By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.
ABSTRACT: U.S. stock indices rallied in earnest throughout the week before slipping modestly on Friday, fueled in part by an inflow of investment into Europe. This also sparked a selloff of U.S. Treasuries. Meanwhile, crude oil bounced back considerably (though not without some volatility) and gold and silver slumped to 3-week lows.
GEOPOLITICS & WORLD EVENTS
The Greek Question Persists
A piece of datum was floated around the news media this week that captured the long-standing lack of stability for the Greek economy: in 90 of the last 192 years, Greece has been in fiscal crisis, either burdened with debt to the point of default or encumbered with thorny debt restructuring.
This is one of the worst track records anywhere in the world over the last two centuries. Although the Greeks’ fiscal failures in the past may not have any particular bearing on the current Syriza government and how it resolves its outstanding debt, it nonetheless creates a compelling narrative for the rest of Europe to seize upon.
Greece is searching for allies after having to back off some of its tough stances on restructuring its ECB bailout debt. Realizing that the Troika will not accept a straightforward writedown of the outstanding debt, new Greek Finance Minister Yanis Varoufakis is trying to strike a balanced public appearance, working amicably with his European counterparts to find a reasonable solution while still assuring the Greeks that he will not let them suffer the “indignity” of further austerity measures.
Although Varoufakis has vowed to secure a new deal in a “very short space of time,” one that will alleviate some of the burden of the original loan the country received from the EC-ECB-IMF triumvirate, the EU brass is playing hardball–particularly Germany, who seems bent on playing the predatory creditor in a “beggar-thy-neighbor” scenario across the entire continent. With a powerful Germany concerned mainly with her own interests, it’s politically impossible for the ECB to accommodate Greece without stirring dissent and distrust among the Germans.
Thus, the ECB rejected Greece’s proposal to use its government debt as collateral for a new “bridge” loan. The central bank did, however, authorize the Bank of Greece to provide nearly €60 billion of direct emergency liquidity to the country’s other lenders. The new government currently has the support of the people, drawing throngs of pro-government protesters outside of the parliament building after the latest round of negotiations with the ECB.
It is the first time in a very long time that Greek protesters were marching–peacefully–in favor of the government.
Both sides in the Greece-EU standoff are accusing the other of blackmail, withholding their cooperation until certain demands are met. The truth is, both sides need each other to keep the monetary union alive in Europe. In such a situation, nearly every strong political maneuver is tantamount to blackmail.
At the moment, market anxieties over the Greek question have eased up as Finance Minister Varoufakis and Prime Minister Tsipras have taken the mantle of pragmatism over ideology, working with their creditors in Europe while maintaining with the Greek populace an atmosphere of duty to escape from the clutches of EU-enforced austerity. With the outlook for a potential deal improving, Greek shares and government bonds have been recovering nicely, as Athens’ major stock exchange advanced 12% this week, its best showing in nearly 3 years, while yields on short-term government debt plunged almost 200 basis points on the optimism surrounding the new administration.
Chances are good that whatever agreement is reached will not look especially appealing to either the Greeks or the Germans, at least relative to each side’s current aspirations. Yet, the sooner the Greek crisis is resolved, the sooner the Eurozone economy can get back on track; the Europeans’ leg of the stool that holds the global order in place has remained wobbly for long enough.
News & Notes
The Reserve Bank of Australia cuts its benchmark cash rate 25 bp down to 2.25%, making it at least the dozenth major central bank to do so already in 2015.
Tensions continue to rise between Ukraine and Russia, prompting prominent European leaders to attempt to strike up peace negotiations with the Kremlin.
In the trash bin of the hotel room where a prominent Argentine prosecutor was slain, a crumpled arrest affidavit for the country’s president was found. Argentina’s president, Cristina Fernandez, did herself no favors by making headlines later in the week: she jokingly mocked Chinese accents on Twitter–this while in Beijing securing fresh investment and trade agreements with China.
Tides Reverse: Equities Up, Metals Down
The market trends that characterized the beginning of the new year swung back the opposite direction this week, as the precious metals trickled lower before really cratering during Friday’s trading session. Gold and platinum each lost $30 (more than 2%) by Friday afternoon, while silver slid about 55 cents (more than 3%) to $16.75/oz. Keeping with its recent trend, palladium resisted the more drastic movements of its precious metal cousins, trading within a tighter range between $775 and $800 per ounce. Even after shedding about $10 on Friday, spot palladium was actually up 2% on the week, the only metal to keep its head above water.
Meantime, crude oil experienced one of its most volatile weeks in over 5 years, rebounding sharply on Tuesday before the announcement of U.S. petroleum inventories on Wednesday revealed that a considerable supply glut still remains. Crude prices responded by tanking nearly 8% on the day. Thursday and Friday saw prices advance again, however. By week’s end, WTI crude and Brent crude sat at $51.65/bbl and $57.65/bbl, respectively. As oil rose, the greenback did ease up initially, falling to 93.5 on the DXY index early in the week. The dollar, however, would not be denied; it swiftly rose 1.2% on Friday to settle back above 94.5.
Treasuries saw similar volatility to crude oil, with yields on the 10-year note undulating between 1.69% and 1.93% over the week. It marked the most volatile week for U.S. government bonds since 2009, and was closely related to the capital flight out of Europe early in the week due to the possibility of a Greek exit from the euro union, followed by a Treasury selloff and capital flight back into Europe when it seemed the Greek government was softening its stance.
Stocks opened the week in the red until a late-day rally on Monday sparked a four-day winning streak for U.S. indices. The Dow added more than 300 points on Tuesday while its counterparts each rose by more than 1%. Interestingly, the three major indices have been mixed a bit more often than usual lately during intraday moves, with the S&P 500 slightly outperforming the Dow Jones and the Nasdaq being pulled up by rising energy shares. Nonetheless, the benchmark indices tracked higher almost in lockstep by each day’s closing bell.
While many expected the incredibly strong employment numbers from Friday’s jobs report to keep Wall Street’s rally going, the stock markets took a downturn midday, falling about 0.50% into the red, when they seemed to realize that an improving job market and steadying U.S. economy are hawkish signs that may prompt the Federal Reserve to raise its key rates sooner than expected.
One of the biggest headlines in U.S. markets this week was the bankruptcy filing and possible dissolution of the nearly century-old electronics retailer, RadioShack. The company’s stock has lost 90% of its value over the last year as it was forced to cede an ever-increasing portion of its market share to stalwarts like Best Buy. RadioShack is planning to sell several thousand of its brick-and-mortar stores, which are reportedly going to be snatched up by Sprint and Amazon, and possibly others. The prospective buyers have indicated that they will likely retain the RadioShack name for certain store locations.
GOVERNMENT & POLICY
Treasuries Ought To Signal Imminent Rate Hike
U.S. Treasuries, the supposedly safest of all safe havens, have been awfully volatile as of late. Yields had been tumbling without end in the tense days and weeks leading up to the European central Bank’s decision to implement QE, and the subsequent political shift in Greece. Then, government bonds dramatically reversed tide, spurred by capital flight back into Europe as the Euro area seems to make progress on finding a solution to its economic woes.
After benchmark 10-year yields dropped to a glaringly low 1.69% on Tuesday, Treasuries saw their greatest one-day selloff in more than a year. Yields rose back to 1.78% by the end of the day, and were back above 1.90% by the end of the week.
This sort of volatility, although a boon for day traders looking for arbitrage opportunities, are a fairly strong signal that the time is nigh for the Fed to wean the U.S. markets off of near-zero interest rates. Especially with the wildly optimistic sentiment created by Friday’s employment report, the markets appear ready to test the limits of this policy, driving greater risk appetite and outright speculation. After mostly erasing their steep losses to start the new year, U.S. stock indices are rallying anew, pushing back near their all-time highs set just two months previous.
As much as we’d like to believe that the free markets always behave rationally (or, at minimum, are subject to certain rational limitations and counterbalances), we can’t be so sure when unconventional, emergency-measure monetary policies remain the norm for too long. Such policies, when in place beyond their apparent usefulness, can only serve to obscure the state of the real economy, drowning out the normal signals of a possible correction in one sector or another.
The outflow from Treasuries has helped restore some liquidity to the U.S. bond market, which was standing as essentially the only game in town amid sub-1% yields for many of the world’s most trusted benchmark government bonds. The Fed undoubtedly wants to dampen the dollar’s runaway appreciation, and raising key interest rates is sure to apply upward pressure on the greenback. Yet, the dollar is unavoidably firming up when Europe, Japan, and China (and now Canada and Australia) are, for all intents and purposes, devaluing their own currencies. When it comes to the strength of the dollar, the Fed finds itself in a bit of a bind; putting off the inevitable rate hike, however, will solve very little.
At best, sticking to ZIRP too long incentivizes unscrupulous speculators to act in the name of chasing higher yields, inflating dangerous bubbles; at worst, it could plunge the entire global economic system into an acute crisis again.
Let’s hope March’s FOMC meeting gives an indication that rates will be gradually normalized sooner than, say, the current expectations of sometime in the third quarter. But I’m not holding my breath.
LOOKING AHEAD: Keep an eye on Tuesday’s JOLTS report for more data on the labor market’s apparent strength. The EIA’s status report on petroleum inventories will come out on Wednesday, and Friday will see the current consumer sentiment gauge as well as import and export prices for January released.