Scoreboard: Emotional ambush

Wall Street was rocked by more taper fears on the back of good unemployment data, but commodities surged amid tumult in the Middle East.

Price action was quite strange last night. It was mixed overall, and there doesn’t seem to be one overarching thematic. For instance, stocks were belted, but at the same time commodities pushed higher. Indeed precious metals surged – silver up 5.7 per cent and gold up $30 to $1363.

The mixed macro flow probably wouldn’t have helped things. Specifically, the fall in jobless claims will alarm those who fear a QE tapering, despite the fact it is great news and won’t change the fact that the Fed is still printing money anyway. More to the point, jobless claims are volatile and bounce around. But the data last night showed they fell to 320,000 in the week to August 9 (from 335,000), which is a great result and points to more strong jobs gains ahead. Combined with an uptick in inflation for June (up to 2 per cent year-on-year from 1.8 per cent), taper talk picked up. Certainly the US 10-year bond yield shot up, about 7 bps to 2.766 per cent, which would seem to justify that talk, and of course rising yields aren’t great for stocks.

Yet it’s certainly not a fait accompli. For a start, the Fed doesn’t focus on the consumer price index – it looks at the personal consumption expenditures deflator as measure of inflation. Secondly, the jobs data was the only good macro news for last night, with industrial production flat for July and the Philly Fed index slumping to 9.3 in August from 19.8. That’s sufficient for the Fed to hold back, I think – I mean, these people extended QE as the economy accelerated at a rapid clip. It’s all about how the data is spun. I think they should taper – in fact, halt QE and raise rates. But for the moment, uncertainty as to the exact taper timing remains, and I suspect that’s part of the plan.

In any case, taper talk doesn’t explain why precious metals surged. That in part is being put down to violence in Egypt. But then again, violence in the Middle East is hardly news, and crude wasn’t up all that much – only 0.4 per cent to $107 (Brent up 0.5 per cent). If Middle East violence were driving commodity gains, this is where you’d see it first. Maybe US dollar weakness is a part of the story. The euro rose almost a big figure to 1.3349 while the yen was at 97.27 from 97.7 and the Australian dollar sits at 0.9143, down about 25 pips or so. At this point what drove such a strong gain isn’t entirely clear.

Whatever the case, stocks were belted with the biggest falls in about two months. At the bell the S&P500 fell 1.4 per cent (1661), the Dow was 225 points weaker (15,112 ) and the Nasdaq fell 1.7 per cent (3606). Big losses were driven by health, consumer stocks (which were also hit after Wal-Mart reported disappointing earnings), financials and tech – although actually all major sectors were weaker.

That’s largely it. For the day ahead there isn’t much, really – the SPI suggests our stocks will be off some 0.6 per cent, although there might be one saving grace: mining stocks, at least in the US, and particularly gold stocks did well too. But other than that there is little data until tonight. Nothing hard hitting, mind you – US housing starts, productivity and labour costs. Then the University of Michigan releases the preliminary estimate of August consumer confidence, and we get eurozone current account and inflation data.

Have a good weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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