By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.
ABSTRACT: With the Greek debt crisis still yet to be resolved, markets were largely idle this week. While shares rose in Asia, Europe, and the U.S., they did so at a fairly modest pace, as many of the major world stock indices are already at or near all-time highs. The precious metals fell back–especially gold and platinum–as crude oil declined.
GEOPOLITICS & WORLD EVENTS
Greek Question Yet Unanswered
With the future of the European Union–and the euro itself–still up in the air pending the outcome of the Greek debt situation, the leaders of the euro area seem to be leaning increasingly toward a compromise that retains Greece’s membership in the union. The clock, however, has begun ticking: the round table of European finance ministers agreed upon a 4-month extension of the issue, ensuring bailout funds will continue to be dispersed to the Greek government in the meantime.
Greece’s previous extension on its bailout loan, agreed upon in December by the previous administration, was set to expire on midnight next Friday. If no deal was struck by this point, the region’s finance ministers worried that they may not have enough time to get the agreement ratified by their respective legislative bodies before the Greek government runs out of funds. Before Friday’s extension deal, Greece only had enough cash on hand to keep the government running for about another month.
In the face of such urgency, the principals for the ECB and the individual member nations have shown admirable resolve and prudence in the course of the negotiations (though tempers have certainly flared at times). They are wise to show patience and restraint; the Greek mess has become as much a battle to settle the crisis as it is a delicate mission to preserve the new Greek administration’s political credibility among the country’s voters. After winning their election by running on an anti-austerity platform, Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis would likely have serious unrest to deal with if they return to Greece with nothing better than a simple recasting of the original bailout agreement. Even in the interest of preserving the euro union, a disgruntled Greek electorate could effectively undermine any settlement that is reached.
The talks continued to go back and forth, with a volley of strong words being exchanged between the Greek and German parties. As the largest creditor (€50 billion) to Greece, Germany has been reluctant to let them off the hook, so to speak; a group of Northern European representatives, led by Germany, rejected a 6-month extension to the current loan agreement earlier this week, citing the ambiguous language of the Greek proposal as a concern.
It appears that, in the interest of allowing cooler heads to prevail and avoiding a hasty deal that leaves too many dissatisfied, the eurozone talks will keep searching for a long-term solution to Greece’s woes over the next 4 months. Although Tsipras and Varoufakis have driven a hard bargain thus far, the longer the rest of Europe can keep them at the negotiating table, the more Greece loses leverage as it becomes squeezed for cash and approaches default. Perhaps this strategy will cause the Greek officials to yield–but there is always the tail risk that an eventual “Grexit” scenario will push a spurned Greece into the arms of a welcoming Russia.
As much as such a development promises to be terrifying politically, one must concede that a Greek-Russian partnership would merely be a case of “misery loves company” in economic terms. Though it wouldn’t do much for the two countries themselves, such an alliance could wreak havoc on the functioning of the global markets at a time when they just seem to be finally gathering positive momentum. With any luck, the Troika and the new Greek government will broker a lasting deal in the interim between the end of this new loan extension, keeping the global economic ship righted for another day.
News & Notes
The Royal Bank of Scotland is set to pay another £10 billion (~$15.4 billion) in fines for rigging foreign exchange markets.
RBS is joined by HSBC in financial regulators’ crosshairs, as Britain’s largest bank is under fire for allegedly abetting tax evasion and money laundering in Switzerland. The Telegraph (U.K.) is also being criticized for remaining silent on the allegations, drawing scrutiny of a £250 million loan and the lucrative advertising revenue it has received from HSBC.
Both China and Japan lessen their holdings of U.S. debt, though they are still the two largest holders of U.S. liabilities at about $1.23 trillion apiece.
Violence continues in Ukraine, as pro-Russian rebels retake a key transport hub in the eastern provinces. Ukraine’s GDP was down 15% year-over-year in the fourth quarter.
Marie Harf, spokeswoman for the State Department, makes a gaffe on television by seeming to suggest that creating more employment opportunities for disaffected ISIL recruits in the Middle East could help defeat the extremist group, spawning the sardonic meme, “JOBS FOR ISIS.”
Markets Calm Amid Uncertainty
In what proved to be a week of low volumes in the U.S. markets, stocks and bonds remained mostly idle, all told.
Trading remained calm even with the uncertainty over Greece’s future in the euro zone, a potential scenario with widespread implications for the global economic order. U.S. stock indices were somewhat mixed throughout the week, with the Nasdaq outpacing its counterparts. The S&P 500 eked out another new all-time high just above 2,100, and the Dow Industrials managed to stay above 18,000.
Outside of the U.S., shares were on the rise in both Europe and Asia this week. Japan’s Nikkei 225 stock index led the way, advancing to its highest levels in 15 years on positive export numbers for the world’s third-largest economy. Consumer spending also saw an uptick across Southeast Asia with the beginning of the Lunar New Year, as mainland Chinese shoppers vacationed to Japan to take advantage of yen-denominated prices. Investors remained confident in Europe’s ability to resolve the Greek debt crisis, as there were no major capital outflows and stock indices across the continent advanced. Signs are that the stagnant eurozone economy is recovering, with both France and Germany posting solid growth over the last month.
The dollar was fairly steady in trading, stuck in a tight range between 94.0 and 94.5 on the DXY spot index. The greenback has been feeling the opposing pressures of falling oil prices (upward) and the Fed’s continued loose monetary regime (downward). It has also been rangebound by the consistency of its biggest peer currencies, the euro and yen, both of which seem to have found a stable equilibrium point. The euro is currently trading at $1.13 while the yen’s exchange rate has settled at 118 to the dollar. Treasuries also stabilized, with 10-year T-note yields parked at about 2.10%.
Though crude oil had been recovering due to a number of supply disruptions around the world, from a violent insurgency shutting down Libyan oil fields to U.S. producers idling their rigs, oil prices began to slip back by week’s end. In addition to the Saudis ramping up their output in order to increase their market share, the Energy Information Administration (EIA) petroleum status report on Thursday showed that U.S. inventories were at an all-time high. The continuing supply glut pared crude’s gains earlier in the week, though Brent crude fared better, remaining above $60/bbl. By Friday, WTI sank to about $50/bbl.
After falling sharply last week, the precious metals waned again this week, though at a slower pace. After touching $1,300/oz only a few short weeks ago, spot gold has tumbled all the way back down to $1,205/oz, with support holding right at the $1,200 mark. Despite this plunge, gold actually widened its disparity with the platinum price, which struggled to find its footing around $1,170/oz. This is the largest gap between the two metals in over two years. Meanwhile, silver and palladium were a bit quieter, with the latter only slightly lower near $785/oz by week’s end, and the former parked at $16.40/oz.
GOVERNMENT & POLICY
Why We Entered the Currency Wars
With no meeting of the Federal Reserve Open Market Committee (FOMC) in February, the release of the minutes from the committee’s January meeting was an especially important development for investors–particularly those attempting to predict the direction of U.S. monetary policy over the course of the next year. Wednesday’s release of the meeting minutes revealed more dovish sentiment from the committee members.
We are again supposed to believe in the virtuosity of patience. With the labor market seemingly improving and the economy hitting a fairly consistent stride, the only element missing from the Fed’s idealized “full utilization” of the economy continues to be target inflation. Ironically enough, the one economic indicator that the massive quantitative easing program embarked on by the Fed was intended to impact has hardly budged.
Part of the reason QE hasn’t stoked inflation as many expected is because the stimulus funds were not simply flooded into the money supply; instead, banks added much of this liquidity to their cash reserves in order to bolster their capital holdings. In most cases, they have not directly lent out the extra funds.
This is, of course, an oversimplification of how QE has been carried out, but inflation is nonetheless below what are considered optimal levels in spite of the extreme measures taken by the Fed. Though consumers are pleased with the relative stability of prices, producers that drive economic activity are not. The situation is exacerbated by the continued appreciation of the dollar, which would be tempered if the U.S. economy was running closer to 2% inflation.
Despite the strong dollar, the economy has been expanding modestly, even with the contraction of the U.S. shale industry amid low oil prices. The longer crude oil prices remain low, the more upward pressure this puts on the greenback.
So it appears that the Fed is dragging out its dovish sermon of patience because normalizing monetary policy by raising the key federal funds rate would most likely cause the dollar to appreciate further. This would eat into the profits of U.S. companies that rely on exporting their products or services overseas, which also affects shareholders’ dividends. There are several drawbacks to a particularly robust U.S. dollar, and the Federal Reserve is ostensibly becoming a player in the global “Currency Wars” by holding back on raising rates. Sure, there’s no way the world’s reserve currency could win a “race to the bottom,” but by actively trying to suppress the USD, the Fed is taking a page right out of China’s playbook.
It is interesting that China finds itself in quite the opposite situation: with $1.1 trillion owed to the Bank for International Settlements (BIS), China would like to avoid any further devaluation of the yuan/renminbi in order to pay off its liabilities more easily.
Although there is still the chance that the eagerly awaited rate hike from the Fed will come earlier than expected, perhaps by June, it seems for now that we have been dragged into the international race to debase each country’s respective national currency. At least in practical terms, this seems like the right move given the circumstances. If the central bank insists on employing unconventional monetary policies, they might as well be for the direct benefit of American companies, not just the banking industry.
A LOOK AHEAD: A slew of economic data in the U.S. will come out Monday, with PMI Services Flash, existing home sales, and the Dallas Fed Manufacturing Survey all released in the morning. The markets are sure to react to Janet Yellen holding a press conference on Wednesday, as well.
By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.