Weekend Update – August 15

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ABSTRACT:Persistent fears over the strength of the European economy were not assuaged this week, as even EU stalwart Germany saw the first quarterly contraction of its economy in over a year, while France showed stagnation and Italy entered a recession. The dollar saw slight weakness due to disappointing retail and labor data released in the U.S. Gold remained steady as the polyglot of geopolitical tensions around the world all seemed to ease, with the possible exception of Russia’s involvement in Ukraine. Stocks and equities were up around the globe at week’s end; with no imminent movement expected with the Federal Reserve’s interest rates, monetary policy has momentarily taken a backseat to politicking for the upcoming midterm elections in the U.S., as well as the 2016 Presidential election.

GEOPOLITICS AND WORLD EVENTS

Ceasefire in Gaza, Peace Discussions Commence

Just as the three-day ceasefire between Israeli forces and Hamas expired Wednesday night, rockets resumed firing from both sides. Yet, no casualties or injuries resulted, and the ceasefire was subsequently extended for five more days while Israeli and Palestinian representatives entered into peace talks held in Cairo.

Israel has admitted that their goal of destroying Hamas’ infrastructure of underground tunnels is complete, which seems to be in large measure the reason they are willing to come to the table. Palestine has its own demands about greater autonomy over its borders in Gaza, while Egypt could also play an important role by agreeing to allow free passage through its border with Gaza. These developments seem to increase the odds that the parties involved will be able to broker a more lasting ceasefire. Despite widespread media coverage, the markets have mostly been silent on the conflict thus far, perhaps encouraged by de-escalation and the prospect of peace negotiations.

Russia Apparently Not Backing Down in Eastern Ukraine

Although Russia completed a series of “military exercises” along its western border with Ukraine, the Western world continues to watch for signs of further aggression. Per expectations, Moscow sent about 260 transport trucks en route to the Luhansk region of eastern Ukraine on Thursday, claiming to be providing humanitarian aid and supplies. However, the International Red Cross cannot confirm what cargo the trucks are carrying, nor will Vladimir Putin allow Ukrainian border authorities to inspect the vehicles. This has widely generated speculation that the convoy is actually intended to bring weapons and other military support to the pro-Russian rebels in Ukraine. Kiev announced it would dispatch its own humanitarian aid to the war-torn areas of the country, as the rebels are now pinned down by the Ukrainian army at Donetsk and Luhansk.

The longer the conflict in eastern Ukraine drags on, the more we can expect to see periodic investor flight to safe haven assets like Treasury bonds and gold. This week also saw the release of abysmal economic data for Europe that showed a -0.2% contraction of Germany’s GDP over last quarter and an overall sluggish Eurozone; taking into account that this data is from before the EU’s sanctions against Russia, it is no surprise that yields for a variety of government bonds were driven lower on increased demand.

ISIS Crisis Continues

In addition to authorizing airstrikes against ISIS forces in northern Iraq, the U.S. and the U.K. began sending humanitarian aid to Iraq’s Yazidi (or Yezidi) community. The Yazidi minority have become refugees within their own state, some of them trapped on the treacherous Mount Sinjar. Peshmergafighters–Kurdish security forces–have been working with Syrian Kurds to create safe passage for the displaced Yazidi between Iraq and Syria. Meanwhile, the Iraqi Kurds have been fighting to protect their own communities in Kurdistan, using weapons provided by the U.S., as ISIS forces attempt to crush Kurdish cities and villages.

In addition to their extermination campaigns against the Yazidi and the Kurds, ISIS has thus far spread their dominion to more than ? of the country’s land, including direct control over oil fields in the north. Surprisingly, the terrorist insurgents have not disrupted the state’s overall oil production. This has bucked the market’s expectations, pressing crude oil prices below $98 on unexpectedly abundant supply. ISIS militants have continued to support themselves through this uninterrupted oil production. Iraq’s richest oil fields are located in the southern half of the country, however, and remain out of the hands of ISIS.

The ISIS insurgency has been exacerbated by Iraqi Prime Minister Nouri al-Maliki’s refusal to abdicate his position. President Fouad Masoum called for a new government, appointing Haider al-Abadi the prime minister designate. Maliki has been maligned for alienating the country’s Sunni minority and thus fueling support for the ISIS rebels. Even Iraq’s high-ranking Shiite clerics have lent their support to a new Abadi government; moreover, fears that Maliki’s sway over militia groups could pose a threat to the formation of a new government were eased on Tuesday when Iran announced it would back Haider al-Abadi, an enormous blow to the shrinking Maliki camp.

MARKETS

Gold and Stocks Gain, Dollar Wavers on Weak Economic Data

Markets experienced a contradiction of sorts this week, with gold gaining due to anxiety over geopolitical strife while stocks rose as investors saw evidence of de-escalation in Ukraine. Gold continued last week’s rally, moving up to around $1,315 per ounce early in the week as it was announced that Russia was sending a convoy carrying humanitarian supplies to Ukraine’s battered East, a move that put Ukraine’s government and Western powers on edge. On Thursday, however, Russian president Vladimir Putin announced that Russia was prepared to defend itself, but would avoid risking conflict with the wider world, comments which sent stocks higher on Wall Street as they hinted at an apparent easing of tensions.

Silver and platinum remained relatively stagnant throughout the week until Friday, each trading within tight ranges with silver hovering just under $20 per ounce and platinum staying close to $1,470 per ounce. Friday morning saw precious metals across the board, including gold, fall. Gold sank back below $1,300 an ounce and silver dropped well below $20 to around $19.70 an ounce. In other precious metals news, the newest electronic iteration of the daily silver fix began on Friday; its real impact on silver prices, if any, will be assessed in the coming weeks.

The stock market’s upswing on Thursday and Friday morning continued its rising trend for the week. U.S. markets saw a partial reversal of the previous two weeks’ losses with the Dow adding nearly 200 points, or 1.1 percent, since Monday’s open of 16,557.27. The S&P and Nasdaq also experienced significant gains, rising by around 1.3 percent and 2.0 percent from respective Monday openings of 1,933.43 and 4,387.38. The Nasdaq’s strong performance was helped along by an upward push from tech and biotech stocks on Wednesday.

The increase in stocks occurred in spite of poor retail and labor numbers. A report on retail sales, which came out Wednesday, indicated that sales for July were stagnant after a 0.3 percent increase in June. Weekly unemployment numbers, released on Thursday, showed an increase of 21,000 claims, though some analysts point to this as a result of more people entering the workforce. The dollar fell following both reports, though losses were largely recovered by each day’s end.

World markets generally traded up for the week, with Britain’s FTSE 100, Hong Kong’s Hang Seng, and Japan’s Nikkei posting increases of around 2.5, 1.7, and 2.0 percent, respectively. Europe continued to struggle as many Eurozone economies grappled with low industrial demand, slow service sector growth, and sanction on food exports imposed by Russia.

GOVERNMENT AND POLITICS

Clinton Continues Positioning for Presidential Bid, Distances Herself from Obama

Few people doubt whether or not Hillary Clinton will make a second run for president. At this juncture, it’s starting to seem like a foregone conclusion, and her statements as of late seem to line up with that assumption. With the start of the Presidential primary season just a year and a half away, Clinton is becoming more and more eager to distance herself from her former primary opponent and boss.

In an interview published on Sunday of last week, the former First-Lady and Secretary of State characterized the President’s decision not to intervene in the Syrian civil war as a “failure.” Clinton cited the recent upheaval in Iraq as evidence that a chance was missed to depose Syrian President Bashar al-Assad, as well as prevent the militant group ISIS from filling the “power vacuum” that existed during the formative early months of the Syrian rebellion.

The failure to help build up a credible fighting force of the people who were the originators of the protests against Assad—there were Islamists, there were secularists, there was everything in the middle—the failure to do that left a big vacuum, which the jihadists have now filled,” said Clinton, accusing the President of a failure in leadership.

For what it’s worth, the President has long held firm in his belief that arming the rebels inside of Syria would have been another foreign policy blunder; one similar to the arming of anti-Soviet Al-Qaeda forces in Afghanistan, who later turned their sights on the United States and the World Trade Center. Certainly, it can be hard to see how something like this could have been accomplished without actually putting troops on the ground, something the American public would have been apprehensive about in the wake of the Iraq War.

All of this brings up a few interesting questions. First, if the issue of arming the Syrian rebels during the early parts of their civil war against Assad seems murky now, then was it not even more so back then? And if so, then why is Hillary Clinton trying so hard to draw distinction from the current president on such a controversial topic? Lastly, does it feel as though Mrs. Clinton is grasping at straws to draw a contrast with President Obama?

We all remember the failed presidential bid of former Vice President Al Gore; but do we all remember how hard he tried to distance himself from President Clinton in the wake of the Monica Lewinsky scandal? It was that very distancing that many political Monday morning quarterbacks said ultimately hampered him in what turned out to be one of the closest and most controversial elections in American history–one which he lost. IfMrs. Clinton is to be successful during the next presidential cycle, she might want to take a lesson from her husband’s former vice-president. You can run, but you can’t hide from your political record and career; voters seem to be more sympathetic of candidates who own up to their past than of those who run from it.


A LOOK AHEAD:A slew of consumer and housing data are set for release next week, including CPI, housing starts, building permits, and existing home sales. Look for market sentiment to track with these numbers as housing has experienced a relatively soft recovery in recent years, leading some to question the depth of U.S. economic recovery. Also, be sure to pay attention to silver prices in coming weeks. The new electronic fixing procedure may affect prices going forward.

By Terrence Campbell, Marty Menz, and Everett Millman


Terrence, Marty, and Everett make up the Content Team atGainesville Coins, aLeading Gold and Silver distributor. Combining diverse backgrounds and interests in economics, history, anthropology, and geography, the Gainesville Coins Content Team seeks to keep readers informed with current market happenings.

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The Deviant Investor