Exhausted equity bulls look set to take a breather on Friday.
Who can blame them after a week filled with dovish slants from central banks, notably the Fed, that produced a fresh S&P 500 record. But stay alert for one more distraction. Stock-index futures, stock-index options, single-stock futures, and stock options will all expire simultaneously today, an event known as quadruple witching, that happens every quarter on the third Friday of the last month.
That can trigger volatility in the last hour of trading, but sometimes into the next week when it has coincided with an average loss of 1.09% for the Dow in 25 of the last 29 years, according to Jeff Hirsch, editor of the Stock Trader’s Almanac.
Away from equities, another herd of bulls are panting this morning. In the wee hours of Friday, gold GCQ19, +0.25% reached a fresh 2013 high of $1,415 an ounce, which was met pretty quickly by sellers. Gold has been on a monster run since the Federal Reserve hinted Wednesday that it could cut interest rates in the coming months.
As gold is seen as a defensive play, while it doesn’t pay a dividend or interest, it’s more appealing as an alternative lower-risk asset to hold when interest rates are low and investors are turned off by bonds.
That brings us to our call of the day from Citigroup analysts who say this “bullish gold fever is justified,” and say the metal could reach between $1,500 to $1,600 an ounce in the next 12 months, and $1,500 by end-2019 in the most optimistic of their new predictions for the metal.
Here’s what needs to happen: monetary policy expectations hit the zero lower bound level — when central banks cut interest rates to zero and have to find other ways to stimulate the economy — financial markets start pricing in expectations of more quantitative easing by those banks, and real U.S. interest rates sink into negative territory, says a team of analysts led by Aakash Doshi.
The analysts are generally upbeat on gold, which they see supported by worries about the global economy and trade and possible equity downturns.
They’ve also upped their near-term view. At the start of the year, Doshi and co. had a $1,400 target for gold over six to 12 months, but they now expect the metal to reach $1,450 within three months.
The markets
Dow DJIA, +0.94% S&P SPX, +0.95% and Nasdaq-100 COMP, +0.80% futures are down.
The dollar DXY, -0.07% is flat, oil CLN19, +5.80% CLN19, +5.80% is up a little and the TMUBMUSD10Y, +0.16% yield on the 10-year U.S. bond is just over 2%.
Europe stocks SXXP, -0.27% are struggling higher and Asian stocks mostly fell. Weak data hit the Nikkei NIK, -0.95% and renewed Hong Kong protests rattled the Hang Seng HSI, -0.27%
The chart
Equities and bonds are pricing in very different economic scenarios, and something’s gotta give says our chart of the day from Dario Perkins, managing director of global macro at TS Lombard.
The yield on the 10-year U.S. Treasury bond TMUBMUSD10Y, +0.16% has been lower than the yield on the three-month note TMUBMUSD03M, -0.62% off and on for a few months. That differential is called yield-curve inversion — when long-term bonds pay lower rates than short-term ones — and has historically signaled a recession.
While stocks are a good guide to the current state of the economy, the bond market is a better predictor, so look out equity investors, says Perkins.
The buzz
President Donald Trump approved, then canceled at the last minute airstrikes on Iran targets, the New York Times reported. Tensions have picked up this week after Iran shot down a U.S. drone. The Federal Aviation Administration says U.S. airlines cannot fly in some Iranian-controlled airspace, over fears of a jetliner accidentally being shot down.
Workplace chat tool Slack Technologies WORK, +48.54% finished its first trading day on Wall Street with a value of nearly $20 billion.
Shares of IQE IQE, -27.56% which makes semiconductor wafers for chips used by companies like Apple AAPL, +0.80% have tanked on a profit warning which it blames on effects of U.S.’s Huawei ban.
“An open mind, but not an open door.” That was Bank of England Gov. Mark Carney who said bank officials are mulling access for Facebook’s FB, +1.09% new digital currency Libra and others.
The economy
We’ll get a first look at the June manufacturing and services purchasing managers indexes after the market opens, followed by data on existing home sales. We’ll hear from these Fed officials Friday: Vice Chairman Richard Clarida, Cleveland Fed President Loretta Mester, and Fed Gov Lael Brainard.
Random reads
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A grim financial lesson awaits you kids from cashless Monopoly
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