Fed Fears Financial Markets May Be Overvalued, Ripe for Reversal

In a muted pre-holiday trade on Wednesday, U.S. equity markets finished mixed and U.S. Treasury yields fell, taking down the U.S. Dollar. Gold prices soared and crude oil prices rose sharply.

The day was filled with U.S. economic reports early in the session, culminating with the Fed meeting minutes near the end of the day.

U.S. Economic Data

The U.S. Commerce Department said on Wednesday that orders for non-defense capital goods excluding aircraft, a closely watch proxy for business spending plans, declined 0.5 percent last month. That was the biggest drop since September 2016 and followed an upwardly revised 2.1 percent increase in September. Traders were looking for an increase of 0.5 percent last month after a previously reported 1.7 percent jump in September. Core Capital goods orders rose 4.4 percent on a year-on-year basis.

Initial claims for state unemployment benefits fell last week after two straight weekly increases, pointing to continued steady job growth after recent hurricane-related disruptions.

The number of Americans filing for unemployment claims declined 13,000 to a seasonally adjusted 239,000 for the week-ended November 18, the Labor Department said on Wednesday, reversing the prior week’s increase. Economists were looking for a read of 240,000.

According to a revision of the data for November from the University of Michigan’s Consumer Survey Center, U.S. consumer sentiment was revised up more than expected. The survey showed consumer sentiment inched up to 98.5 from the initial reading of 97.8. Traders were looking for a slight rise to 98.0.

Fed Minutes

The minutes of the U.S. Federal Reserve meeting in November released Wednesday revealed that central bank officials were largely optimistic about the economy but also worried that financial market prices are out of balance and posing a threat to the economy.

U.S. Equity Markets

The major U.S. equity indexes finished mixed on Wednesday. The S&P 500 and Dow Jones Industrial Average finished lower after the Federal Reserve expressed concern about the market’s sharp rise on the economy in a summary of its previous meeting. The tech-based NASDAQ Composite closed at a record high, led by a sharp rise in shares of Amazon.

Crude Oil

U.S. West Texas Intermediate crude oil spiked to a 2-1/2 year high on Wednesday as traders responded to a report that showed faults on a major pipeline dented Canadian deliveries to the United States. International-benchmark Brent crude oil also posted a small gain after a small drop in U.S. inventories.

According to the U.S. Energy Information Administration, crude inventories fell by 1.9 million barrels in the week to November 17, slightly more than analysts’ forecasts for a decrease of 1.5 million barrels, but much less than the 6.4 million-barrel draw reported by the American Petroleum Institute late Tuesday.

Gold

Gold prices spiked higher on Wednesday in response to a weaker U.S. Dollar and a late session sell-off in the Dow Jones Industrial Average and the S&P 500 Index.

U.S. Dollar and stock market traders were responding to the minutes of the Fed meeting which said Fed officials fear valuations in the stock market are too high and a ‘sharp reversal’ could be ahead. The weakness in the stock market late in the session sent investors into safe-haven assets like gold and the Japanese Yen.