Courtesy of Gainsville Coins:
ABSTRACT:The dollar was on a steady climb all week, picking up steam on the release of unexpectedly positive economic indicators for July. This was the overriding development of the week, muting the possible effects of various global conflicts. Both the stock market and precious metals eased from recent rallies, while Asian markets were up across the board. Europe continued to struggle with deflation and structural weaknesses in its financial sector, a problem exacerbated by the EU’s new round of sanctions against Russia.
GEOPOLITICS AND WORLD EVENTS
In general, the slew of ongoing violent conflicts on the world stage had only a subtle effect on the markets this week.
Europe Grinds To Slow, Painful Halt
Espirito Santo, a noteworthy Portuguese bank, has been scrambling to find secure footing in the two weeks since concerns over its imminent default became public. After posting a €3.6 billion loss ($4.8 billion) in the first half of 2014, Espirito Santo’s stock plummeted 42% for a total 67% slump in the month of July, prompting the Lisbon Stock Exchange to temporarily suspend any short-selling of the company’s stock. Espirito Santo’s problems can be traced to its questionable loans and mismanagement of risky assets, such as a subsidiary bank in Angola. However, many believe that if it can raise enough capital quickly–perhaps as much as 3 billion euros–the bank will survive. Nonetheless, the threat of default has raised concerns of a domino effect of bank failures sweeping across the Continent. The European economy already appears fragile, nevermind stagnant; the Eurozone inflation rate fell to just 0.4%, a five-year low, reviving anxieties over deflation.
Adding to the instability in Europe was the announcement of EU sanctions against Russia this week. The European Union’s response to Russia’s aggression in the Ukrainian conflict largely mirrors U.S. sanctions, but there is far more concern over potentially crippling blowback because Europe, especially Germany, is reliant upon Russian natural gas for its energy supplies. Many EU member nations (and their largest corporations) are also heavily invested in Russia, so retaliation could deal a devastating blow to the integrity of the European economy. In expectation of these sanctions, investors have been fleeing the ruble and Russian stocks, which neared 3-month lows; the market has also been bearish on the euro, which is at its lowest purchasing parity to the dollar in 8 months.
Fighting in East Ukraine continues around the wreckage of the downed Malaysian Flight MH17. This has impeded investigators from properly examining the crash site while drawing an influx of volunteers (and weapons) on the side of the pro-Russian rebels. This was amid news that stakeholders of Yukos, a large Russian petrochemical company, won a $51 billion judgment in an international court for Vladimir Putin’s illegal seizure of the business a decade ago. The seizure was a tactic to oust one of Putin’s political opponents, Mikhail Khodorkovsky, who actually sold his ownership of Yukos prior to the favorable judgment. Taken together with sanctions from the West, these events threaten to stretch Russian capital too thin for any expanded investment in the economy.
Conflagrations In the Middle East
Israel has increased its airstrikes on Hamas as the militant group continues to convert evacuated Palestinian schools and mosques into hideouts for stashing weapons and supplies. Although the bloodshed in Gaza shows no signs of relenting, the major powers have been largely inactive in the conflict. A ceasefire proposed by U.S. Secretary of State John Kerry gained no traction. Somewhat surprisingly, the persistent violence and devastation has yet to stoke any significant safe haven demand for the precious metals, which continued to slide all week.
Crude oil is experiencing upward momentum on the civil unrest in petrol-rich Libya. In the wake of Muammar Gaddafi’s ousting in 2011, warring factions have been vying for control of the country, causing a prolonged nationwide bedlam. This week, rebels set a fuel tank ablaze at the Tripoli airport, causing a second fuel tank to explode before the flames could be quelled. In addition to affecting oil prices, the upheaval in Libya has the potential to destabilize the surrounding nations of North Africa.
Argentina Misses $539 Million Interest Payment On Debt
The third largest economy in South America, Argentina, has entered default for the second time in thirteen years. The Argentine government actually has the funds to pay its current bondholders, but was blocked from doing so by a U.S. court ruling that Argentina must first satisfy its debts to large hedge fund bondholders; these outstanding payments stem from the inauspicious restructuring of Argentina’s debt during the last default in 2001-2002. Because the Argentine government is still solvent, this “soft default” is viewed by many as minor strain that will merely take time to sort out.
Again, the short-term ramifications of these events were largely overshadowed by the release of important Q2 economic data in the West that proved dovish for the dollar.
Strong U.S. Data Contributes to Market Anxiety
A body of positive U.S. economic news was released this week, strengthening the dollar and contributing to a slight weekly dip in precious metals. The surging dollar also contributed to declining relative values of a number of world currencies, with the pound, euro, and yen all trading lower versus the dollar. Analysts predict that the dollar could trade at 105 yen by the year’s end; it currently trades at around 102.7. Meanwhile, the pound saw its largest monthly decline against the dollar in over a year.
News released this week includes the highest consumer confidence level in the U.S. since October 2007. Strong Q2 GDP growth was reported on Wednesday; the U.S. economy grew an annualized 4.0 percent rather than the 3.0 percent projected. This is up from a contraction in Q1 GDP of -2.1 percent, revised up from the previous value of -2.9 percent.
This positive growth outlook was followed Thursday by a reported 0.7 percent increase in employment costs for Q2, which includes wages and benefits. July nonfarm payroll numbers released on Friday came in at 209,000, lower than the 230,000 expected. Despite this shortcoming, July is the sixth straight month of 200,000+ job growth. The stock market responded to this chain of positive labor numbers with selling in fear of the Federal Reserve increasing interest rates sooner than expected. Fed Chair Janet Yellen has stated that the U.S. central bank will focus on labor numbers such as wage growth to determine when they will raise rates.
The Dow Jones Industrial Average and the S&P 500 both ended in the negative for the month of July, with selling helped along by poor earnings reports and projections by a number of companies Thursday. The Dow opened this week at 16,956.91 on Monday morning, climbing slightly through Tuesday’s open. Tuesday and Wednesday saw slight losses with an acceleration on Thursday as the Dow lost more than 300 points. The S&P 500 remained relatively static throughout the week until it too saw large losses on Thursday. The Nasdaq opened to a sharp drop on Thursday as well, losing more than 40 points in overnight trading on Wednesday night. U.S. stocks opened to slight losses on Friday, continuing their week-long skid.
Argentina’s credit default compounded with worries over an increase in U.S interest rates, poor earnings reports, and the effects of sanctions against Russia to negatively impact European stocks heading into Friday. The Asian stock exchanges were less gloomy as the Nikkei and Hang Seng both saw gains throughout the week until Friday when both exchanges declined slightly.
Precious metals saw some relief Friday morning after prices fell throughout the week. Gold moved upward towards $1,300 per ounce after dropping below $1,285 per ounce on Thursday. Platinum and Palladium also saw losses this week, but supply concerns may affect prices in the future. A five-month strike at Lonmin’s South African mines has ended, but production is still below half capacity, projected to reach full capacity by the year’s end. South African platinum production was also hurt by an accident at Northam Platinum’s Zondereinde mine where a shaft elevator was damaged, cutting production there by 50%.
GOVERNMENT AND POLITICS
President Obama Gives Speech Slamming Republicans. Touts Economic Recovery.
On Wednesday, President Obama spoke to a crowd of supporters at the Uptown Theater in Kansas City, Missouri, touting the economic progress of the last 6 months, as well as maligning House Republicans. His speech echoed many of the same talking points the President has been developing ahead of the fall midterm elections: namely, the merits of the economic recovery during his Presidency, as well as the unwillingness of the Republican-led Congress to act on current problems the country is facing.
With his sleeves rolled up, the President laid out his case for the economic recovery during the first two quarters of 2014, and spoke more generally about the recovery during his tenure as Commander-in-Chief. In light of the recent resurgence of the dollar, it seems as though President Obama is trying to capitalize politically in the waning months before a midterm election that, history says, will likely not favor his party.
“We have gotten back off [sic] our feet, we’ve dusted ourselves off,” claimed the President to the packed theater. The crowd applauded uproariously, reminiscent of his campaign stops during his 2008 and 2012 runs “Today, our businesses have added nearly ten million jobs over the past fifty-two months.” A claim that many will say is conveniently cropped to hide that the majority of those jobs created pay less, and have fewer benefits than, the jobs they are replacing. More importantly, his critics will cite that the meager labor force participation rate, which the President failed to mention in his speech, is still at historic lows at just 62.9%; a factor that is often obscured by current measures of unemployment.
Later in his speech, the President continued his argument that Congress has impeded the recovery by failing to work with him, citing a partisan political agenda. Referencing no-votes and filibusters on bills that address the minimum wage, fair pay for women, and student loan refinancing, the President said “…Republicans in Congress keep blocking or voting down, just about, every idea that would have some of the biggest impact on middle class families, working class families.” President Obama also accused Republicans of failing to prevent corporations from hiding profits overseas and using tax loopholes to get around paying taxes on profits; measures he claims would help greatly reduce the deficit.
Mr. Obama’s final jab was to needle Republicans about a measure, taken up and passed in the House that day, to sue the President for violating his constitutional mandate. “…the main vote that they’ve scheduled for today, is whether or not they decide to sue me for doing my job.” The President characterized the vote as a political stunt, aimed at defaming the administration, and distracting from more pertinent matters currently faced by the nation. Republicans counter that the President has overstepped his constitutionally given authority in recent months by abusing his privilege of executive order.
With the fall midterms right around the corner, it seems as though the President is gearing his rhetoric for a campaign that could end up being as contentious as his previous two; one that both parties would agree is more important than any mid term has been in recent history. Well, at least they can agree on one thing.
LOOKING AHEAD: The FOMC will not meet again until September, so speculation will be rampant in the coming weeks about how soon the Fed will raise interbank loan rate. Whichever way investors and traders position themselves relative to this development–whether they anticipate the rate rising sooner or later–will have a considerable effect on the markets at large. If rates are raised earlier than expected, we may see increased activity in the bond market as Treasury yields rise with the tide; if the rate hike is delayed, equities could remain hot as investor’s preferred place for their money until there is any change to Fed policy.
-The Content Team at Gainesville Coins:
Thanks to Gainsville Coins!
The Deviant Investor