Today I want to discuss reports that global debt levels are at all-time highs, and what this means for your investment decisions going forward.
But first, a few comments about this past week. I recently returned from the Oxford Club’s Private Wealth Seminar, held at the historic Grand Hotel on Michigan’s Mackinac Island. The hotel, which some of you might remember as the setting for the 1980 film “Somewhere in Time,” starring Christopher Reeve and Jane Seymour, took a mere 93 days to build in the 1880s—impossible by today’s standards, especially when you consider that it boasts the world’s largest front porch at 660 feet.
While there, I had the privilege of catching up with some old friends and contacts, including Alex Green, the Oxford Club’s chief investment strategist. You might have read some of his wonderful work for Investment U, the group’s educational arm.
Alex reminded me over lunch that the difference between Democrats and Republicans, in his view, is that Democrats are for personal freedom and some economic restrictions, while Republicans are for economic freedom and some personal restrictions.
I prefer to focus on policies instead of partisan politics, but Alex has a point. I’m convinced that Donald Trump, a Republican, won the presidential election because his pledge to reform the tax code and deregulate resonated with both white-collar and blue-collar Americans who felt as if the U.S. economy was no longer working for them. U.S. corporate taxes are among the highest in the Organization for Economic Cooperation and Development (OECD), spurring large multinationals to move operations overseas, and out-of-control regulations threaten to strangle business growth.
But just as Green insinuated, the Trump administration has enacted, or has hinted at enacting, policies that rankle Americans of all political stripes, precisely because they could be used to encroach upon personal liberties.
Take Attorney General Jeff Sessions’ recent decision to strengthen the government’s ability to seize private property from suspected criminals. (The operative word here is “suspected.”) Many now are arguing this directive could be abused by police and other officials. It could, in fact, violate the Fourth Amendment, which of course protects Americans against “unreasonable searches and seizures.”
This is just one among numerous policy-making decisions that have members of both political parties, as well as independents, scratching their heads. Trump was elected to reform taxes, slash regulations and generally make business and capital formation run more smoothly. It’s unclear how private-asset seizures fit into that picture.
If this administration resolved to stay on message and on course, and worked to bring fiscal relief to everyday Americans, it might receive greater support from those who voted for Trump—and perhaps even from those who didn’t.
U.S. Dollar in Bear Market, a Boon for Gold
Since the start of the year, the five-year Treasury yield, adjusted for inflation, has risen about 150 percent. Normally this would put remarkable pressure on the price of gold—higher yields raise the opportunity cost of buying gold—but over the same period, the U.S. dollar has steadily weakened and is now officially in a bear market. Because gold is priced in dollars, this has been supportive for prices. Year-to-date, the yellow metal is up more than 8 percent.
As I said, the greenback’s been on the decline for most of the year so far, but it slumped to a 13-month low against the euro this week following European Central Bank (ECB) president Mario Draghi’s remark that “monetary accommodation” would continue in the European Union (EU) until at least the end of the year.
“We need to be persistent and patient and prudent, because we’re not there yet,” Draghi said, referring to the fact that EU inflation and wage growth have been disappointingly slow, despite the bloc’s economic recovery since the financial crisis. (Indeed, the June purchasing manager’s indexes for emerging European markets were all above the key 50 mark for the first time in recent memory.)
UBS: We’re Still Constructive on Gold
That gold is still holding at its current level—despite rising rates, despite a stock market that continues to rally—is “encouraging.”
That’s one of the key takeaways from a UBS note this week, in which the Swiss financial services firm maintains its constructive view of the yellow metal. Investor demand this year has been slower than expected, but UBS analyst Joni Teves makes the case that expectations of a good monsoon season in India this summer could help push consumption in the world’s second-largest importer of gold to a new record high by the end of the year. With India having imported a phenomenal 525 metric tons in the first half of 2017 alone, Teves writes that “we expect gold demand in India this year to be around historic averages,” which would be very supportive for prices.
ETPs Attracted a Record $245 Billion in the First Half of 2017
Exchange-traded products (ETPs) also had a knockout first half. As Deutsche Bank reports this week, ETPs attracted a record $245 billion in the first six months of 2017, in what has historically been the weaker half of the year. To put into perspective just how impressive this figure is, $245 billion would be the second-largest full-year record amount following 2016’s $283 billion. We could see ETP inflows climb as high as $500 billion by the end of this year, Deutsche estimates.
Of course, runaway demand for ETPs and other risk assets has contributed to muted interest in gold.
Having said that, though, BullionVault—the world’s number one online precious metals market—reported last week that private gold holdings among its users leaped to a record 38 metric tons, as of the beginning of July. That’s enough gold to make more than 10 million 18-carat wedding rings, BullionVault says, or to supply the microchips for 1.5 billion iPhones. The site points out that investor demand has lately been driven by lower prices, following three months of “light liquidation.”
Global Debt on Alert
All of what I’ve said so far pertains to the near-term. Gold’s medium- to long-term investment case, I believe, looks even brighter. Many unsettling risks loom on the horizon—not least of which is a record amount of global debt—that could potentially spell trouble for the investor who hasn’t adequately prepared with some allocation in a “safe haven.”
According to the highly-respected Institute of International Finance (IIF), global debt levels reached an astronomical $217 trillion in the first quarter of 2017—that’s 327 percent of world gross domestic product (GDP). Notice that before the financial crisis, global debt was “only” around $150 trillion, meaning we’ve added close to $120 trillion in as little as a decade. Much of the leveraging occurred in emerging markets, specifically China, which is spending big on international infrastructure projects.
It goes without saying that this is a huge risk. Some are calling this mountain of debt “the mother of all bubbles,” and we all remember how the last two bubbles ended, in 2000 (the tech or dotcom bubble) and 2007 (the housing bubble).
Paying down this debt will not be easy. As Scotiabank mentions in a note this week: “Higher interest rates are going to make the burden of refinancing the debt considerably heavier, and as more money goes into servicing the debt, it means less money is available to spend on other things, which could lead to less infrastructure spending and increased austerity.”
Add to this the fact that global pension levels are also sharply on the rise, with people living longer and population growth—and therefore workforce growth—slowing in many advanced economies. In May, the World Economic Forum (WEF) estimated that by 2050, the size of the retirement savings gap—unfunded pensions, in other words—could be as much as $400 trillion, an unimaginably large number.
The U.S. alone adds about $3 trillion every year to the pension deficit. I shared with you earlier in the month that the State of Illinois’s unfunded pensions could be as high as $250 billion, putting each Illinoisan on the hook for $56,000.
Central banks’ efforts to promote economic growth through monetary easing haven’t exactly been a raging success, nor can they continue forever. Plus, near-zero interest rates are precisely what encouraged such inflated levels of borrowing in the first place.
You can probably tell where I’m headed with all of this. Another crisis could be in the works. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.
Gold is one such asset that’s been a good store of value in such times, and gold stocks have tended to outperform the yellow metal as production costs have fallen, according to Seabridge Gold. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in gold stocks, mutual funds or ETFs.
- The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.27 percent. The S&P 500 Stock Index rose 0.54 percent, while the Nasdaq Composite climbed 1.19 percent. The Russell 2000 small capitalization index gained 0.49 percent this week.
- The Hang Seng Composite gained 1.20 percent this week; while Taiwan was down 0.07 percent and the KOSPI rose 1.47 percent.
- The 10-year Treasury bond yield fell 10 basis points to 2.24 percent.
Domestic Equity Market
- The utility sector was the best performing sector of the week, increasing by 2.59 percent versus an overall increase of 0.54 percent for the S&P 500.
- Vertex Pharmaceuticals was the best performing stock for the week, rising 24.5 percent.
- The pharmaceutical company reported positive data from its Phase1 and Phase 2 trials for cystic fibrosis patients. The results are clear and compelling with one analyst calling it, “breakthrough – quality.” Cowen increased its price target from $105 to $200.
- The industrial sector was the worst performing sector of the week, declining 1.01 percent versus an overall increase of 0.54 percent for the S&P 500.
- Chipotle was the worst performing stock for the week, declining 12.76 percent.
- Chipotle’s shares were once the best performing of the fast casual restaurant industry, but as with food, stock prices can spoil too. The company’s shares slid to a new 52-week low on broker downgrades due to concerns over a norovirus outbreak at one of the Virginia locations, along with another detrimental video about rodents living in the ceiling at another location.
- Where is the inflation? According to Blackrock’s strategists, “technological innovation is disrupting traditional business models putting a lid on inflation.” The longer that inflation seems to be a non-event, the better the chances are the Fed keeps interest rates low.
- Your company’s 401k match may be getting bigger. Company matches are on pace to become 4.7 percent of an employee’s salary this year, up from 3.7 percent last year. The reason behind the increase? The labor force continues to stay tight. If this trend continues, and more companies start competing on benefits, the stream of capital flowing into the markets from 401ks may become substantial.
- Historically, shipping volumes were used as an indication of economic growth. More products shipped implied companies were “moving product.” More products sold, meant more capital changing hands (which, in the future, should eventually show up in GDP reports). Earlier this week The Wall Street Journal highlighted the volume of cargo imports are currently at record monthly levels.
- Labor participation in the workforce for men age 25 to 54 is lower than it was during the Great Depression. According to a recent working paper by the National Bureau of Economic Research, video games are responsible for reducing the amount of work the younger generations of men perform over the year by nearly 30 hours. The big concern here is the growth of this behavior, and whether or not the distraction will impact workforce’s overall productivity.
- Is a recession in the midst? Historically, when the difference between the interest rate on a 10-year Treasury note and the interest rate on a 3-month Treasury bill resulted in a negative yield, an economic recession follows. Although we are not at that critical point yet, the spread between the 10-year Treasury has been narrowing over the past few years. If the Fed continues to tighten, it’s possible the curve may become inverted (the T-Bill yielding more than the 10-year yield) in the next few years (implying a recession could be in the cards).
- Another indicator for an impending recession is a labor market at full strength. Currently, the U.S. has one of the lowest unemployment rates in history. Another indicator: frothy asset prices. Right now, the stock market is at all-time highs. And then there is central bank tightening. The Federal Reserve has tightened three times and other global central banks are discussing tightening too. Lastly, a pervasive sense of calm is an indicator. Many are saying, “don’t worry, the market always comes back,” while the volatility index is near all-time lows.
This week spot gold closed at $1,254.81, up $26.11 per ounce, or 2.13 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 2.56 percent. Junior-tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index rose just 0.45 percent. The U.S. Trade-Weighted Dollar Index was crushed lower this week by 1.27 percent.
|Jul-16||China Retail Sales YoY||10.6%||11.0%||10.7%|
|Jul-17||Eurozone CPI Core YoY||1.1%||1.1%||1.1%|
|Jul-18||Germany ZEW Survey Current Situation||88.0||86.4||88.0|
|Jul-18||Germany ZEW Survey Expectation||18.0||17.5||18.6|
|Jul-20||ECB Main Refinancing Rate||0.000%||0.000%||0.000%|
|Jul-20||Initial Jobless Claims||245k||233k||248k|
|Jul-25||Conf. Board Consumer Confidence||116.0||--||118.9|
|Jul-26||New Home Sales||615K||--||610k|
|Jul-26||FOMC Rate Decision (Upper Bound)||1.25%||--||1.25%|
|Jul-27||Hong Kong Exports YoY||8.0%||--||4.0%|
|Jul-27||Durable Goods Orders||3.1%||--||-0.8%|
|Jul-27||Initial Jobless Claims||240K||--||233k|
|Jul-28||Germany CPI YoY||1.5%||--||1.6%|
|Jul-28||GDP Annualized QoQ||2.5%||--||1.4%|
- The best performing precious metal for the week was silver, up 3.34 percent as investors loaded up on ETFs that purchase the physical metal, perhaps speculating that silver would outperform gold if the latter rallied. Gold traders and analysts remained bullish this week, for the fifth week, as the European Central Bank keeps its stimulus going, reports Bloomberg. In addition, as the dollar slumps amid an investigation into President Trump, gold heads for the first back-to-back weekly advance since early June, another Bloomberg article reads.
- Gold bulls are keeping their faith in the metal, reports Bloomberg, as the equity rally pares the yellow metal’s gains. Gold bulls have pointed to slow inflation and Fed concerns that asset prices look “somewhat rich.” Similarly, a Bank of America Merrill Lynch survey shows fund managers are growing hesitant to buy U.S. equities. Jason Mayer of Sprott Asset Management says that the non-stop bull market has led to a lot of complacency where managers aren’t hedging. “Once that tide turns, that could prove to be bullish for gold and precious metals,” Mayer said.
- After President Trump’s economic revitalization agenda once again faltered, the U.S. dollar fell to an 11-month low this week, reports Bloomberg. Opposition to Trump’s health-care reform bill, along with European shares dropping amid earnings disappointments, sent gold to its highest level this month.
- The only negatively performing precious metal for the week was palladium, off 1.62 percent. Hedge funds and money managers seem to be losing their faith in gold, along with other precious metals, reports Bloomberg. Before posting its first weekly gain in six weeks, the net-long position in gold fell to the lowest in 17 months for the week ended July 11. Money managers are hitting the exit as they brace for monetary tightening in the U.S. and Western Europe, the article continues, and aren’t waiting around for signs that the Fed may change its rate trajectory.
- U.K. Royal Mint sales dropped in the second quarter by 62 percent compared with the previous three months, reports Bloomberg. Sales are down 41 percent from a year earlier. And according to data on the Swiss Federal Customs Administration’s website, Swiss gold exports declined 169.5 tons in May. Month-over-month exports to India also fell, but exports to China and Hong Kong both rose.
- Jaguar Mining previously had seen its 2017 gold production output at 100,000 ounces, but the company cut its forecast to 95,000-105,000 ounces, reports Bloomberg. Positive news, however, came after its decision to leave Turmalina at Level 9 and commence development and mining of Level 10 in Orebody A. Turmalina saw significantly stronger production in June versus April following this decision, the article continues.
- Scotia Mining Sales notes that as silver has gotten cheap again, particularly when looking at the widening gold-silver ratio, investors have been piling into silver ETFs (while dropping out of gold ETFs). Interestingly enough, there seems to be a bearish outlook in the futures market, where hedge funds are now holding the first net short silver position seen in two years, the group writes. The risk of higher U.S. interest rates should drive silver prices lower, is the reasoning behind this. However, if the Fed “blinks” and silver prices rebound, they will rebound quickly and violently, Scotia continues.
- Klondex Mines reported record, second-quarter operating results for its Nevada and Canadian operations this week, producing 66,629 gold equivalent ounces (GEOs), an increase of 94 percent from the first quarter. In the press release, the company also stated that it remains on track to meet its annual production guidance of 210,000 to 225,000 GEOs, up 36 percent from 2016. “As expected, the operating results for the second quarter were the best in the company’s history,” President and CEO Paul Huet said.
- Roxgold Inc. announced an updated mineral resource estimate (MRE) and complete drilling results from its first half Infill and Extension drilling program at the Bagassi South deposit. The Bagassi South deposit is located less than two kilometers from Roxgold’s flagship underground gold mine at the 55 Zone. According to a press release, highlights of the estimate are as follows: 1) Indicated MRE of 352,000 tonnes at 16.6 grams of gold per tonne (g/t Au) for 188,000 ounces and 2) Inferred MRE of 130,000 tonnes at 16.6 g/t Au for approximately 69,000 ounces of gold. In other company news, Columbus Gold Corp. announced its intention to spin out its mineral projects in the U.S. into a separate publicly traded company to be named Allegiant Gold Ltd. The plan of arrangement would see shareholders of Columbus receive one share of Allegiant for every five shares of Columbus. This should unlock the value for their North American assets.
- As Global Mining Research points out in a note this week, over the last few years there have been a number of companies that haven’t mined to their Life of Mine (LOM) plans. In particular, stripping requirements haven’t been met. One of the most well-known examples of this recently is Detour Gold, the research group points out, but clarifies that it certainly not the only one. Deferring the waste removal puts the company at risk for greater waste removal requirements in the future, which is obviously not a source of revenue.
- Due to Goldcorp’s failure to properly consult with affected indigenous peoples on its proposed Coffee Gold project, the Yukon Socio-Economic Assessment Board decided to stop its assessment of the project, reports Seeking Alpha. This means the project’s timeline could be in jeopardy, along with costs associated with the project. This decision points to deeper troubles at Goldcorp in relation to the company’s Canadian operations, the article continues.
- Special Counsel Robert Mueller is taking a wide-angle approach to his probe regarding President Donald Trump’s campaign and Russia in last year’s election. He is now looking into other Trump business transactions, despite the President’s caution not to do so. “The roots of Mueller’s follow-the-money investigation lie in a wide-ranging money laundering probe launched by then-Manhattan U.S. Attorney Preet Bharara last year,” the Bloomberg article reads.
Energy and Natural Resources Market
- Thermal coal was the best performing commodity this week, rising 3.8 percent. The move came after unconfirmed reports stated that Andrew Wheeler, a top coal industry lobbyist, is likely to be named number two official at the Environmental Protection Agency (EPA).
- The best performing sector this week was the Bloomberg Global Coal Producers Index. The index rose 5.4 percent on the back of strong Chinese steel mill demand reflected in record steel output for the month of June, followed by positive momentum in coal prices triggered by the potential for a top coal lobbyist to join the high ranks of the EPA.
- Braskem SA, a major Brazilian petrochemical refiner, was the best performing stock this week finishing up 9.2 percent. The company rallied after Morgan Stanley raised its recommendation to overweight citing widening margins on the back of a weaker Brazilian real, strong free cash flow generation, as well as a valuation that trails its petrochemical peers.
- Lumber was the worst performing commodity this week dropping 4.0 percent. The commodity was the best performer the previous week after a severe wildfire threatened sawmills operations in British Columbia, Canada. This week, tempered U.S. housing data weighed on the commodity in spite of continuing risks of greater wildfires on the Canadian west coast.
- The worst performing sector this week was the FTSE 350 Mining Index. The index fell 1.6 percent on the back of a single stock, Acacia Mining which dropped 19.3 percent. The company discontinued its dividend and lowered guidance as a result of a spat with the Tanzanian government that resulted in a ban on exports of its gold and copper concentrates.
- The worst performing stock for the week was GAMESA. The Spanish renewable energy supplier dropped 5.8 percent after announcing it will shut down its Tillsonfurg, Ontario factory as a result of weaker-than-expected wind mill demand in North American markets.
- Gold rallied above its 50-, and 100-day moving averages this week, setting up for what could prove to be a strong technical move to $1,300 as the U.S. dollar continues to weaken. In fact, when looked at in the context of the weak U.S. dollar, gold fares even better; the chart below shows the tight inverse correlation between gold and the U.S. dollar, which going by the chart, suggests gold could move as high as $1,350 an ounce.
- China's economy expanded 6.9 percent in the second quarter, significantly ahead of the government’s target of 6.7 percent. With two consecutive quarters of 6.9 percent growth, China’s GDP is on track for its first year-on-year growth acceleration since 2010.
- Property investment was one of the key drivers behind China’s strong GDP beat, providing a positive read-through for steel and industrial metals demand. Property investment grew 8.5 percent year-on-year, showing a marked acceleration from the previous growth rates of 6.9 percent.
- OPEC July output is set to exceed 33 million barrels per day (bpd), according to tanker tracking data. If sustained until month-end, the volumes would represent a sizeable increase over the 32.4 million bpd average for the first half of the year.
- The Energy Information Administration (EIA) suggests U.S. shale output is likely to increase by greater than 100 thousand bpd next month, according to its recent drilling productivity report. The increase in volumes is expected to drive total U.S. shale output to 5.59 million bpd, the highest level in all of 2017. These improvements, together with OPEC output reaching its highest of the year threaten to derail the nascent recovery in oil prices.>
- China reported record amounts of steel and aluminum production in June. Reports out of Beijing suggest mills around the country rapidly increased output to profit from rallying commodity prices into quarter-end. The rapid output growth suggests China has been unable to meet its promise of cracking down on marginal mills to help rebalance the global steel market. Markets reacted negatively to the news fearing that China, the world’s top steel exporter, may resort to dumping to alleviate its oversupply.
- South Korea’s Korea Stock Exchange Index (KOSPI) finished the week up 1.47 percent, beating out Hong Kong’s Hang Seng Composite Index (HSCI) and the Philippines’ PCOMP Index by 10 and 15 basis points, respectively.
- Information technology finished the week as the top sector in the HSCI. Tech rose 4.16 percent in the last five trading days despite a few hiccups late in the week for some of the most recent dominant performers.
- China’s second quarter GDP growth rate came in at a steady 6.9 percent, ahead of consensus estimates for a 6.8 percent growth rate and even with the first quarter’s 6.9 percent print. Retail sales, fixed asset investment, and industrial production also came in ahead of estimates for China this week.
- Consumer services constituted the worst performing sector in the HSCI for the week, falling 81 basis points and making the sector the only one to finish the week in the red.
- Vietnam’s Ho Chi Minh Stock Index dropped 1.79 percent in the last week, while Indonesia’s Jakarta Composite (JCI) Index declined 1.14 percent.
- Both imports and exports missed in Indonesia for the June period. Imports came in down 17.21 percent year-over-year, shy of expectations for a 9.25 percent increase and down from the prior period’s 24.03 percent, while exports fell 11.82 percent, missing estimates for a gain of 7.28 percent and the prior month’s pace of 24.08 percent growth.
- A combination of a growing population in Asian urban areas together with more efficient transport systems will give a rising number of people greater access to more airports. The chart below shows urbanization rates in key Asian countries growing, which is likely to boost Asia’s long-term air travel demand growth.
- According to a plan issued by the State Council, “China aims to make the artificial intelligence industry a ‘new, important’ driver of economic expansion by 2020,” reports Bloomberg. Late Thursday, policy makers on the cabinet announced that they want to be global leaders in the space, with the AI industry generating more than 400 billion yuan of output per year by 2025.
- China is facing less pressure from capital outflows, according to data released by its currency regulator Thursday. China’s banks sold a net $93.8 billion of foreign exchange to clients in the first six months of 2017, writes ChinaDaily.com, down 46 percent year-on-year. Economists say the situation may continue to improve in the second half of the year, the article continues.
- The United States is banning its citizens from traveling to North Korea, starting 30 days from July 27th. The announcement comes in the wake of the tragic imprisonment and death of student Otto Warmbier, North Korea’s recent test launches, and what the Trump administration is branding as disappointing efforts from the Chinese to rein in their rogue East Asian neighbors.
- On July 19, U.S. Commerce Secretary Wilbur Ross opened economic talks by “scolding China over its trade surplus,” reports Bloomberg. China and the U.S. have hit some rough patches since Trump became President and some U.S. firms could be at risk if a trade war breaks out. Trump has considered restricting imports of Chinese steel and aluminum, a move that could prompt retaliation from Chinese President Xi Jinping, the article continues.
- Finally, Canadian singer Justin Bieber will not be invited to perform in Beijing, media reports suggest. The reason cited, per the Beijing Municipal Bureau of Culture, is apparently “bad behavior.”
- Romania was the best performing country this week, gaining 2.98 percent. Shares of Electrica advanced as much as 7 percent after the company agreed to acquire minority stakes in its subsidiaries from Fondul Proprietatea. This transaction has been long awaited and should benefit both companies, according to Wood & Company research team.
- The Hungarian forint was the best performing currency this week, gaining 1.89 percent against the dollar.
- The real estate sector was the best performing sector among eastern European markets this week.
- Russia was the worst performing country this week, losing 1.81 percent. Oil prices fell Friday morning on renewed concerns about oversupply. OPEC officials are about to start meetings in Russia this weekend with counterparts from non-OPEC countries that have participated in this year’s output cuts. Delegates are supposed to discuss the possibility of including two previously exempted OPEC members, Nigeria and Libya, into the deal. But traders are becoming skeptical that meetings will produce any significant changes.
- The Russian ruble was the worst performing currency this week, losing 58 basis points against the dollar.
- The consumer staples sector was the worst performing sector among eastern European markets this week.
- Local-currency bonds in Poland and Germany have advanced this month, pushing yields lower in the face of growing concern that the European Central Bank (ECB) will start reducing its monthly bond buying program. Polish and Hungarian bond yields on average are four times higher than those offered in Germany, which is attractive to investors still looking for a good carry trade.
- Kepler Cheuvreux wrote in European Investment Notes that last week marked the beginning of our “late show.” The note stated that this is the summer rally in equities markets that promises to be the last of the series that began early last year. From here the company sees a 5-10 percent advance for major European indices.
- The recent recession in Russia has created a space for a cyclical recovery. Potential growth is still very weak, but prospects for the second half of this year and next year are stronger than many think, according to research by Emerging Europe Economist. Inflation has fallen sharply, easing the pressure on real incomes and consumer spending. Inflation will stay low, allowing the central bank to loosen monetary policy and support the recovery.
- The top three credit rating agencies, Standard & Poor’s, Fitch and Moody’s all withdrew from Russian domestic ratings, refusing to comply with the registration drawn up in 2014 when they downgraded Russia after the annexation of Crimea, according to Reuters. ACRA, a new Kremlin-backed rating agency promoted by the central bank, and Expert RA are the only agencies able to assess Russian debt. Investors may be skeptical to believe that the domestic-produced ratings would be of the same standards as international ones.
- The administration of former U.S. president Barack Obama expelled 35 Russian diplomats and seized their properties last year in December. Now Moscow threatens to expel U.S. diplomats saying that too many American spies operated in Moscow under diplomatic cover. Despite the seemingly friendly meeting between the Russian president and Donald Trump last week, the US-Russia relationship is delicate.
- The European Commission, the EU’s regulatory arm, may impose sanctions on Poland for its judicial overhaul. If Article 7 of the EU treaty is triggered, Poland could lose its voting rights in the 28-nation bloc. This dispute with the European Commission over breaking the rule of law may deepen and political noise may put pressure on equities. The Warsaw stock exchange is one of the best performing emerging Europe markets, gaining 21 percent year to date.
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