LONDON – Just ahead of a week packed with corporate earnings, central bank meetings and major economic data, global stocks fell on Monday as a sudden and massive drop in precious metals forced investors to dump other assets to cover losses.
Silver fell another 7% on top of Friday’s 30% plunge and was headed for its biggest two-day decline since at least the 1980s.
Pressure on many silver futures funds in China fueled a decline late last week, which worsened on Monday when the CME raised margins on many futures contracts, including silver and gold, dealers said. Oil prices also fell by more than 4% after President Donald Trump said over the weekend that Iran was in “serious discussions” with the US government, presumably reducing the US risk to Iran. military attack on the country. European stocks fell 0.5% and Wall Street futures fell about 1% ahead of a week in which about 30% of STOXX600 constituents report earnings. Friday’s rebound in the dollar, following President Trump’s nomination of Kevin Warsh, a man seen by many as less favorable to ultra-loose monetary policy, hurt Wall Street stocks and exacerbated an already ongoing decline in silver prices.
Silver frenzy Silver prices more than doubled in six weeks, hitting an all-time high of $121.64 an ounce on January 29, in an unprecedented rally fueled by investor appetite for non-dollar assets and the zeal of retail traders looking for big profits against the backdrop of a global shortage of physical metal relative to demand. Ole Hansen, Head of Commodities Strategy at Saxo Bank, said: “We are seeing significant retail participation in these markets and record sales in the silver options market.” Hansen added that anyone selling an option that gave the holder the right to buy silver would have needed to own some form of long silver position themselves. “If the market suddenly reverses, there’s a huge need to get out of the market quickly because there’s no reason to hold (a position),” he said. Spot gold, which also hit a record high of $5,594.82 an ounce last week, fell 5%. Much of the pressure is coming from China’s commodity markets, where trading in silver futures had to be halted due to extreme volatility. The spillover effect on Asian stocks saw MSCI’s broadest index of Asia-Pacific stocks outside Japan drop nearly 3%, while Japan’s Nikkei stock average fell 1.3% ahead of Sunday’s lower house elections. Investors are already on edge ahead of this week’s earnings results from Alphabet, Amazon, AMD and others, and tensions are rising across the stock market as investors wait to see if the billions of dollars they are pouring into artificial intelligence will start to yield any returns, as evidenced by another spike in the VIX volatility index.
Dollar remains stable despite weak yen
In currencies, the dollar rose 0.1% against the yen to steady at 155.00, while the euro moved into positive territory and traded at $1.185, reversing some of Friday’s 1% decline. The dollar posted its biggest single-day rally since May of last year on Friday after President Trump announced former Federal Reserve President Kevin Warsh as the next central bank chairman. Although many see Mr. Warsh as less likely to push for deep interest rate cuts than some of his rivals, he has recently suggested that easy monetary policy may be appropriate, consistent with Mr. Trump’s view that borrowing costs need to come down rapidly.
Ray Attrill, head of currency strategy at NAB, said: “If Mr. Trump did not seriously support lower interest rates, he would most likely have nominated Mr. Warsh, and there is ample evidence that Mr. Warsh believes in higher economic growth without inflation.” Traders are still holding on to their bets that the Fed will cut interest rates twice this year, but that could change if January’s nonfarm payrolls report on Friday comes out significantly higher or lower than expected. The European Central Bank and Bank of England will meet on Thursday, but neither plans to make any changes to monetary policy. The Reserve Bank of Australia will also make policy decisions this week, with the possibility of rate hikes. Meanwhile, oil prices fell as the risk of a military attack on major exporter Iran receded, with Brent crude falling 4.7% to $66 per barrel.
