By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.
ABSTRACT: The precious metals and U.S. equities alternated rallies this week before both sets of assets advanced alongside one another by Friday’s close. The current of the markets was defined this week by a pullback in government bonds around the globe, pulling European bond yields back from the brink of turning negative.
GOVERNMENT & POLICY
Hedge Fund Influencers Meet for SALT Conference
This week, the glitz and opulence of Las Vegas is aptly hosting the SkyBridge Alternatives (SALT) conference, a 4-day meeting that brings together many of the biggest names in the financial industry. Leaders in government, banking, and investing were gathered, totaling some 1,800 hedge fund professionals. Of course, even former Fed Chair Ben Bernanke was scheduled there, no doubt basking in the self-affirmation of earning millions as a consultant for Pimco and Citadel since leaving the Fed. (Wasn’t the same complaining about not being able to refinance his mortgage a few months ago?)
The truth is that Bernanke is relatively new to the world of high-paid fund managers and exorbitant speaking fees. (A speech at SALT is rumored to fetch $200,000.) Many within the hedge fund industry see Bernanke as an outsider at their annual gala, while others have hoped to pick his brain for insights about the inner workings of the Federal Reserve.
We may scoff at the notion of taking advice from Bernanke–and fairly so. He has not only spent virtually his entire career in academia and government positions, but would also have a difficult time holding up his experience at the Fed as anything worthy of emulation.
But plenty of the crowd gathered at SALT come from government, the defense department, and other public positions. The 2016 presidential election, and the interplay between Washington and Wall Street, will be topics of discussion. But what do these the titans of investment at the event see in Helicopter Ben?
In a phrase, contrarian value. Here is an individual who had a backstage VIP pass to the most recent financial meltdown. If the institutional investors gain a more intimate understanding of Bernanke’s follies, and his errors in judgment in reaction to the crisis, perhaps they can take appropriate measures to insulate their firms–and, by extension, the wealth of innumerable clients and retirees–from the worst effects of faulty Fed policy.
Or, more likely, those attending the event are looking for entertainment and diversion, just like the scheduled musical performances and cocktail parties.
POTUS Opposed by Own Party Over Trade Deal
The President has been taking flak lately over the proposed Trans-Pacific Partnership treaty, which would establish greater economic ties between the U.S. and some of the fast-growing markets in Southeast Asia. For a change, it is not Republicans that are standing up to the commander-in-chief, but members of Obama’s own party.
Democrats tend to see the trade agreement as a concession of U.S. competitiveness in the global jobs market, an effort to grow the Asian market at America’s expense. The Trans-Pacific Partnership (TPP) was one of the few items that Obama brought up in his State of the Union address that conspicuously received more cheers from Republicans than from Dems.
While a portion of the Democratic Party opposes Obama’s efforts as a step toward the U.S. relinquishing “market share” on a global scale, so to speak, the measure is by and large supported by the pro-business G.O.P. as a proactive way of better integrating American firms into important emerging markets.
Whatever the outcome of the TPP, it’s been encouraging to see the current administration be pulled closer to the center during the last two years of this two-term presidency. Chances are, no matter which party wins the presidential election, the next POTUS will almost certainly be to the right of Obama; the discouraging sign is that the Democratic Party as a whole has skewed further left since the end of the Clinton Administration.
News & Notes
Retired neurosurgeon Ben Carson announces his presidential bid, followed shortly thereafter by former Hewlett-Packard CEO Carly Fiorina, adding two candidates to the G.O.P. field from outside of the political class.
Markets Up After Bond Selloff
Although volatility and uncertainty have still been at play, stocks rose by week’s end while the precious metals gave up their early week rally to close only marginally higher.
U.S. equities rose in tandem with the metals on Monday, though the big news was WTI crude steadying above $60/bbl for the first time in 2015. After advancing 25% during April, crude prices continued to carry this momentum into May. The modest recovery of oil prices has aroused speculation that fracking operations may soon be resumed if prices can support new drilling.
While the precious metals rose again on Tuesday, U.S. stock indices fell sharply, with the Nasdaq falling furthest, by about 1.5%. Gold again hit the $1,200/oz mark before sliding back over the next two trading days. Silver and palladium both gained on the day, yet platinum remained flat about $50 below the gold price.
Wednesday saw the metals again trade largely flat while stocks repeated their performance from the day before, with each U.S. index falling another 0.8%. The markets made quite a ruckus about Fed Chair Janet Yellen’s comments that market values were “quite high” while there remains “moderate” risk associated with abnormally low interest rates. This was followed by the weakest ADP payrolls report since April of last year, although first-time jobless claims remained near a 15-year low. Headline unemployment actually ticked lower to 5.4%, a 7-year low; the mixed data seem to indicate that the labor market has improved considerably over the last 18 months, but is somewhat stagnant.
The big driver this week, however, was the bond market. As the German Bund 10-year note was perilously close to approaching negative yields, beginning last week with yields as low as 0.05%, traders and hedge funds sensed an enormous amount of upside on the short side. The bond bears came out of hibernation in earnest, and the ensuing selloff sent 10-year Bund yields jumping more than 40 basis points over the course of the next week to about 0.50%.
The movement in German Bunds, which are generally seen as the world’s safest government bonds thanks to Germany’s fiscal austerity, were a bellwether for the entire bond market. Bonds across Europe retreated, and U.S. Treasuries followed. After beginning last week below 2.0%, 10-year Treasury yields rose to 2.24% on Wednesday before the selloff gave way to a bit of fresh demand. By Friday, the 10-year T-note had moved back to 2.18%.
Meantime, the U.S. trade deficit has notched a new post-recession high thanks in part to the strength of the dollar and the labor disputes at West Coast ports eating into U.S. exports. The slump in exports combined with generous government spending (with a Republican congress, no less) caused the trade deficit to widen a staggering 43% during March.
Thursday was solid for Wall Street, as the Dow jumped over 100 points, while the precious metals and the crude benchmarks slid back. After charting divergent paths on Friday, WTI crude and Brent crude settled around $59.25/bbl and $65.50/bbl, respectively. U.S. stocks rose by more than 1% during trading on Friday, while the precious metals tracked modestly higher. By week’s end, spot gold hovered around $1,190/oz; silver held steady above $16.50/oz; palladium advanced to $805/oz; and platinum approached $1,150/oz.
GEOPOLITICS & WORLD EVENTS
International Partners Skeptical of Iran Nuclear Deal
It’s not just Israel that’s wary of the direction of the multilateral nuclear deal being brokered largely by the U.S. with Iran on behalf of an international coalition. Some of the United States’ strongest partners have also voiced skepticism about whether or not the negotiations are actually going to have the teeth to prevent Iran from converting its nuclear energy program into a weaponized regime.
France and Saudi Arabia sent a joint message to the U.S. expressing the need for a truly robust agreement, one that should not threaten regional security and stability. This public gesture by the two countries should be a clear enough sign that there is some validity to the criticism that the U.S. officials may be too apt to make concessions to the Iranian side in the interest of striking any deal at all. To some, a large portion of the Obama Administration’s legacy rests on the securing of an agreement that keeps Iran’s nuclear ambitions in check.
To their credit, diplomats from the Iranian side have made it clear that Iran believes developing a nuclear weapon would only destabilize the Middle East, and in fact cause a proliferation of WMDs among her nervous regional rivals and enemies. This is a good basic point of concession. Iran can also hold up its recent record of complying with international sanctions, and point to how it has refined enough nuclear material over the last decade to make many bombs, yet has chosen not to.
At the same time, outside of the bubble of the understanding being outlined by the two sides’ diplomatic teams, tensions still run high. One of the Supreme Leader Ayatollah Khomeini’s highest-ranking government officials insisted in recent comments that any accord with the West–and the U.S. in particular–is entirely limited to the nuclear issue, reiterating that America was the “Great Satan” of the world and Iran will not rest until the United States is an Islamic republic.
The veracity of these latent threats notwithstanding, the outlandish assertions only serve to make the international community increasingly unsure of how much they can trust the leadership of Tehran to honor any agreement made on its behalf.
Within Currency Wars, Here’s Another Skirmish
Despite the Russian ruble’s woes over the last 7 months or so, it has not been the world’s worst-performing currency over that period. Even before a modest recovery this spring, the ruble’s slide was actually outpaced by its regional peer, the Ukrainian hryvnia.
With the seemingly endless turmoil and violence gripping Ukraine, it stands to reason that its economy would be thrown into disarray. Right now, the country is essentially partitioned between the Kiev-controlled west and the independent rebel-held republics in the eastern provinces.
In a country divided so, there are certain vulnerabilities that manifest beyond the battlefields. They can often involve shifts in culture–think of radical revolutions in just about any time period–but are just as frequently a matter of pragmatism. This is the case with the ruble’s penetration into Ukraine.
No observers seem particularly surprised by Russia’s willingness to assert its military or political might, first in the Crimea and now in Ukraine. But economic warfare? The notion seemed far more dubious, especially just a few months ago. Under the constricting pressures of economic sanctions and rampant corruption, it wouldn’t seem that Russia has much to leverage economically aside from its abundant energy resources.
Yet, the hryvnia has actually fared worse than its Russian counterpart, losing about half of its purchasing power since August. With the incipient governments in the eastern provinces paying their fighters and local pensioners in rubles, the Russian currency has naturally begun to take a stronger foothold in the eastern half of Ukraine as a more attractive alternative to the hryvnia. Grocery stores have been forced to accommodate by introducing separate check-out lines for customers paying in rubles in some areas. Amid the disrupting influence of the ongoing conflict, local citizens have shown they will accept and use whatever currency is most readily available.
This doesn’t mean that Ukrainians, especially those living in the western part of the country, have no cultural attachment to their currency or to the Kiev establishment. Even with the deep-seated cultural pull that Russia exerts on Ukraine, the old wounds from the collapse of the Soviet Union do not die easily. But the longer this standoff with Russian-backed insurgents drags on, the more that economic considerations (rather than cultural or political sentiments) will come to dictate the people’s allegiances.
Putin may finally be grasping the power of economic warfare, if only after learning his lesson from last year’s ravaging of the ruble and Russia’s financial system.
News & Notes
While the media portrayed the parliamentary elections in the U.K on Thursday as possibly the closest of the last 70 years, the results were far less compelling than expected. Not only did current Prime Minister David Cameron and the Tories retain a plurality of seats in Parliament, but Conservative Party actually gained a simple majority, and can forego a continued coalition with the Liberal Democrats. The results not only helped boost the financial markets in Great Britain, but also raised the possibility of a 2017 referendum on whether the U.K. should exit the EU. Interestingly, alternative parties to the Lib-Lab-Con mainstream, led by the Scottish National Party (SNP) and the U.K. Independence Party (UKIP), managed to garner nearly a quarter (24.8%) of the popular vote combined.
Argentina’s floundering economy shows signs of improvement, as the country’s stock market has rallied 45% thus far in 2015 partly due to improving sentiment with upcoming presidential elections in October.
Talks between Greece and the eurozone finance ministers seem to be progressing, prompting Greek Prime Minister Alexis Tsipras to predict a “happy ending” to the negotiations. Yet, firebrand Finance Minister Yanis Varoufakis is still offering incendiary comments about how his government is willing to stretch negotiations “to the end of the wire” in order to avoid total capitulation to the EU.
A LOOK AHEAD: Adjusted retail sales from Switzerland are released Monday, while the Bank of England announcement will be made at 7 am ET. The rest of week is rather busy with CPI and Flash GDP data from across Europe.
By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.