- months.
- Geopolitical tensions remain high, and while the market has been able to shrug off these events so far, an escalation could be the catalyst for a long-awaited correction.
The Economy and Bond Market
Treasury yields rose sharply this week as expectations of an interest rate hike got pulled forward. The 10-year Treasury rose by 15 basis points this week as the market braces for next week’s FOMC meeting where speculation is building that the Fed will remove the “considerable time” reference in the statement, potentially bringing the Fed a step closer to actually raising interest rates.
Strengths
- Retail sales in August rose 0.6 percent after an upward revision to July data. This is very supportive of the idea that we are in a self-sustaining positive economic dynamic.
- The Labor Department reported that hiring in July rose to the highest levels since December 2006.
- Bank of Japan governor Kuroda stated that the central bank would take any steps needed to achieve its 2 percent inflation target. This argues for continued aggressive monetary policy out of Japan.
Weaknesses
- U.S. bond yields rose again this week and the 10-year Treasury rose 27 basis points over the past two weeks.
- Housing data continues to disappoint. Mortgage applications declined to the lowest level of activity in 14 years. A Fannie Mae survey also indicated deterioration in the number of consumers who believed thisis a good time to buy a home.
- Weekly initial jobless claims rose last week to 315,000.
Opportunities
- Bond yields in Europe remain exceptionally low, with some short-term European bond yields trading in negative territory. U.S. fixed income yields are attractive and will likely attract money flows from overseas.
- The ECB followed through sooner than expected and cut interest rates last week, pledging to implement a quantitative easing (QE) program. This highlights the deflationary pressure around the world. Prospects for materially higher interest rates seem unlikely in the near future.
- With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields likely remains down.
Threats
- The U.S. economy has some positive momentum and appears poised to continue to build on that as we move into the fall. Recent indications from some Fed officials point to the potential for higher interest rates sooner than many were expecting.
- The Federal Reserve meets on September 17, and the market is bracing for a more hawkish message.
- Several Fed speakers have become more vocal in recent weeks, indicating a potential shift in Fed thinking toward normalizing interest rates.
Gold Market
For the week, spot gold closed at $1,229.70 down $39.22 per ounce, or -3.09 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 4.21 percent. The U.S. Trade-Weighted Dollar Index rose 0.57 percent for the week.
| Date | Event | Survey | Actual | Prior |
|---|---|---|---|---|
| Sept 11 | Germany CPI YoY | 0.8% | 0.8% | 0.8% |
| Sept 11 | US Initial Jobless Claims | 300K | 315K | 304K |
| Sept 16 | US PPI Final Demand YoY | 1.8% | — | 1.7% |
| Sept 17 | Eurozone CPI Core YoY | 0.9% | — | 0.9% |
| Sept 17 | US CPI YoY | 1.9% | — | 2.0% |
| Sept 17 | FOMC Rate Decision | 0.25% | — | 0.25% |
Strengths
- Koos Jansen, a well-known Chinese gold demand analyst, pointed out on Bullionstar.com that weekly gold withdrawals from the Shanghai Gold Exchange for the last two weeks in August have increased substantially from previous levels. This is a positive sign that gold jewelry demand in China is on the move again.
- Goldman Sachs officially removed African Barrick Gold from its sell list. The stock has climbed 50 percent over the last 16 months, causing Goldman to reverse the prior recommendation.
- Klondex Mines Ltd. announced this week that it has appointed Richard J. Hall as Chairman of the Board of Directors. Hall’s guidance will be exceptionally valuable as he is an experienced mining executive with over 40 years of leading precious metals companies in the Americas and in Australia.
Weaknesses
- Gold prices continue to be depressed in the current economic environment, falling to the lowest level since January. Down 2.59 percent for the week, gold continues to face significant headwinds from an increasingly strong dollar. Accordingly, gold stocks fell for the second straight week.
- A report out of the San Francisco Federal Reserve this week said that investors may be underestimating how soon rates will rise in the United States. The thought of sooner-than-expected interest rate increases spooked markets, particularly for precious metals and related equities.
- Inflation expectations, as measured by the benchmark five-year Treasury Inflation-Protected Securities (TIPS) yield, fell to the lowest level this year, significantly pressuring gold and silver prices. The breakeven rate reached a year-to-date low of roughly 1.79 on Wednesday.
Opportunities
- Although the rapidly appreciating dollar has caused concern for gold investors, the recent data provides positive prospects for gold moving forward for two reasons: First, if one looks at gold in dollar terms compared to gold in euro terms, investors will see that gold as an asset has not depreciated significantly when priced in euros. Therefore, the rapid decline in gold prices, which are priced in dollars, is simply due to the unusually rapid rise in the value of the U.S. currency. In other words, fundamental supply and demand factors remain unchanged.
- Second, and more importantly, the dollar’s 20-day return has moved well past 1.5 standard deviations of its five-year average. Clocking in at roughly 1.66 standard deviations from the mean, the 20-day return on the dollar should revert to the mean in the near future. A coming decline in the dollar could cause gold prices to reverse and rally.
- Gold trading in the Shanghai free-trade zone will begin on September 29. The deregulatory step should help boost demand for the precious metal in what recently became the largest gold consuming country in the world. According to the World Gold Council, China has overtaken India in consumption of gold. This combination of increased consumption and deregulation of the gold market in China serves to boost gold prices in the future.
- Agnico Eagle Mines is set to acquire 100 percent of Cayden Resources for C$205 million. This news reveals that merger and acquisition (M&A) activity in the gold sector is heating up in the fall, creating opportunities for other deals to occur.
Threats
- The new sanctions on Russia may cause the Russian government to sell some of its massive gold reserves in order to secure liquidity. As Russia’s central banks rank fifth in terms of outstanding gold reserves, increased selling would depress gold prices.
- Two tax bills have found their way onto the ballot in Nevada. Aimed at the mining sector, the first law would remove a cap on the net proceeds of mines that are taxed. The second would impose a 2-percent gross-margins tax on corporations. The increased tax pressures could prove to be very expensive for the mining sector in Nevada.
- The National Mining Association president, Hal Quinn, said that the number one challenge to the U.S. mining industry is the domestic regulatory bureaucracy. While it typically takes seven to 10 years to permit a mine in the United States, other countries with similar environmental standards do so within two to three years. Bureaucracy in the U.S. continues to weaken the domestic mining industry.
Energy and Natural Resources Market
Strengths
- Despite declining global growth and weak commodity prices, rail stocks outperformed relative to other resource-related sectors. Union Pacific Corp. saw a 52-week high on Thursday.
- Conifex Timber Inc., a manufacturer of forest products, rose 4.62 percent this week. The stronger U.S. dollar has been a tailwind for the company with respect to improving margins.
- Emerge Energy Services LP outperformed this week, up 1.44 percent. The company is involved in sand and fuel processing and distribution.
Weaknesses
- Oil and gas refining stocks fell this week, down 6.29 percent. The decline comes on the back of increased support for, and discussion about, U.S. oil exports. Proponents are pushing for a relaxation of the export restrictions, which could harm U.S. refiners.
- Precious metals continue to take hits. Slower growth prospects and a rapidly rising dollar have weighed on precious metal stocks in general, particularly on gold stocks. The NYSE Arca Gold Miners Index was down 4.21 percent this week.
- Oil stocks continue to face headwinds and underperform as lower oil prices weaken margins. West Texas Intermediate (WTI) crude was down for the second week in a row as prospects for global demand decrease.
Opportunities
- Chinese aluminium demand rose significantly in the second quarter. The boost comes from the automotive and infrastructure sectors, which have seen growth as a result of economic stimulus in China.
- China Railway Corporation reported that Chinese railway fixed-asset investment in the first eight months of the year, increased 20 percent year-over-year. The boost in railway construction spending should prop up demand for metals in China.
Threats
- The Environmental Protection Agency (EPA) may raise the renewable fuel quotas that were issued last year as a response to rising gasoline prices. The quotas, which require a minimum amount of ethanol to be blended the overall fuel supply, serve as a headwind for refiners, who argue that they are limited in their capacity to meet a higher quota.
- A fresh new set of sanctions for Russia have been delivered. Despite the threat of weaker global economic growth as a result of sanction wars, the European Union (EU) may make the energy threat more severe by restricting service probision of oil field services to Russian oil companies at deepwater, Artic and shale oil fields. It seems the geopolitical environment in eastern Europe continues to plague global growth.
- Noble Corp. signed a 200-day contract with Danny Atkins’ UDW rig in the Gulf of Mexico this week, at a dayrate of $317,000 per day according to RBC. This is much lower than the prior rate of $500,000 per day. The company expects rig rates to move lower and sees offshore drillers underperforming in the near future.
Emerging Markets
Strengths
- Despite significant headwinds for emerging markets recently, fund flows are gaining traction. For the week ending September 10, emerging market equity funds reported substantial inflows of $3.41 billion. This is a significant improvement from the prior week, which saw inflows of just $0.69 billion. Furthermore, this week’s inflows trump the 10-week average of $2.25 billion.
- Argentina announced a plan allowing citizens to use credit cards to buy selected goods and services produced domestically. The cards will bear no interest on the 12 monthly installments the
