Don’t Be Spooked by Market Volatility-Opportunity Is Still Knocking!

Updated on
  • rally in banking stocks and is effectively “easier” monetary policy. The Swedish central bank also cut interest rates to zero this week.
  • Third-quarter GDP grew a better-than-expected 3.5 percent, demonstrating some economic resilience.

Weaknesses

  • Durable goods orders fell 1.3 percent in September and were much weaker than expected.
  • Housing data points remain weak with home prices falling and mortgage applications falling 5 percent last week.
  • While widely expected, the Fed completely wound down its QE program this week and is incrementally less accommodative.

Opportunities

  • Global central banks are easing again, offsetting the incremental Fed tightening. This remains a positive for fixed income globally.
  • Next week is a big week for economic data as the ISM manufacturing index (a purchasing managers’ index or PMI) and nonfarm payrolls are released. The recent global trend for PMIs has been weak and it wouldn’t be surprising if the ISM manufacturing index disappointed, allowing bonds to rally.
  • Short-term bonds have been relatively volatile in recent weeks and with yields moving higher the past two weeks, a reversal would not be surprising.

Threats

  • The European bank stress tests have come and gone, and while generally in-line with expectations and not too troubling, there remains work to be done to restructure the European banking system before the next downturn or panic.
  • Quantitative easing has ended and the next logical step would be an interest rate hike. While estimates of when that may occur remain fluid, the Fed’s relatively hawkish tone increases the risk to the bond market.
  • With geopolitical situations in Ukraine, Iraq and Syria, Greece’s economy, and new Ebola fears, investor anxiety remains high along with further volatility.

Gold Market

For the week, spot gold closed at $1,171.09 down $59.81 per ounce, or 4.86 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 14.67 percent. The U.S. Trade-Weighted Dollar Index jumped 1.31 percent for the week.

Date Event Survey Actual Prior
Oct 28 U.S. Durable Goods Orders 0.5% -1.3% -18.2%
Oct 28 U.S. Consumer Confidence Index 87.0 94.5 86.0
Oct 30 U.S. GDP Annualized QoQ 3.0% 3.5% 4.6%
Oct 30 Germany CPI YoY 0.9% 0.8% 0.8%
Oct 31 Eurozone Core CPI YoY 0.8% 0.7% 0.8%
Nov 02 HSBC China Manufacturing 50.4 50.4
Nov 03 U.S. ISM Manufacturing 56.2 56.6
Nov 05 U.S. ADP Employment Change 220K 213K
Nov 06 U.S Initial Jobless Claims 285K 287K
Nov 07 U.S. Change in Nonfarm Payrolls 235K 248K

Strengths

  • Despite declining gold prices, demand for the precious metal remains strong. In September, Chinese gold imports from Hong Kong rose to the highest level in five months as retailers increased purchases before the holiday season. In the United States, gold coin sales are heading for their first back-to-back monthly increase since January. Volume rose to 58,000 ounces as we entered the last week of the month, compared to 50,000 ounces in September.
  • Although gold premiums had fallen to below $10 per ounce earlier this week in India, they rallied on Wednesday to reach roughly $15 per ounce. The initial decline was due to the winding down of the Diwali holiday. However, the premium spiked up after rumors emerged that the Reserve Bank of India or the Ministry of Finance might impose more restrictions on gold imports.
  • A number of gold companies reported misses on production this week, but Alacer Gold reported strong third quarter results. The company saw gold production increase 27 percent which helped to drive production costs lower.  In addition, Alacer’s cash balance rose by $28 million to $320 million.

Weaknesses

  • This week we saw gold markets wildly affected by central bank policy makers across the world. In the United States, a more hawkish tone from the Federal Reserve, combined with the official announcement of the end of Quantitative Easing (QE), pushed gold prices down. On Friday, the Bank of Japan surprised investors with a substantial expansion in its asset purchases and a commitment to double its purchases of equities, making the central bank the single biggest holder of Japanese equities.  These two events, combined with stronger-than-expected, third-quarter GDP data from the U.S., caused a selloff in gold and gold stocks this week.
  • Investors should remember that U.S. elections are next week and the current administration is putting the best face possible on what has been an anemic recovery.  Even Alan Greenspan noted this week that QE has failed to right the economy, but did lift asset prices.   For example, while the Fed desperately sought to stimulate the housing sector, the homeownership rate in the third quarter came in at 64.4 percent, the lowest level since 1995.  Furthermore, while QE has been halted, the Fed will continue to reinvest the principal payments from mortgage-backed bonds and roll over any maturing Treasury securities from its $4.5 trillion portfolio. We are living in a world of unrepayable debt, money printing, and governments buying equities to create a wealth effect – yet life goes on without a worry.
  • As a consequence of this week’s announcement from the Federal Reserve, gold traders turned bearish for the first time in six weeks. A Bloomberg survey revealed nine bearish forecasts from analysts, compared to only five bullish.

Volatility
click to enlarge

Opportunities

  • Related to the above point on U.S. GDP growth, the third quarter yielded stronger-than-expected results due to a substantial increase in government spending. As it turns out, 0.83 percent of the GDP gain was attributed to government spending, primarily defense spending. JP Morgan, in response to this data, reduced its forecast for fourth-quarter GDP growth from 3.0 percent to 2.5 percent, explaining that this type of increase is usually associated with payback the following quarter.
  • Alan Greenspan has come out with interesting points on the current global economic environment. The former Federal Reserve Chairman referred to QE as a pile of tinder that hasn’t been lit. Furthermore, due to the global turmoil, Greenspan stated that gold is a good place to invest money due to its value as a currency outside of government policy. In fact, he argues that gold is the premier currency, more so than the dollar.
  • Civilian wages and salaries appear to be on the rise, which is a powerful source of inflation. Higher wages, which lead to higher incomes, fuel higher demand and pull up prices. The long-awaited arrival of strong inflationary pressures in the United States appears to be on the horizon.

Volatility
click to enlarge

Threats

  • Depressed oil prices are contributing to the deflationary environment. Without any catalyst to boost oil prices, gold will continue to face the headwinds from global deflation.
  • Social unrest has come to the capital of Burkina Faso, Ouagadougou, after a proposal to enable the current president to stand for another five-year term, was submitted to parliament. Protestors have set fire to parliament, city hall and the headquarters of the ruling party. Mining companies in the region have been negatively affected. Specifically, Roxgold declined 27 percent this week on the news, despite the fact that the company reported being unaffected by the unrest.
  • There is speculation that Red Kite Group, a London hedge-fund manager, has bought more than half of the copper held in London Metals Exchange warehouses. Although no material news has been reported, such substantial control over supply could have serious implications.

Energy and Natural Resources Market

Volatility
click to enlarge

Strengths

  • Oil and gas refining stocks outperformed this week in a strong-dollar environment. The S&P Supercomposite Oil & Gas Refining & Marketing Index was up 3.88 percent. Marathon Petroleum and Tesoro were up 5.96 and 8.72 percent, respectively, following strong earnings reports.
  • Chemicals stocks outperformed the broader resources space this week. The S&P Supercomposite Chemicals Industry Index rose 1.12 percent this week, as Agrium was up 5.81 percent, bouncing significantly off of prior lows.
  • Iron and steel stocks rallied for the third week in a row. The Bloomberg World Iron/Steel Index was up 1.82 percent and U.S. Steel, which reported impressive quarterly results this week, closed up 8.45 percent.

Weaknesses

  • Precious metals stocks significantly underperformed this week, with gold and silver stocks declining substantially after the announcement from the Federal Reserve. The NYSE Arca Gold Miners Index and the Global X Silver Miners ETF were down 14.37 percent and 14.31 percent, respectively.
  • Industrial metals stocks continue to underperform amid a slower global growth environment. The S&P/TSX Capped Diversified Metals and Mining Index declined 1.74 percent this week.
  • As oil prices continue to decline, WTI crude dipped below $80 per barrel during the week, eventually closing at $80.57 per barrel. The continued depression of oil prices, led by perceptions of weak global demand and ample supply, continue to create headwinds in the commodities space.

Opportunities

  • One of the largest potential benefits to oil prices continues to stem from the OPEC meeting taking place at the end of November. As depressed prices weigh on revenue, any action the cartel takes to limit supply would send oil higher.
  • While sentiment remains mixed, certain analysts are projecting future oil prices to rebound. With refineries in the United States absorbing crude inventories, WTI could rise to as much as $90 per barrel by the end of 2014. On a relatively longer timeline, Barclays forecasts that Brent prices could be back over $100 per barrel by the end of 2015.

Threats

  • Expanded stimulus in Japan and newly implemented stimulus in the eurozone serve to weaken both the yen and euro, which will cause the dollar to rally further. While it seemed as if the dollar had reached an upper limit, there is still the possibility that the currency could inflate even further. On a positive note, however, the long-term benefits of the stimulus policies (if effective) could spur global growth, which would boost commodity demand and prices.
  • Global growth fears and the deflationary environment have yet to dissipate. Commodities will remain depressed if market sentiment does not shift.

Emerging Markets

Strengths

  • Two of the best-performing

Leave a Comment