Wall Street finished this rocky trading week like it started, as all of the major benchmarks finished the day well off of the session’s highs. The Dow fell by 0.8% while the S&P 500 sank by 0.7% and the Nasdaq tumbled by just 0.4% in comparison, as weakness in the GDP report combined with gloom over the debt ceiling debacle to cause many traders to flee risky assets. Meanwhile, in commodity markets, gold finished higher by nearly $11/oz. to come within a few dollars of its all-time high thanks to continued uncertainty over the American economy. Unfortunately, this trend had the opposite impact on oil as the vital commodity finished the day below the $96/bbl. level, down more than 1.5%. Softs also plunged on the day as all of the grains finished the week lower led by a nearly 2.6% loss in both corn and Chicago wheat, although industrial metals and most livestock contracts did manage to buck the trend and finish Friday in the green.
The real action, however, continued to be in the currency and T-Bill markets as the debt ceiling deadline looms ever closer. Despite the worries over a potential default on Tuesday, Treasury bonds saw yields plunge to close the week as the 10 Year’s rate sank by 15 basis points and the two year experienced a six basis point drop all the way down to the 0.37%. For the medium term debt, this represented the biggest one day drop since December, suggesting that while many are worried about the future of the American economy, they aren’t willing to give up the ‘safe haven’ status of U.S. government bonds just yet.
One of the biggest ETF winners on the day was the iShares Barclays TIPS Bond Fund (TIP) which gained 1.2% on the session. Today’s sharp gains, which were on volume that well exceeded the average for the popular fund, came as traders sought protection in whatever safe havens they could find. Since the debt deal is still elusive and the status of regular T-Bills is uncertain, many traders bought up TIPS instead as a way to maintain exposure to the bond market but with potentially lower levels of risk. According to the Treasury website, 5 Year TIPS are now yielding an unfathomable -0.72% while the seven year were negative as well today, as yields for that issue plunged to -0.18%. Meanwhile, on the long side of the TIPS curve, yields fell to just 1.39% for thirty year bonds, a nearly 38 basis point drop since the beginning of the month. Thanks to this heavy demand, TIP is now up nearly 4.9% over the past month including a 1.9% gain in the past week alone, demonstrating just how fearful some investors have become in this current market environment [see fundamentals of TIP here].
One of the biggest losers in the ETF world was the Market Vectors Gold Miners ETF (GDX) which sank by 2.1% to close out the week. Today’s losses, which came as somewhat of a surprise given the strength in gold prices, was largely a result of worries over capital expenditures at many gold mining firms and the possibility of rising costs to access gold. Barrick Gold recently reported that capital costs on its project in the Dominican Republic are expected to rise by 10% while the gold giant is now expecting a nearly 40% increase in costs at its project in Chile and Argentina, suggesting additional gold output will require more investment. “Everybody’s asking, ‘why aren’t the stocks higher, gold is making new highs?’ And basically it’s because gold stocks are stocks and right now everybody is being fairly cautious,” said John Ing, president of Maison Placements Canada. Thanks to this, most gold stocks were off today despite the underlying metal surging close to the $1,630/oz. level as all three of the fund’s top components were down at least 1.3% on the day, led by a nearly 3.7% loss in the shares of Newmont Mining Corp. This was the result of Newmont missing consensus expectations for its most recent earnings release, a situation that helped to push the broad gold mining sector sharply lower to close out the week [see holdings of GDX here].
Disclosure: No Positions at time of writing.