Low Volumes & Extreme Prices Across Markets

Low Volumes & Extreme Prices Across Markets

US stocks rose to new all-time highs after Fed Chair Janet Yellen told the Senate Finance Committee that despite an improved employment picture, job growth and inflation remain too weak to warrant a June increase in interest rates.

Low Volumes & Extreme Prices Across Markets
Low Volumes & Extreme Prices Across Markets

Yellen cited low wage growth as one sign that the employment situation is still not as robust as the Fed would like, but expressed optimism that long-term unemployment and the "quit rate" are returning to pre-recession levels. 

As for inflation, she acknowledged that, independent of other factors, the large drop in crude oil prices has suppressed inflation. Nevertheless, Yellen cited a "supply glut" as the major cause, not a lack of demand, and said that the FOMC expects consumer demand to continue growing to help reach the Fed's target inflation rate of 2%.

Crude oil back below $50 a barrel
Crude oil futures dropped 2.7% yesterday and remain below $50 this morning. Oil prices had risen following a statement by OPEC president and Nigerian oil minister Diezani Alison-Madueke in the Financial Times that she would call an emergency meeting if oil continued to drop, but that meeting now looks unlikely.

Nigeria's agenda is at odds with that of fellow OPEC member Saudi Arabia, which we wrote about last week. Terrorist group Boko Haram has increased both the number and intensity of its attacks on major cities, national elections were recently postponed, and the Nigerian naira is at all-time lows against the US dollar. Cheap oil is fueling the crisis in Nigeria and may do so for some more time.

Dollar close to 10-year highs again
The US dollar index, which hit its highest point since 2004 last week, rose again on Monday. Like the stock market, the index is pausing to wait for Janet Yellen's comments. If she seems "dovish," waiting for more job growth and being patient about raising rates, the dollar may drop a bit. If she seems more upbeat, it may signal dollar strength.

However, traders should beware of drawing any simple conclusions or trading the news. Different currencies will react differently to either a drop or rise in the dollar index, because of the prevailing interest rates in their respective economies, relative to US rates.

Gold continues slide
The flight to quality trade in gold has largely disappeared for now as investors weigh the balancing of their portfolios between equities and bonds. While gold isn't tracking the stock market lately, it has returned to its traditional close correlation with the energies. As crude weakens, so has gold. While this isn't an absolute rule, it is a well-known tendency.

While the markets reacted somewhat to the release of Yellen's prepared testimony, once they made new highs, they went relatively quiet again. If you didn't know the news, you'd have said that the markets were just continuing their existing trends. The Fed chair's testimony, while it is always newsworthy, rarely changes market direction on its own.

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