Monthly Archives: August 2015
US durable goods orders +2.0% in Jul, well above expectations of -0.5%, vs positive revised +4.1% in Jun; +0.6% ex-trans.
ECB’s Praet notes mounting disinflation risks, says central bank is ready to expand QE if needed. Euro plunges, buoying dollar.
Gold lower at 1130.00 (-16.12). Silver 14.30 (-0.44). Dollar higher. Euro plunges. Stocks called sharply higher. US 10yr 2.13% (+6 bps).
DOW, S&P CLOSE LOWER IN BIGGEST REVERSAL SINCE OCT. 2008
25-Aug (CNBC) — U.S. stocks closed lower, after a failed attempt to rally from the Dow’s worst 3-day point decline in history, as investor confidence waned amid continued concerns about China and global growth. ( Tweet This )
The Dow Jones industrial average and the S&P 500 closed about 1.3 percent lower after rallying nearly 3 percent earlier, their biggest reversal to the downside since Oct. 29, 2008. The S&P 500 remained in correction territory after falling there on Monday. The index also posted its first six-day losing streak since July 2012.
“That crash (Monday) was so big and so long since we had one (investors) don’t want a repeat of 2008 so they bail out,” said Lance Roberts, general partner at STA Wealth Management.
[source]
The Daily Market Report: Do you have enough gold?
25-Aug (USAGOLD) — Gold pulled back into the range on Tuesday after the PBoC responded to today’s latest rout in Chinese stocks by cutting interest rates. More easy money policies provided support to global shares, lifting the dollar as well, which weighed on gold.
The PBoC cut the benchmark one-year lending rate by 25 bps after the Shanghai Composite nosedived yet again, falling another 7% in the wake of Monday’s 8% plunge. There are rumors circulating that the PBoC may have spent as much as $500 bln in FX reserves this month in its dramatically unsuccessful attempt to underpin its stock market.
I wouldn’t be surprised at all if the number was actually higher. Back in April, the Wall Street Journal reported the PBoC “spent an estimated $231 billion in March to prevent the yuan from sliding further against the dollar.” It’s almost comical, given that five-months later they are devaluing the heck out of the yuan versus the dollar through direct debasement and easier policy.
The yuan continued to weaken today, dropping to 6.4142 to the dollar. However, Bloomberg reports that “Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year,” and 8 to the dollar by the end of 2016. Welcome to the currency war.
A researcher at the PBoC says the Fed is to blame for recent market volatility because it fostered the notion that U.S. rates would start rising in September.
Rather than dispute who is to blame, I think we can all agree that central bankers the world over are to blame for inflating asset prices to unsustainable levels. This is the direct result of accommodative global monetary policy resulting from weak economic growth.
As we noted in yesterday’s DMR this is really a story of mounting growth risks. Stalling global growth precipitates extraordinary measures by central banks, leading to asset bubbles and extreme market volatility.
With stocks rebounding today — albeit not nearly by the same magnitude as the recent losses — and gold lower, now may be the ideal time to rebalance your portfolio. Do you have any liquid assets in your physical possession, rather than a little blip on a computer screen? Something shiny that is outside the realm of the traditional banking and financial services realm? Something that has a proven track record as a safe-haven, dating back thousands of years?
Do you have enough gold?
Trading was halted 1,200 times Monday
24-Aug (CNNMoney) — The selling on Wall Street was so dramatic Monday that it triggered unprecedented emergency freezes on stocks.
Stocks and exchange-traded funds were automatically halted more than 1,200 times, according to Nasdaq.
The high level of trading pauses highlights just how extreme the selloff was in a short span of time. Fears about China’s economic slowdown caused the Dow to plummet over 1,000 points when the market opened. The Dow ended down 588 points, its worst decline since August 2011.
…But a closer look at the securities that were halted also raises questions. The circuit breakers were implemented more than 600 times on ETFs, the increasingly-popular securities that trade like stocks. ETFs hold a basket of stocks, removing the risk of betting on a single company.
ETF.com examined the pricing action and discovered at least eight ETFs that showed “flash-crash” style drops at the opening of trading.
…Yet other ETFs that experienced panic selling are far larger and wouldn’t be expected to have that kind of turbulence. For example, the iShares Select Dividend ETF (DVY) plummeted as much as 35% at its lows.
That’s a stunning move considering this BlackRock (BLK)-backed ETF is worth over $13 billion and is focused on stable American stocks that have a long history of paying dividends.
[source]
PG View: Illiquidity in ETFs during a market rout? That should be an eye-opener for every investor, warranting a reexamination of your portfolio diversification. Do you have enough physical gold?
PBOC researcher blames Fed for stocks rout
25-Aug (Xinhua) — A researcher with China’s central bank on Tuesday blamed wide expectation of a Fed rate rise in September for the global market rout.
Yao Yudong, head of the People’s Bank of China’s Research Institute of Finance, said the expected Fed rate hike next month had been the “trigger” for the wild market swings.
Analysts worried that the Fed rate hike could accelerate the plunge of U.S. stocks and trigger a sell-off of assets worldwide and even a new global credit crisis.
Yao said the Fed should remain patient before the U.S. inflation reaches 2 percent.
[source]
PG View: Can we just agree that central bankers the world-over are to blame for driving asset prices to unsustainable levels?
U.S. Home Prices Remain Flat in June, Case-Shiller Says
25-Aug (Wall Street Journal) — U.S. home price growth remained largely flat in June, according to a report released Tuesday, a further indication that the housing market is holding steady after years of turbulence.
The S&P/Case-Shiller Home Price Index, covering the entire nation, rose 4.5% in the 12 months ended in June, slightly greater than a 4.4% increase in May.
The 10-city index saw a slightly lower gain of 4.6% from a year earlier, compared with a 4.7% increase in May. The 20-city index gained 5% year-over-year, compared with a 4.9% increase in May.
[source]
US consumer confidence jumped to 101.5 in Aug, well above expectations of 93.0, vs positive revised 91.0 in Jul.
US new home sales +5.4% to 507k in Jul, below expectations of 510k, vs negative revised 481k in Jun.
US Richmond Fed index plunged to 0.0 in Aug, below expectations, vs 13.0 in July; biggest drop in 9-years.
Gold falls as China rate cut boost stocks, dollar
25-Aug (Reuters) – Gold fell on Tuesday as global markets rebounded from the previous day’s rout after China cut interest rates to stimulate its wavering economy, with European stocks rising 4.5 percent and the dollar up 1 percent versus the euro.
Autocatalyst metal palladium continued to slide, however, falling as much as 7 percent to its lowest in five years.
Spot gold was down 0.6 percent at $1,147.26 an ounce at 1151 GMT, while U.S. gold futures for December delivery were down $6.60 an ounce at $1,147.00.
Gold had edged lower on Monday, with some traders citing liquidation to cover losses on other markets, but largely held its ground after a plunge in Chinese equities sent world stocks and commodity prices tumbling and knocked the dollar.
Markets made gains after China’s central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months.
[source]
Chinese Agencies Have Begun to Assume Yuan at 7 to Dollar in Research
25-Aug (Bloomberg) — Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.
The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public. Those projections — which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 — were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
While the rate used in the research isn’t a government target, it suggests China may allow the yuan to fall further after a depreciation in which the currency was allowed to weaken by nearly three percent on Aug. 11 and 12. The yuan weakened for a second day in Shanghai to 6.4124.
[source]
PG View: With the devaluations and the rate cuts, it is evident that China is engaged in a desperate beggar-thy-neighbor struggle to save its economy and markets. Now the questions is: Will those neighbors retaliate in this escalating currency war?
China cuts rates, reserve ratio after stocks plummet again
25-Aug (Reuters) — China’s central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months on Tuesday, ratcheting up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.
The moves came after Chinese stocks tumbled again on Tuesday, as investors despaired at the lack of policy action from Beijing in response to recent data suggesting the downturn in the world’s second-largest economy was deepening.
The People’s Bank of China (PBOC) said it was cutting the one-year benchmark bank lending rate by 25 basis points to 4.6 percent, cutting one-year benchmark deposit rates by the same amount, and reducing reserve requirements (RRR) by 50 basis points to 18 percent for most big banks.
Major Chinese stock indexes nosedived more than 7 percent on Tuesday, hitting their lowest levels since December, following a more than 8 percent plunge on Monday.
[source]
PG View: Investors “despaired” and the PBoC jumps; one might start to think that central banks are trying to support equity markets . . .
Gold easier at 1151.32 (-2.31). Silver 14.83 (+0.010). Dollar higher. Euro lower. Stocks called sharply higher. US 10yr 2.06% (+6 bps).
Could China’s Yuan Devaluation Spark a New Financial Crisis?
23-Aug (Bloomberg) — Asia’s biggest economy is slowing, the Federal Reserve is about to kick off an interest rate tightening cycle, and China has just devalued its currency.
That chain of events back in 1994 eventually touched off a round of competitive currency devaluations that helped trigger the Asian financial crisis, featuring bank and corporate failures and recessions across much of the region.
Is the current market turmoil foreshadowing yet another region-wide bust? There are certainly parallels, but important differences as well. This time around, Asian economies have stronger current account balances, fiscal positions and foreign exchange reserves that provide a thicker buffer against turbulence.
Risks are building nonetheless as China’s surprise yuan policy U-turn on Aug. 11 sends ripples across the globe from Vietnam to Kazakhstan and threatens vulnerable emerging market economies from Brazil to Turkey. The global selloff deepened Monday, with U.S. index futures signaling more losses.
[source]
The Daily Market Report: Gold Underpinned as Safe-Haven Bid Offsets Deleveraging Pressure
24-Aug (USAGOLD) — Gold is holding up remarkably well in the face of today’s global stock market rout. Safe-haven demand seems to be offsetting the broad deleveraging pressure being seen in other markets.
Chinese stocks got whacked again today, with the Shanghai Composite plummeting another 8.5%. European indexes were down about 5% and the DJIA opened a whopping 1,000 points lower. Other assets, particularly commodities are under heavy pressure as investors are jettisoning anything-and-everything to raise cash. Seemingly with the exception of the ultimate safe-haven . . . gold.
Silver, which derives most of its demand from industry, is trading more like a commodity today, pushing the gold/silver ratio to a 6½-year high of 79.14. Given the huge demand for silver we’ve seen lately and the exceedingly tight supply, one might suspect that the downside is limited from here.
Global markets are reacting to mounting growth risks and the possibility of a disinflationary depression. The financial press would have you believe that equities elsewhere in Asia, in Europe and the U.S. are tanking simply because they’re following Chinese stocks lower. In reality, Chinese stocks are falling because there is growing evidence that China will miss its growth objective, potentially by a wide margin, resulting in a hard-landing.
But, it’s not just China: U.S. growth has been tepid at best. U.S. Q1 GDP was a mere 0.6%. The initial look at Q2 GDP was a pretty soft 2.3%. The Atlanta Fed’s GDPNow forecasting tool, which has been pretty accurate lately, sees Q3 GDP weakening to 1.2%.
The more compelling evidence came out of Japan last week, where Q2 GDP actually contracted by 1.6%. That dismal result despite trillions of yen in quantitative and qualitative easing. You don’t get that kind of spectacular ‘fail’ unless there is a severe underlying problem that simply can’t be papered over.
Japan’s massive intervention in markets has included the direct purchase of equity funds. In the last couple weeks, the Nikkei index has plummeted nearly 12%, severely undermining confidence in ‘Abenomics’.
The ECB remains fully engaged in its ZIRP and QE programs and the latest GDP read was 0.4% in Q1, down from 0.9% in Q4-14. Expectations through year-end remain well below 1% q/q. Hardly anything to get excited about.
Emerging market, that are largely commodity based economies, are likely to be decimated by rapidly falling commodity prices. Those falling commodity prices are amplifying the disinflationary pressures, while simultaneously undermining growth potential.
The current market rout can not and should not be overly-simplified, suggesting that all would be just fine, if it weren’t for China. There is plenty of trouble to go around, which suggests that investors should be diversifying their portfolios to make sure they have adequate protection in the event that the current situation does indeed devolve into a disinflationary depression.
Theory On China’s Gold Strategy
Introduction
Koos Jansen’s latest study offers initial proof of a speculation we published here when China announced its change in the yuan price discovery mechanism. “China says it wants a say in the gold price and that’s why it established its own fix outside of London and New York’s purview. If the price of gold in yuan goes higher, it adds value to both Chinese gold reserves, which are likely much higher than recently announced, and to the asset structure of the Chinese people and banks that are hoarding it. In fact the low announcement may have been in anticipation of the devaluation strategy. Too, if the yuan price goes higher, it could force the dollar price higher in order to discourage arbitrage of physical metal globally into China.” Jansen, an expert on the gold market in China, herein offers the first proof that this might very well be the case. This strategy is of great importance to the long term price trend in the gold market and well-worth monitoring. We will attempt to keep you informed. MK
https://www.usagold.com/publications/theorychinagoldstrategy.html
PG View: The number of U.S. investors saving in gold remains disturbingly low. Take heed people! The dollar is part of the “rodeo” too and has dropped about 7% from the high set early this year.