• York, and containment in question, fear could spread faster and more aggressively than the virus itself.
  • Russia’s economy continues to decline on lower oil prices and a weak currency, and with the upcoming European bank stress test, and sluggish growth in China, the international equity markets continue to be tenuous relative to U.S. markets.

The Economy and Bond Market

Treasury yields rose across the board this week, with two-year Treasuries up 4.04 percent, and the 10-year up 3.33 percent. This overall trend is slightly more positive than the previous week, which fell to year lows. Higher yields continue to show strength across the board, highlighting a more constructive view for growth than last week.

10-Year-Treasury-Yield
click to enlarge

Strengths

  • The European Central Bank commenced covered bond buying, which amounted to 800 million euro in the first three days.
  • Manufacturing PMI came in above the key 50 level, signaling steady economic activity.
  • New home sales and existing home sales, and, as expected, mortgage applications, beat expectations as low borrowing rates help bring out potential home buyers.

Weaknesses

  • A draft document showed that roughly 25 banks will fail the euro stress test, including some of the largest shipping lending banks in the world.
  • Brazil continues to be highly volatile as the country’s election comes near, showing the largest South American economy is still struggling with the tumultuous political ramifications of potentially antibusiness and anti-foreign investment rhetoric.
  • France’s PMI numbers were weak, which shows its economy is still contracting. The world continues to look at America as a beacon for safe investing in the Western world.

Opportunities

  • The European Central Bank has been purchasing corporate bonds, which will strengthen investor confidence in the region.
  • The Fed announced that it will hold onto its $4 trillion balance sheet that it has accumulated since November 2008, which should restrict the supply of government notes and keep the borrowing costs down.
  • With the financial crisis and subprime mortgage crisis receding farther into history, the government is loosening some financial rules, hoping to inject more life into the country’s still-recovering housing market.

Threats

  • The European Central Bank stress test over this weekend, and potential failures, may lead many to question the eurozone effectiveness.
  • The end of quantitative easing may affect the bullish trend of the market, as it is unclear just how much of the market the Fed has been buying.
  • With the geopolitical situations in Ukraine, Iraq and Syria, Greece’s economic troubles, and new Ebola fears, investor anxiety remains high along with signs of further market volatility.

 

Gold Market

For the week, spot gold closed at $1,230.39 down $7.93 per ounce, or 0.64 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.31 percent. The U.S. Trade-Weighted Dollar Index rebounded 0.71 percent for the week.

Date Event Survey Actual Prior
Oct 20 China Retail Sales YoY 11.7% 11.6% 11.9%
Oct 22 US CPI YoY 1.6% 1.7% 1.7%
Oct 22 HSBC China Manufacturing PMI 50.2 50.4 50.2
Oct 23 US Initial Jobless Claims 281K 283K 264K
Oct 24 US New Home Sales 470K 467K 504K
Oct 28 US Durable Goods Orders 0.5% -18.2%
Oct 28 US Consumer Confidence Index 87.0 86.0
Oct 30 US GDP Annualized QoQ 3.0% 4.6%
Oct 30 Germany CPI YoY 0.9% 0.8%
Oct 31 Eurozone Core CPI YoY 0.8% 0.8%

Strengths

  • Gold analysts and traders are bullish on gold for the fourth-straight week, the longest streak since February. Bloomberg survey results for next week showed 11 out of 21 traders holding a bullish outlook for gold.
  • The primary driver for the recent positive sentiment on gold is higher expected demand, particularly from China and India. Gold imports into India last month rose by roughly four times to 95 metric tons compared to 15 to 20 tons in September of last year. Festival season in India, as well as the deregulation of the Chinese gold market, has given a substantial boost to global gold demand.
  • Fear and uncertainty in the global economy is stimulating gold demand as well. This month the International Monetary Fund (IMF) downgraded its outlook for global growth, increasing the attractiveness of gold as a safe haven. Furthermore, the more dovish mentality from the Federal Reserve has been a big tailwind for gold, which has been depressed by expectations of rate increases.

Weaknesses

  • JP Morgan reduced its gold price forecast for 2015 and 2016 this week. The bank sees gold prices declining to $1,220 per ounce and $1,200 per ounce in 2015 and 2016, respectively.
  • SPDR Gold Trust holdings were reduced to their lowest level in a year on Monday. This decline in gold assets is concerning given that gold prices have recently rebounded.
  • Alamos Gold reported disappointing third-quarter results this week. During the quarter, the company only produced 28,000 ounces at higher than expected costs. Despite the poor operating performance, the company’s financial position remains strong with $375 million in cash and no debt.  Expectations remain that Alamos could acquire another asset in the nea -term.

Opportunities

  • The first opinion poll pertaining to the Swiss gold referendum revealed stronger support for the policy than against. The referendum would require the Swiss National Bank to hold at least 20 percent of its reserves in gold. As it currently stands, the Swiss National bank has only 7 percent of its reserves in gold. The cost to reach the 20 percent mark would amount to roughly $70 billion of additional gold purchases.
  • Lukas Lundin, Chief Executive Officer of Fortress Minerals Corp., seeks to raise the value of the company fivefold over the next four to five years. The positive outlook for Fortress Minerals stems from the recently announced acquisition of the Fruta del Norte gold project in Ecuador. The government of Ecuador has already indicated its support for the project.
  • This week, Royal Gold Inc. purchases a $175 million gold stream on Euromax Resources’ Ilovitza greenfield project. The project is expected to be Macedonia’s first modern gold mine and is said to have a proven management team as well as strong local support.

Threats

  • Zambia altered its tax rules for the second time in six years this month. The government is aiming to scrap the corporate tax rate and variable taxes in favor of raising the revenue-based royalty. While the royalty currently stands at 6 percent, it could go as high as 20 percent.
  • Severe droughts in the western United States may weigh heavily on mining companies operating in the region. In 2013, mining companies around the world spent $12 billion on water infrastructure, a 275 percent increase from 2009. The extra costs incurred by maintaining water quality and quantity are problematic for the industry.
  • Paul Tudor Jones, a world renowned macro trader, said that commodities as a whole will be ugly until at least 2020. Jones argues that having reached the peak a few years ago, commodities still have a long way to go before the bottom is reached.

Energy and Natural Resources Market

World Oil Demand Outpacing Non-OPEC Supply
click to enlarge

Strengths

  • Chemical stocks outperformed this week, with the S&P Supercomposite Chemicals Industry Index up 3.5 percent. One company in particular, LyondellBasell Industries NV, a manufacturer of plastic, chemical and fuel products, reported higher than expected earnings this week. Furthermore, LyondellBasell is forecasting a positive fourth quarter due to favorable ethylene capacity. The company stock was up 3.1 percent this week.
  • According to Wall Street analysts, Cenovus Energy Inc. may increase its annual dividend by 10 percent to C$1.17 per share in February, after it reports fourth-quarter earnings. The company was up 4.5 percent this week.
  • A historic source of contention between the British Columbian government and the liquefied natural gas (LNG) industry, the government’s long-awaited tax regime has been established. The regime reduces the after-payout tax rate from 7 percent to 3.5 percent, which should boost investment in natural gas developing companies in the region. CanElson Drilling Inc. and Black Diamond Group Ltd were up 1.2 percent and 4.4 percent this week on the news, respectively.

Weaknesses

  • Gold and silver mining stocks suffered this week as concerns over a slowdown in global growth eased. The NYSE Arca Gold Miners Index was down 1.3 percent this week, while the Global X Silver Miners ETF fell by 2.3 percent.
  • Micro-cap stocks continued to underperform their larger counterparts in global markets. The S&P/TSX Venture Composite Index was down 0.58 percent this week.

Opportunities

  • Codelco, a Santiago-based copper producer, is looking to invest $24 billion over the next four to five years in order to increase annual output to roughly 2.5 million tons by 2025. The company plans on selling roughly $8 billion of bonds over the next five years to help finance the program.
  • Investments in oil funds are on the rise as investors prepare for a rebound in global energy stocks. The four largest oil ETFs in the United States received a combined $334 million this month through October 20. Shares outstanding in the funds are now at a nine-month high.

Threats

  • A major Wall Street firm has lowered its forecast for domestic oil producers given current oil prices. According to the report, United States oil producers will outspend 2015 cash flow by an average of 80 percent with WTI below $80 per barrel. Furthermore, debt to EBITDA will increase to an average of 2.5x by the end of 2015, up from 1.9x at the end of the second quarter this year.
  • The dollar appears to be consolidating, showing no sign of returning to its prior range. Without any catalyst in sight, it appears that the dollar’s newfound strength is here to stay.

Emerging Markets

 

Strengths

  • Malaysia was among the best-performing countries in Asia this week, led by plantation companies as palm oil futures rose to a two-week high on hopes that even a weak El Nino by the end of this year might cause drought, curb palm oil production, and push up prices.
  • Greece saw a tremendous bounce back this week as concern over the country’s financial stability eased. Greece is eagerly awaiting the results of the banking system stress test, which the government believes will yield positive results. Yields on the 10-year Greek government bonds have declined roughly 160 basis points to 7.327 percent since last week’s high. The Athens Stock Exchange General Index was up 6.39 percent this week, breaking six weeks of consecutive declines.
  • Indian stocks rallied this week on the back of increased demand from festival season as well as optimism over Prime Minister Modi’s expected policy changes aimed at boosting growth. The S&P BSE Sensex Index rose 2.84 percent this week.

Weaknesses

  • Two polls released this week showed Brazilian President Dilma Rousseff
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