures. The weekly jobless claims figure is also due prior to the market's open followed by the ISM Manufacturing Index for April and construction spending data for March. On the earnings front, Exxon Mobil is the Dow component along with a few other companies to report before market opens
Fed cuts rates, hints at a pause
The Federal Reserve on Wednesday cut interest rates by a quarter point to 2 per cent and hinted at a likely pause at its next policy meeting in June.
However, the US central bank was careful not to suggest that it thinks the rate-cutting cycle is necessarily over, and left open the option of cutting rates in June, or resuming rate cuts later in the year if required.
The Fed decision followed new data that suggest that the US economy grew 0.6 per cent in the first three months of this year, avoiding outright contraction due to a build-up in business inventories and continued support from exports.
But real final sales (excluding inventories) declined as investment fell and consumption slowed, suggesting that underlying demand may not be enough to support continued expansion.
The report revived the debate as to whether the US is in recession.
Richard Yamarone, director of research at Argus Securities, said "claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia".
But John Ryding, chief US economist at Bear Stearns, said "the fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession".
The official verdict will be made by the National Bureau of Economic Research. It puts "considerable weight" on GDP, but uses measures such as employment and income as well.
Many analysts believe the economy will probably contract in the second quarter as companies cut back on inventory.
"The increase in inventories is likely unintentional: corporations were seemingly surprised by the cooling off in demand," said Drew Matus, senior economist at Lehman Brothers.
However, others argue that tax rebates will arrive just in time to boost consumer spending and keep second-quarter growth positive too.
Carlos Gutierrez, the US commerce secretary, said the report suggests growth will be "slower but positive" in the first half.
Real personal consumption increased at a 1 per cent rate in the first quarter — still positive, but the weakest growth since the second quarter of 2001.
Crude slips by another $2
Prices go down further as crude supplies rise more than forecast for last week
Crude prices dropped by more than $2 today, Wednesday, 30 April, as the weekly inventory report by the Energy Department showed that crude supplies rose more than forecast. Also, Federal Reserve’s decision to slash interest rates by another quarter basis point to 2% affected crude prices. Earlier this week, prices had touched an all time high of $119.93 during intra day trading.
Crude-oil futures for light sweet crude for June delivery closed at $113.46/barrel (lower by $2.17/barrel or 1.9%) on the New York Mercantile Exchange. For the year, crude is up by 17.5% till date. Oil increased 75% in the past year as supply failed to keep up with surging demand in China, India and the Middle East.
EIA reported today that U.S. crude oil imports averaged 10.2 million barrels per day last week, up 174,000 barrels per day from the previous week. Traders had anticipated that U.S. crude-oil supplies advanced 950,000 barrels in the week ended 25 April. Crude inventories were boosted by increasing imports. U.S. refineries operated at 85.4% of their operable capacity last week, down 0.2% from the last week.
EIA also reported gasoline supplies fell by 1.5 million barrels in the latest week, while distillate stocks, which include diesel and heating oil, rose by 1.1 million barrels.
In the currency market today, the dollar fell against major counterparts after the Fed decision. The dollar index, which tracks the performance of the greenback, dropped 0.5% to 72.54.
Brent crude oil for June settlement today fell $2.07 (1.8%) to $111.36 on the London-based ICE Futures Europe exchange. The London benchmark rose 54% in FY 2007, the most since 1999 when prices more than doubled.
Natural gas was little changed as crude oil fell after a government report showed supplies rose more than forecast. Natural gas for June delivery rose 0.1 cent to settle at $10.843 per million British thermal units.
Against this backdrop, June reformulated gasoline fell 2.2 cent to $2.9107 a gallon and June heating oil lost 2.19 cents to $3.255 a gallon.
Crude had ended FY 2007 substantially higher by $35 or 57%. It was crude’s biggest yearly gain in five years.
At the MCX, crude oil for May delivery closed at Rs 4,628/barrel, lower by Rs 36 (0.8%) against previous day’s close. Natural gas for July delivery closed at Rs 439.5/mmbtu, lower by Rs 1.7/mmbtu (0.4%).
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