Investors Brace for a Storm of Uncertainty with Gold
As Winter Storm Niko blanketed the Northeast in snow this week, disrupting scores of flights in the U.S., airline executives convened in Washington to talk shop with President Donald Trump.
Back in November, I wrote that domestic carriers are likely to see the new president—himself the former owner of the now-defunct Trump Airlines—as a strong partner in several key areas. Although a couple of airline CEOs have recently expressed strong opposition to some of Trump’s protectionist immigration policies, yesterday’s meeting appeared to be constructive, with the president telling the group he would soon be announcing something “phenomenal in terms of tax and developing our aviation infrastructure.”
Details of the tax plan, he said, would likely be announced sometime in the next two or three weeks. This rejuvenated some of the spirit that swept through the market soon after his election, reassuring investors that reform would come sooner than expected.
Among other topics discussed at the meeting were the need for airport infrastructure improvements, industry deregulation, air traffic control and U.S. carriers’ competitive disadvantage to heavily-subsidized Persian Gulf carriers. Three state-owned Gulf carriers in particular have received as much as $50 billion in subsidies from Middle Eastern governments since 2004, which allow them “to operate without concern for turning a profit,” according to a letter addressed to Rex Tillerson, the new Secretary of State, and signed by three U.S. airline CEOs, including Doug Parker of American Airlines, Edward Bastian of Delta Air Lines and Oscar Munoz of United Airlines. U.S. airlines, obviously, do not have the same privilege, putting them at a competitive disadvantage in the international market. Encouraging the Gulf states to end subsidization, as the CEOs hope, would be a huge win for domestic carriers and their workers.
The market seemed to like what it heard, as the NYSE Arca Airline Index rallied close to 2.3 percent yesterday. This was the biggest one-day move for the group in about a month, during which Trump’s executive immigration ban grounded airline stocks.
The selloff following the executive order was overdone, I think, but it gave airline investors such as Warren Buffett an attractive buying opportunity.
Speaking of which, we learned this week that Buffett was convinced to bet big on the industry, reversing his famously negative opinion of the group, after being in attendance at one of Doug Parker’s investor presentations last March. Parker told attendees that consolidation had fundamentally transformed the industry, making it efficient and focused on demand.
What else is driving the airline industry?
Teaching an Old Dog New Tricks
Airlines got another boost this week after a federal appeals court, in a unanimous decision, struck down Trump’s travel ban. This prompted the president to tweet “SEE YOU IN COURT,” presumably meaning the Supreme Court.
With respect to Trump, I’m reminded of a statement former president George W. Bush made back in 2010, less than a year after leaving office. “Here’s what you learn,” he said. “You realize you’re not it. You’re part of something bigger than yourself.” The buck might stop with the president, but the office is so much greater than one man.
This point was made by David Gergen, former advisor and senior official to a number of presidents, including Nixon, Ford and Reagan. He’s now a CNN political analyst, and it was my pleasure to hear him speak at Harvard last week. Trump is learning the hard way, Gergen said, that the Office of the President cannot be run like the Trump Organization, or any other private company. In public office, there are checks and balances, and there’s blindingly harsh transparency—all of which the billionaire president, aged 70, has never had to deal with.
Trump ran largely on his dealmaking expertise, and I’m still willing to give him the benefit of the doubt that he can negotiate good deals for the U.S. But it’s important to remember that successful deals, in business and in government, often can’t occur without a judicious amount of compromise. If he truly believes in the value and necessity of imposing a temporary immigration ban on seven mostly-Muslim countries, his administration will need to go about it in a way that pleases the courts.
But then, none of us should be surprised if he insists on the ban in its current form. “My style of dealmaking is quite simple and straightforward,” he wrote 30 years ago in Art of the Deal. “I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.”
Hedge Fund Managers Sound Off
Meanwhile, the president’s unpredictability and Twitter outbursts have inevitably engendered quite a lot of market uncertainty, which, as you know, investors don’t like. This has prompted several big-name hedge fund managers to weigh in.
One such manager is value investor Seth Klarman, who oversees $30 billion as head of Boston-based Baupost Group. He tends to be media-shy, but Klarman is no slouch. In the last 34 years, he’s lost money in only three. He’s one of the very few money managers to receive open praise from Buffett himself.
Anyway, in his annual letter to investors, Klarman raised concerns that Trump’s protectionist policies and deep tax cuts could seriously hamper economic growth, both domestically and abroad, by isolating the U.S. from global trade and adding significantly to the already-bloated national debt.
“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote. You can read more of Klarman’s letter over at Andrew Ross Sorkin’s DealBook.
Managers at hedge fund firm Carlson Capital, which controls over $8 billion, share many of the same concerns, telling investors last week that Trump’s trade policies could “cause a global depression and a major equity market decline.”
Even for some money managers who were initially excited by Trump—Ray Dalio and Jeff Gundlach among them—reality is beginning to set in.
Gold Gains on Uncertainty
February 8, 2017
February 8, 2017
February 8, 2017
The Economy and Bond Market
- Optimism in the U.S. about economic growth is boosting business confidence, a survey of chief executive officers showed. According to YPO, an organization for business leaders, an indicator of U.S. economic confidence reached 64.6 in the fourth quarter of 2016, its largest single-quarter gain in five years from 60.4 in the third quarter. The U.S. boasted the highest confidence ranking among the regions surveyed.
- The U.S. posted a budget surplus in January, helping narrow the federal government’s spending deficit through the opening third of the fiscal year. The U.S. budget deficit totaled $156.94 billion from October, the first month of the fiscal year, through the end of January, the Treasury said Friday. That was down 2 percent from the same period a year earlier.
- Initial jobless claims came in at 234,000, lower than the 249,000 expected by economists.
- Job openings ticked down slightly. Job openings totaled 5.501 million in December, according to the latest Job Openings and Labor Turnover Survey (JOLTS) report, slightly below the prior month's reading of 5.505 million, and below economists' estimates of 5.580 million.
- The University of Michigan preliminary February consumer sentiment index fell to 95.7 from January’s final reading of 98.5. Economists surveyed by The Wall Street Journal had expected a February reading of 98.0.
- The cost of imported goods surged in January for the third time in four months and they are climbing at the fastest pace in five years, mostly because of rising oil prices that are nudging U.S. inflation higher. Import prices rose 0.4 percent last month after a revised 0.5 percent gain in December, the government said Friday.
- According to Renaissance Macro Research, the U.S. economy is displaying signals that growth is poised to accelerate. The firm says that leading indicators of activity have already turned, but are not being discussed in the media. These indicators include: the extent to which housing starts have trailed permits, which should cause a pick-up in housing activity; the bounce in temporary employment which is a leading indicator for the job market; the surge in aggregate hours worked, which foreshadows higher GDP growth; and gains in final sales to private domestic purchases, which does a better job of indicating where GDP growth will be one quarter later than past GDP growth itself.
- President Donald Trump said that in the next few weeks he will release his plan to reform the U.S. tax system. "We're going to be announcing something over the next, I would say, two or three weeks that will be phenomenal in terms of tax," Trump said at a meeting with airline executives on Thursday. He added that he is "lowering the overall tax burden on American businesses, big league."
- The U.S. reports retail sales, industrial production and consumer price data on Wednesday. These reports will be an important gauge of economic activity.
- More states are failing to put away cash for the next rainy day. The number without budget reserves has doubled to four from last year, according to data from the National Association of State Budget Officers. Further, the number of states with rainy day funds of less than 1 percent of expenses rose to five from three in fiscal 2017, while those with balances of up to 5 percent declined to 17 from 19, the budget officers’ report showed. Investors have punished states with low reserves. Of the four with none — Illinois, New Jersey, Nevada and North Dakota — Illinois and New Jersey must pay the highest premiums over benchmark debt among 20 states surveyed by Bloomberg. The two, which grapple with chronic budget deficits and elevated pension costs, are also the lowest-ranked U.S. states.
- Larry Fink is worried about two long-term problems looming over the U.S. economy. During an interview at Yahoo Finance's All Markets summit on Wednesday, the CEO of BlackRock said the U.S. is facing a crisis over retirement and the deficiency of the nation's infrastructure.
- Out-of-pocket healthcare costs in the U.S. are among the fastest-growing expenses for Americans, and they can be devastating. JPMorgan Chase looked at the data of 250,000 banking customers to study their financial habits, and found just how difficult paying for a large medical expense can be. Perhaps the most startling statistic from the JPMorgan Chase findings is the length of time it takes for families to recover from the large medical expense. According to the study, "A year after a major medical payment families had not fully recovered financially relative to the baseline," the research found. "In aggregate, comparing 12 months after the medical payment to the baseline period, income was 3 percent lower, non-medical expenses were 1 percent lower, liquid assets were 2 percent lower, and revolving balance was 9 percent higher."
This week spot gold closed at $1,234.03, up $13.83 per ounce, or 1.13 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 3.03 percent. Junior tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index climbed 2.06 percent. The U.S. Trade-Weighted Dollar Index finished the week up by 0.90 percent.
U.S. Initial Jobless Claims
Germany CPI YoY
Germany ZEW Survey Current Situation
Germany ZEW Survey Expectations
|Feb-14||U.S. PPI Final Demand YoY||1.5%||--||1.6%|
U.S. CPI YoY
U.S. Housing Starts
|Feb-16||U.S. Initial Jobless Claims||245k||--||234k|
- The best performing precious metal for the week was palladium with a 4.51 percent gain. Metal Focus Ltd. reports that palladium supply has been in deficit since 2012 with 2016 marking the widest deficit in six years. Palladium performed well last year with the boast in auto production in China.
- Gold traders keep their bullish calls on gold for a seventh week as bullion is trading near three-month high levels due to uncertainty around President Donald Trump and the upcoming French elections. French presidential candidate Marine Le Pen announced her party’s plan to take control of the central bank. She plans to use the central bank to print money to finance French welfare programs and debt repayments after abandoning the euro. Bloomberg reports that since Trump said the dollar is too strong, hedge fund and other money managers have cut their bets on the dollar.
- Money flows into the largest physical gold bullion ETF accelerated this week to $856 million, almost double the previous week’s inflows. The largest gold physical gold bullion ETF has also been approved for use in the Islamic Shariah financial system, along with five other gold-related investment vehicles.
- The worst performing precious metal for the week was platinum, up just 0.84 percent despite production falling 15 percent in December for South Africa. BullionVault’s Gold Investor Index, which measures the balance of client buyers against sellers, fell to 54.3 versus 55.5 in December. The reading above 50 indicates there are more buyers than sellers, but the level has fallen month-over-month, possibly due to gold’s 5.5 percent price increase over last month.
- According to data from the People’s Bank of China, the country has not accumulated any more gold for the third month in a row in January. Ole Hanson of Saxo Bank A/S states that China may be reducing focus on gold in favor of its large purchases of currency lately to strengthen the Yuan.
- A number of money managers who were previously quite bullish after the Trump election have expressed their concerns about Trump’s trade rhetoric, cautioning investors that the “America First” policies hinder global trade, could drive down exporters’ currencies, curb corporate revenue and slow U.S. consumption.
- Independent Strategy Ltd.’s David Roche says that gold will climb 6 percent through the end of the year. Roche states, “The amount of political risk being created by this new U.S. president and administration is going to create an enormous amount of international tension and uncertainty, and will probably result in a trade war at least with China and possibly other areas.” He notes that he would be more inclined to increase gold’s weighing in a diversified portfolio. Also, Dominic Schnider of UBS Wealth Management sees gold rising to $1,300 per ounce on negative real interest rates.
- “Miners now are really starting to focus on profitability and cash flow,” says George Cheveley, a fund manager at Investec Asset Management. Randgold Resources announced it will increase dividends 52 percent after a jump in profits, Centamin Plc increased dividends five-fold, and AngloGold Ashanti Ltd. and Gold Fields Ltd. both reported profits. Cheveley states that the mining companies want to produce “good cash-flows and return some of that to their shareholders.” Also, the industry is seeing a resurgence in exploration and mergers and acquisitions, as they recognize the limited mining assets and the declining production output of mines over the next couple of years.
- Reversing his stance after the election, Stan Druckenmiller, billionaire investor, bought gold again in December and January. “I wanted to own some currency and no country wants its currency to strengthen,” said Druckenmiller, continuing, “Gold was down a lot, so I bought it.”
- Uncertainty in the markets seems to be at an extreme, as Bloomberg data shows that frequency of the word “uncertainty” has reached record levels in news stories from multiple sources. In addition, the difference between the CBOE Volatility Index (VIX) and the Global Economic Policy Uncertainty Index is at its highest level on record, indicating more fear in Washington than on Wall Street.
- Ecuadorean presidential candidate Guillermo Lasso has pledged referendums to prevent mining projects in sensitive areas like Andean wetlands and river headwaters. This would be a reversal from the current president who is looking to implement a number of mining projects.
- Gina Lopez, the environment secretary in the Philippines, says she will not support any new mining ventures in the country, which is the world’s top nickel supplier. Lopez announced her department will close 23 mines and suspend another five.
Energy and Natural Resources Market
- Gold rallied to a three-month high this week touching $1,241 an ounce. Gold has appreciated steadily since December as investor sentiment has shifted towards caution and anxiety on the back of geopolitical fears around the globe according to the Financial Times. As the U.S. dollar continues to move downward and President Donald Trump works on revamping fiscal policy, the shiny metal may continue to rally on upwards.
- The best performing sector for the week was the S&P Super Composite Steel Sub Industry Index. The index rose 5.48 percent on the back of rallying iron ore prices this week as Asian producers begin to ramp up production for the New Year.
- ArcelorMittal USA, one of the world’s leading steel and mining companies, was the best performing stock this week, finishing up 9.96 percent. The stock rallied on the back of turning its first annual profit since 2011.
- Rotterdam coal was the worst performing commodity this week, falling 1.35 percent. The drop in the commodities price was driven by abnormally warm winter temperatures in Germany and other parts of northern Europe.
- The worst performing sector this week was the S&P 1500 Super Composite Construction & Materials Sub Industry Index. The index fell 1.91 percent on the back of mixed sentiment from U.S. market participants questioning the merits of the reflation trade.
- The worst performing stock for the week was Korea Zinc Company LTD, a Korean-based manufacturer and marketer of zinc products. The company fell 16.25 percent on the back of a negative earnings forecast and a series of downgrades from leading analysts in Asia.
- Iron ore prices surged back to $100 a metric ton this week after rallying prices lost momentum in December. The outlook for construction demand in Asia, the largest consumer of the commodity, is strengthening on the back of developers in China and Singapore ramping up supply for future projects according to Bloomberg. This is positive for iron ore and miners of the mineral.
- OPEC countries drastically cut output for January, the first month of their new production agreement according to the Financial Times. The International Energy Agency (IEA) reported that crude oil production fell by 1 million barrels per day (B/D) to 32 million (B/D) in January, strongly beating expectations. Crude oil has been plagued by an overhang of built up supplies; however, it is evident that the world’s largest oil producers are committed to fulfilling their November agreement to cut global supplies which may translate into higher crude oil prices in the near future.
- South Africa’s 2016 corn crop dropped to the smallest in nine years according to Bloomberg. The country is the biggest producer of the white variety, after Mexico, where crops fell by 22 percent on the back of damage induced by El Nino. The lower crop outputs may result in rallying corn prices.
- Nickel miners in the Philippines, the world’s largest nickel ore exporter, are urging President Rodrigo Duterte to stop mine closures according to an article written by the Financial Times this week. Several nickel mines have been shut down in the Philippines over the past few months as the country cracks down on breaches of environmental and labor rules. The squeeze has hit many companies hard and has pushed world nickel prices higher. If nickel miners in the Philippines can quickly clean up their act, rallying nickel prices may be short lived.
- U.S. crude oil stockpiles surged last week increasing 2.5 million barrels according to the American Petroleum Institute inventory report. The primary factor contributing to this stockpile build resulted from U.S. drillers putting more rigs into production at rates not seen since mid-2014, according to Baker Hughes, one of the world’s largest oil field services companies. This is the second largest build in U.S. history, which could be negative for crude oil prices over the short term.
- Consumer sentiment in the U.S. is beginning to ease as February’s preliminary reading came in at 95.7 versus 98.5 for the prior period according to Bloomberg. It is still too early say whether euphoria from the Trump rally has completed faded; however, this drop prompts caution to the raw materials complex.
- The Hang Seng Composite Index climbed 2.41 percent for the week, making it the region’s top gainer among our investable countries even as it puts in more multi-month highs.
- Hong Kong utility network company NewOcean Energy Holdings climbed more than 42 percent this week, the top gainer in the Hang Seng Composite over the last five trading days.
- Imports and exports both came in higher than anticipated in the Philippines. Imports were up 19.1 percent year over year, while exports were up 4.5 percent, ahead of expectations for growth of 2.9 percent. Imports and exports also beat in China, where year-over-year imports rose 16.7 percent, exports 7.9 percent, well ahead of expectations for a gain of only 3.2 percent.
- China’s foreign exchange reserves number dropped below the $3 trillion mark, coming in at $2.998 trillion and missing estimates for $3.004 trillion.
- January period Caixin China Services PMI came in at a reasonable expansionary 53.1, though this is slightly lower than December’s reading of 53.4.
- Year-over-year Indonesian GDP came in at 4.94 percent, below survey expectations for 5.0 percent (though still ahead of the government’s initial fourth quarter guidance for the period).
- Bloomberg reports that China’s Vice Premier Zhang Gaoli issued a statement that China must punish those who falsify economic data, perhaps “a signal that top leaders are attaching greater importance to data accuracy to better frame policy governing the world’s second-largest economy.”
- Geely Automobile, which climbed more than 3 percent on the week and reported a 71 percent year-over-year jump in January sales volume, is now slated to replace languishing wholesaler Li & Fung in Hong Kong’s blue chip Hang Seng Index next month (effective 6 March).
- President Donald Trump clarified Taiwan and China policy, according to press reports, specifying in a call with Xi Jinping that the United States will adhere to the longstanding “One-China” policy, a move which—though lessening major tension and settling certain questions—essentially returns to the status quo without specifying what might be expected in exchange for the action.
- The Philippines’ environmental secretary Gina Lopez continues to push for mine closures and “healing” of the land, clarifying—if the situation required any clarification—that she is not supportive of further or new mining ventures in the island-nation. She is allegedly backed by President Rodrigo Duterte.
- The drop in China’s FX reserves below the psychological mark of $3 trillion continues to call attention to China’s steady trickle of outflows. Relatedly, Chinese regulators cracked down this week on Chinese bitcoin exchanges, freezing them for what is being termed “compliance updates.”
- U.S.-China trade policies remain unclarified.
- Poland was the best performing country this week, gaining 3.6 percent. Polish banks rallied after Poland’s ruling party appeared to drop plans to force lenders to convert $36 billion in foreign currency loans. Jaroslaw Kaczynski, the leader of the ruling party, said that the government can’t take actions that could shake the banking system as it would affect all citizens. Instead he asked foreign exchange (FX) loan holders to sue their banks and try to reverse the abusive terms of their loans.
- The Russian ruble was the best performing currency this week, gaining 1.2 percent against the dollar. The ruble is highly correlated with the price of oil, which actually declined by 20 basis points in the past five days, moving in the opposite direction.
- The consumer staples sector was the best performing sector among eastern European markets this week.
- Russia was the worst performing country this week, losing 2.9 percent. The U.K. Prime Minister, Theresa May, said that sanctions on Russia must remain in place until Minsk agreements are fully implemented.
- The Czech kurona was the worst performing currency this week, losing 1.4 percent against the dollar. Czech inflation unexpectedly exceeded the central bank’s 2 percent target for the first time in four years, boosting the case for the currency cap removal.
- The energy sector was the worst performing sector among eastern European markets this week.
- Russia is deepening financial ties with China. Rusal, the Russian aluminum producer, is moving closer to becoming the first Russian company to issue bonds in China’s mainland debt market. Rusal has registered a prospectus for a Renminbi denominated bonds issue totaling up to CNY 10 billion (USD 1.5 billion)
- Germany’s exports exceeded its imports by the widest yearly margin on record last year, a sign of the strength of Europe’s biggest economy. Germany’s trade surplus—or the balance of exports and imports of goods—rose to €252.9 billion ($270.58 billion), marking the highest surplus since records began after World War II, the statistics body said Thursday. Total exports of goods rose 1.2 percent from 2015, while imports increased just 0.6 percent. Germany’s current account stood at €266.0 billion in 2016, which marks the highest surplus since records began in 1991.
- Romania’s constitutional court has rejected a bill to help holders of Swiss franc loans to convert them into Romanian currency at the rate at which they were borrowed. In the mid of 2000s, thousands of Romanians took out low interest rate loans denominated in Swiss francs and when the Swiss francs increased in value, they found it hard to repay the loan. Lawmakers approved the bill in October, but the central bank has opposed the measure, which will cost local banks about 2.4 billion lei or $570 million.
- Germany’s central bank is bringing home gold reserves stored in places like New York and Paris faster than planned as some people argue the world’s second-largest bullion reserve may be needed to back a new deutschemark, should the euro zone break up. The 120 billion euro gold stockpile, or 3,378 tonnes of gold, has become a symbol of Germany’s economic ascent and guardian of its stability. Once the relocation is completed, the Bundesbank will keep 1,236 tonnes in New York, 423 tonnes in London and the rest in Frankfurt. The current move involves 300 tonnes from New York and 374 tonnes from Paris.
- Russia is resuming dollar purchases next week to replenish the country’s drained reserves. The central bank will buy the equivalent of 113.1 billion rubles ($1.9 billion) between February 7 and March 6, the finance ministry said. The ruble may weaken.
- National Front leader Marine Le Pen is leading in polling for the first round of Presidential voting in France on April 23. According to Bloomberg’s article by Helene Fouquet, if she becomes France’s next president she would ask euro members to replace the single currency with a basket of new national currencies comparable to the European Currency Unit or ECU, which preceded the euro. Also, she has a plan for the French government to take control of the central bank and create money to fund government spending.
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