Weekend Update October 24

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: This week was characterized by renewed volatility in the markets. This can partly be attributed to the diverging policies of the Federal Reserve and European Central Bank: the latter is just now instituting its form of monetary easing, while the former is set to conclude its stimulus program. After undulating, stocks ended the week up as gold retreated from its recent rally.

 

GEOPOLITICS & WORLD EVENTS

Russia Remains Assertive Despite Sanctions

With its currency in free fall and energy prices continuing to drop, Russia has been doing everything it can to stave off a deep economic recession. The country’s central bank has been furiously selling off its forex reserves in an attempt to stabilize the ruble. Russia holds the second largest stockpile of foreign reserves in Europe, trailing only Switzerland, and has sold from those reserves for nine straight weeks. In just the last two weeks, the central bank has dumped nearly $11 billion of international reserves. At the same time, Russia made its largest monthly purchase of gold in 15 years, adding 1.2 million troy ounces of the yellow metal to central bank holdings.

With its economy on the brink of a serious contraction, Russia has encountered a series of problems abroad, as well. It remains mired in a bona fide war with Ukraine despite a supposed ceasefire; fighting between the two sides continues as talks of a trade agreement for Russia to supply natural gas to Ukraine are at an impasse. Then reports surfaced that Sweden was searching for a Russian submarine that apparently breached the Nordic nation’s waters while a series of naval exercises were being conducted. This sub may have been spying on the Swedish fleet’s exercises to evaluate their capabilities. Some geopolitical analysts are speculating that the Nordic-Baltic region could become a new security “soft spot” that the Russians would like to exploit. On Thursday, NATO and Swedish forces intercepted a Russian spy jet over Estonian airspace; such incursions between Russia and its Scandinavian neighbors in the North Sea and the Baltic have escalated since the annexation of Crimea earlier this year.

On top of it all, this week we hear that the CEO of the largest corporation in France, Total Energy, was mysteriously killed in a Russian plane crash. While taking off from an airport in Russia, the plane hit an errant snowmobile. This piles on yet more bad publicity for Russia in the West, where negative sentiment toward the Eurasian power is gradually approaching Cold War levels.

Other News & Notes

India will resume its record-high 10% import duty on gold as the Diwali Festival, the season’s largest gold-buying event, is celebrated all week. Gold demand is expected to jump as much as 450% in the world’s largest democracy, leading to higher premia for physical gold.

The ECB began buying covered bonds on Monday as part of its stimulus package.

Brazilian elections are a dead-heat, as voters are starkly divided by socioeconomics.

Expectations for Chinese growth over the next decade were cut to 3.9%. This quarter’s GDP, released on Monday, still came in slightly above experts’ predictions at 7.3%.

The Swiss gold referendum still looms on November 30; pro-gold sentiment currently hovers around 45% in polling, though–like Scotland’s independence referendum–a “yes” vote is considered unlikely.

The Hong Kong demonstrations are abating but not yet gone; Chief Executive Leung has cited the Basic Law, outlining the relationship between the semi-autonomous city and mainland China, as clearly tying his hands regarding the protesters’ demands.

MARKETS

Market Volatility Up as Fed’s Asset Purchases Set to End

After a considerable period of record-low volatility, the markets oscillated throughout the week before the stock markets in the U.S. and Europe rallied on Thursday. Gold and silver were also volatile as strong seasonal demand is setting in. Just three months ago, market volatility was quietly stable, as the VIX volatility rating registered its lowest ever reading; after this week, the VIX has hit a 13-month high.

With the beginning of the European Central Bank’s asset purchase program coinciding with the end of the Fed’s own quantitative easing, the markets didn’t seem to know which way to go on Monday’s open. Germany’s DAX slipped 1.4%, the CAC 40 in Paris was 1.1% lower, and London’s FTSE 100 was down 0.7%. Meanwhile, the Nasdaq and S&P 500 rose 1.35% and 0.91%, respectively. Despite IBM plummeting nearly 8% on news that it will be contracting an outside company to manufacture all of its microchips, the Dow Jones still nudged into the green by 0.1%.

After plunging more than 150 points (-0.93%) on Wednesday, the Dow reverse in earnest on Thursday, rallying over 200 points. The S&P closed Thursday up 4.2% over the last week, peeking above the 1950 mark for the first time in two weeks. Yet, online retail giant Amazon saw its shares nosedive on Thursday after third quarter losses exceeding $400 million were reported. Meantime, its rival Alibaba and tech giant Microsoft saw continued strength, and Apple stock closed at a new all-time high of $104.83. European markets likewise saw a positive reversal around midweek: on the week, the CAC 40 was up 4.2%, the FTSE 100 rose by 2.4%, and the German DAX moved 3.8% into the green. After trending below the 15,000 mark, Japan’s Nikkei 225 gained some 5.2% on the week to open near 15,300 on Friday.

After dipping just below 85.0 earlier in the week, the DXY dollar spot index pushed back upward on Thursday, closing above 85.8. A rising dollar continued to drive commodity prices lower, especially energy prices. West Texas Intermediate fell to a 27-month low below $81/barrel, and Brent crude threatened to break below the $85 mark. Gas prices fell by as much as 25 cents in parts of the U.S. Gold and silver retreated with the strength of the greenback, as gold slid from its recent high of $1,250 to about $1,230. Silver was equally volatile, trading within a range between $17.20 and $17.50 during the week. 

GOVERNMENT & POLICY

Lest We Forget About the Fed . . .

There is no break from the market manipulation machine that is the Federal Reserve.

This week, volatility went through the roof. Panic abounded. People began to worry that this was the great correction that would accompany the end of the Fed’s asset-buying stimulus program, better known as QE. 

As Wall Street executives met at the New York Fed on Monday to discuss the ethics and culture of the banking industry, one wonders if the central bank’s common practice of conveniently timing dovish announcements when the markets begin to sour was up for discussion. Surely they would want to coordinate these things–although, with how well the machine works, it hardly seems necessary. 

With stocks on their most serious losing streak in quite some time, the President of the St. Louis Fed opined that he’d like to see a fourth round of QE instead of a taper off of the bubble-blowing policy. Then, the Boston Fed President suggested that the Fed may not deviate from ZIRP by raising interest rates until 2016, forecasting yet another year–why not make it seven in a row?–of near-zero rates.

Doesn’t that feel good? The stock markets sure thought so; they subsequently rallied.

Forget that Europe is scrambling to avoid economic doom. Ignore the signs that growth projections are being scaled back around the world. Worry not about mounting debt or vastly over-leveraged financial institutions.

Just keep your eyes trained on the tip of your nose. That’s as far ahead as the Fed wants anyone looking.

 

A LOOK AHEAD: The big news next week comes on Wednesday, when the Federal Reserve Open Market Committee (FOMC) makes its post-meeting announcement. The end of the Fed’s QE program of bond purchases is expected. Investors will also be closely watching the docket on Thursday when 3Q GDP and first-time jobless claims are released.

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.