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Transcription

Global Money Trends Magazine
August 5, 2016
Forget the opinion polls. Wall Street has another way to predict whether Donald Trump or
Hillary Clinton will be the next president of the United States. Keep an eye on the stock market
from August 1st through October 31st. If stocks go up during that three month stretch, expect
Clinton to win. If stocks slide, Trump will likely prevail. Those critical three months have
been astonishingly accurate at predicting the next president, says Sam Stovall, a
stock market expert at S&P Global Market Intelligence. Stovall looked at the data for
every presidential election going back to 1944 (FDR v. Dewey). If stocks rose in price from
July 31st to October 31st, the party that currently controlled the White House won the
election 82% of the time. This year, the key stretch will start on August 1st.
Similarly, if the S&P-500 index <SPX> fell, voters opted to kick out the party in power
and replace it, 86% of the time. “We all know that prices lead fundamentals. And more
times than not, the performance of the S&P-500 index signaled whether the incumbent
president, or his party, was reelected or replaced,” Stovall noted. The basic idea is that if the
economy is growing and people think the good times will continue, they are likely to want to
stick with the same presidential party (in this case Clinton). If they are fearful, stocks tend to
fall, and voters want new leadership. The only times that the stock market predictor
didn't work were in years where a strong third party candidate was involved (1968
or 1980) or when there was a surprise geopolitical shock like 1956 when England and France
seized the Suez Canal from Egypt.
Since 1928, there have been 22 Presidential Elections. In 14 of them, the SPX climbed
during the 3-months preceding Election Day. The incumbent President or party won in 12
of those 14 instances. However, in 7 of the 8 elections where the S&P-500 fell over
that three-month period, the incumbent party lost. The last time this correlation failed
was back in 1980, and at that time Americans were suffering from double digit inflation, and
double-digit inflation, and other reasons. In Aug –Oct 1980: SPX rose +6.7% ahead of the
election, yet the incumbent president Jimmy Carter lost in a landslide to Ronald Reagan.
But this is a very strange year. We have never seen anything like the Republican’s candidate
“Whacky” Donald Trump before, while many billionaires are lining up to fill the coffers of
“Crooked” Hillary Clinton and the liberal media is pulling out all of the stops to block Trump’s
march to the White House. On August 5th, the odds of Mr Trump winning the presidency have
tumbled to 26%, down from as high as 39%, nine days earlier, after FOX News posted a poll
showing Clinton with a +10% lead over Trump. With polls pointing to a landslide win for
Clinton, US-stock traders can expect the S&P-500 to climb higher over the months ahead.
Copyright ©2006-16 SirChartsAlot, Inc All rights reserved
1
August 5, 2016
By the morning of Thursday, August 4th, the perceived outlook for Mr Trump had gotten so
bad, that the on-line betting website at www.predicitit.org, started a new contract for
betting on the odds that Trump would bow out of the race for the White House before August
31st. During the first 24-hours of trading, the odds of Trump stepping down hovered between
7% and 9%. Former House speaker Newt Gingrich, one of Trump’s most loyal defenders,
warned that his friend was in danger of throwing away the election and helping to
make Democratic nominee Hillary Clinton president unless he quickly changes
course. “The current race is which of these two is the more unacceptable, because right now
neither of them is acceptable,” Gingrich said in a Wednesday morning telephone interview.
“Trump is helping her to win by proving he is more unacceptable than she is.”
Gingrich said Trump has only a matter of weeks to reverse course. “Anybody who is
horrified by Hillary should hope that Trump will take a deep breath and learn some new skills,”
he said. “He cannot win the presidency operating the way he is now. She can’t be bad enough
to elect him if he’s determined to make this many mistakes.”
On August 5th, North Carolina’s leading newspaper, The Charlotte Observer, published a
blistering editorial, calling on Mr Trump to immediately exit the presidential race to
allow the Republican Party a chance to resurrect itself with a competent candidate.
“Donald Trump’s campaign is on fire! There’s talk of GOP leaders abandoning him en masse if
his political fortunes keep plunging. But even if Trump and his campaign can’t figure it
out, there is a way the GOP could still mount a competitive fall campaign. All it takes
is for Donald Trump to drop out.”
Has anyone considered the possibility that Donald Trump is acting as a covert
double-agent, working on behalf of the Clintons, with the aim of destroying the
Republican Party from within? Remarkably, this TV reality charlatan has been able to fool the
hierarchy of the Grand Old Party, has wiped out its best candidates during the primaries, and
never ceases to attack Republicans, even while he is designated as the nominee. It is perhaps,
the greatest act of deception ever perpetrated in American politics.
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August 5, 2016
Here is the full content of the Observer’s editorial; Donald Trump’s campaign is on fire.
Not in the Stephen Curry “watch me sink 10 straight long-range jumpshots” sense. More like
the “raging dumpster fire behind an abandoned Wal Mart in the middle of nowhere” sense. So
far this week, he has fought the parents of a Muslim American war hero, suggested women
facing sexual harassment should just find another job, doubled down on appeasing Russia in
Crimea, and refused to endorse House Speaker Paul Ryan and Sen. John McCain. For extra
credit, he kicked a crying baby out of his rally.
New polls put him well behind Hillary Clinton. A few notable Republicans now say they’ll vote
for her. Among them: Hewlett Packard Enterprise CEO Meg Whitman, a GOP billionaire who
helped lead fundraising for Mitt Romney’s 2008 campaign. Vin Weber, a former GOP
congressman and Ryan ally, called Trump’s nomination “a mistake of historic proportions.”
There’s talk of GOP leaders abandoning him en masse if his political fortunes keep plunging.
Donald Trump talked
politics with Bill Clinton
weeks before launching
2016 bid
Newlyweds
Donald
Trump Sr. and Melania
Trump
with
Hillary
Rodham Clinton and Bill
Clinton
at
their
reception held at The
Mar-a-Lago
Club
in
January 22, 2005 in
Palm Beach, Fla.
There was a cordial,
even cozy, relationship
between the two when
Clinton was a U.S.
senator from New York
and Trump was a
constituent
and
supporter.
At Trump’s 2005 wedding, Hillary Clinton sat in the front row for the ceremony, and Bill Clinton
joined her for festivities later. The Clintons were photographed laughing chummily with Trump and new
wife Melania Knauss at the reception, with Bill Clinton clasping Trump’s shoulder. Trump has also donated to
Hillary Clinton’s Senate campaigns and to the Clinton Foundation.
Former president Bill Clinton had a private telephone conversation in May 2015 with Donald
Trump at the same time that the billionaire investor and reality-television star was nearing a
decision to run for the White House, according to associates of both men. Four Trump allies and one
Clinton associate familiar with the exchange said that Clinton encouraged Trump’s efforts to play a larger role
in the Republican Party and offered his own views of the political landscape. Clinton’s personal office in New
York confirmed that the call occurred in late May, but an aide to Clinton said the 2016 race was never
The Observer continues; “As everyone but Trump seems to know, he needs to stop lashing out
at every perceived slight. He must at least pretend to be presidential and serious-minded. But
it looks increasingly doubtful that he can. Frustration with the erratic, constantly offmessage billionaire is rising among campaign staffers, numerous news reports said
Wednesday. CNBC’s John Harwood tweeted that a longtime ally of campaign manager Paul
Manafort’s told him Manafort is “not challenging Trump anymore. Mailing it in. Staff suicidal.”
But even if Trump and his campaign can’t figure it out, there is a way the GOP could still
mount a competitive fall campaign. All it takes is for Donald Trump to drop out. It’s hard to
imagine him doing so, but consider that he has been whining in recent days that the general
election looks to be “rigged” against him. So, GOP insiders are preparing for the possibility he’ll
bow out, ABC News is reporting. If he did, the 168 members of the Republican National
Committee would pick his replacement, with members generally casting the same number of
votes that their state cast at the convention.
They still have about a month to get a more capable general election candidate on
enough state ballots. Think Romney or perhaps Paul Ryan. Sure, Trump fans might stay
home Nov 8th. Then again, swing voters scared off by Trump’s volatile personality
might replace them. Admittedly, the chances of Trump dropping out are slim. But if he
doesn’t, we’re talking about possibly putting nuclear launch codes in the hands of a man who is
showing the impulse control of a 3-year-old. More top Republicans need to join Whitman.
Summon some backbone. Disavow him now.
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August 5, 2016
Given the odds for the incumbent party <Democrats>, to retain the White House for
four more years, the odds also favor the S&P-500 index climbing higher over the
next three months. Yet surprisingly, Goldman Sachs <GS>, is bucking the “bullish”
presidential polls. On July 30th, GS predicted the recent rally that's pushed the S&P to all-time
highs is about to hit a speed bump. GS analyst Christian Mueller-Glissmann expects the
S&P-500 and the EuroStoxx-600 index to fall -10% over the next three months.
“Given equities remain expensive and earnings growth is poor, in our view equities are now
just at the upper end of their 'fat and flat' range. We are downgrading stocks to 'underweight'
for the next three months, while keeping our 'neutral' position over the next 12-months and
staying 'overweight' in cash. Our fundamental view has not changed: valuations still appear
high and we still expect poor earnings growth across regions. Until the growth situation
improves, we are not that constructive on equities,” the GS equity analysts wrote.
Corporate earnings are one of two key drivers of stock prices, (the other being the actions of
central banks), Nearly two-thirds of SPX companies have reported Q’2 results, so far, and the
optimists can cheer the fact that 71% of those firms exceeded consensus profit estimates. The
blended decline in earnings growth; - an aggregate of the earnings already reported
and the estimates of those to come, is expected to be -3.8%, according to FactSet,
much smaller than the -5.5% fall projected on June 30th before the earnings reporting season
began. Revenue growth, however, turned positive for the first time since Q’4 of 2014.
But while SPX companies are beating both earnings and revenue expectations in large
numbers and by wide margins, that might just be a function of the bar being dropped too low.
Still, Bullish optimists can be encouraged by the resiliency and the strength of the Bull market,
even during five consecutive quarterly declines in earnings,—the longest drought
since 2009. And Wall Street analysts are predicting a recovery to earnings growth, as early as
the current Q’3; at +2% year over year, and +8% in Q’4, and +16% in Q’1 of 2017, compared
with earnings of a year earlier.
In a note of caution; Blackrock’s global chief investment strategist says equity markets are
rising on Price to Earnings <P/E> multiple expansion. While earnings growth has been
flat to negative, the S&P-500 index is setting all-time highs and some analysts suggest the
rally has been mostly due to a phenomenon known as multiple expansion, or investors’
willingness to pay more for $1 of earnings, as opposed to a situation in which investors buy
shares because earnings are growing. As of July 29th, the Price to Earnings <P/E> ratio was
25-times earnings, compared with 21.5-times, a year earlier, and a historical average of 16times. However, the P/E expansion is largely fueled by ultra-low interest rates and QE.
Wall Street’s “Least Loved” Bull market is 2,704 days young, - and is now the second
longest ever. Today’s never-say-die Bull, now the second longest at 89-months, has longevity
genes, too. Distrusted since it began in March 2009,- the “Least Loved” Bull market is up
+223%. It’s been artificially inflated by the Fed’s liquidity injections and cheap-money policies.
But this Bull could still continue to exceed expectations. If things go its way, it might challenge
the #1 ranked 1990’s mega-Bull '90’s rally that lasted 3,452 days, before it was snuffed out in
early 2000, by the bursting of the Internet stock bubble. To eclipse the 1990’s Bull market the
current rally needs to go another 748-days, without suffering a decline of -20% or more.
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August 5, 2016
Never say never, Wall Street pros say. This Bull, despite expensive P/E’s, slowing global
growth, a wobbly Chinese economy, less profitable US-companies and fallout from Britain's
vote to exit the European Union, continues to defy the skeptics. Global Money Trends
<GMT> predicts the Dow Jones Industrials could eventually reach the 20,000-level,
up from around 18,500 today by Q’1 of 2017, with possible pullbacks limited to support at
the 18,000-level. That spells good news for “Crooked” Hillary Clinton.
Once again, conventional wisdom get thrown out the window. The “Least Loved” Bull
market for the SPX continues to climb higher, even amid the weakest economic
growth rate since the 1940’s. The US economy grew at a tepid +1.2% rate in Q’2, far less
than forecasts of +2.6%. Growth for Q’1 was revised downward to +0.8%, from +1.1%
earlier. However, consumer spending, which accounts for about 70% of the economy,
surged at an annual pace of +4.2% - and added +2.8% to the headline GDP figure. On the
negative side of the equation, business spending fell at a -9.7% annual rate in Q’2.
Investment in business inventories fell $8.1-billion; and subtracted -1.2% from GDP.
Businesses were reducing stockpiles amid weak global markets, and the lingering drag from a
stronger US$. Private fixed investment, which includes residential and business spending,
dropped at a -3.2% pace in Q’2, the most in seven years.
Also holding back economic growth in Q’2; government spending also shrank -0.9%, the most
in more than two years as outlays for the military fell. States and municipalities also cut back.
The US trade deficit jumped 8.7% in June to a 10-month high of $44.5 billion, subtracting for
GDP. Cash and short-term investments sitting on the S&P-500 companies’ balance sheets have
surged to 10-year at $1.45 trillion. They will also hold off investing until they have a better
sense of the future tax and regulatory burdens they are likely to face next year. Mrs. Clinton is
promising more costly rules on finance, health care, drug prices, higher mandated wages and
benefits and more. Normally all of this would help the party that doesn’t hold the White House,
but Donald Trump is under a blistering attack by the liberal media, and sinking in the polls.
While S&P-500 companies are cutting back on capital spending <capex>, they’ve
ratcheted up their purchases of the companies’ shares on the open market. They
spent $166-billion on share buybacks during Q’1, a new all-time high. The dollar-value of the
buybacks in Q’1 were +15% higher than a year-ago.
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August 5, 2016
In Q’1, they bought back 3.1-billion shares, up from the 2.3-billion shares repurchased in the
year-ago quarter. The dollar amount spent on share buybacks for the trailing 12months ending in Q’1 totaled $603-billion, an increase of +8.7% from a year earlier.
At the end of Q’1, trailing 12-month buybacks made up 73% of net income.
Look no further than Switzerland to find another reason how the S&P-500 index continues to
defy the law of gravity. The Swiss National Bank <SNB> increased its FX allocation to USstocks by +$7.3-billion to a record $61.8-billion in June. Unlike some other big central banks,
the SNB, holds equities as well as bonds. At the end of June, 20% of its 609 billion-franc
($628-billion) pile of foreign currencies was in stocks. The SNB has stakes in 2,581
companies listed in the US. Its biggest holdings are Apple <AAPL>, Exxon Mobil <XOM>, and
Microsoft <MSFT>. It bought more of the three companies over Q’2. This US Bull market just
won’t die. The S&P Composite is now +38% above its 2007 previous high. This has left
traditional valuations looking expensive compared to other global markets.
Post Brexit Rally to new all-time highs; Following the 2008-09 financial crisis, central
banks in the US, Europe and Japan have slashed short-term interest rates to close to zero –
with some even going below zero; or negative rates. The big-4 central banks have massive
bond-buying programs. They’ve flooded the markets with a $14-trillion tsunami of ultra-cheap
cash in order to boost equity prices. This is supposed to trigger a “wealth effect,” – (ie;
investors might spend more of their new found wealth). The problem is that inflating stock
indexes has delivered most of the wealth to the Richest-10% of US-households, with little
trickling down to wage earners. Massive dosages of monetary steroids, combined with near
zero or negative interest rates, have failed to ignite a robust economic recovery at home or
abroad. As a result, even though the developed countries have seen an improvement in their
labor markets, there’s been virtually no growth in real wages (after taking account of
inflation). However, the plunge in long-term interest rates, engineered by the central banks, is
keeping stock markets very buoyant. For example, the S&P-500 index quickly rebounded from
the panic sell-off following the Brexit vote on June 24th and June 27th, and soared +182-points
higher to a record 2,182. The buying spree was driven by the belief that the Brexit vote would
force global central banks to crank up the printing presses even more.
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August 5, 2016
In this case, the Bank of England was quick to stabilize the markets, by promising to
inject £250-billion into the banking system, on the morning of June 24th. A few days
later, on June 30th the BoE chief telegraphed a rate cut and hinted at a resumption of QE. But
while central banks can inflate financial prices by printing money, they can’t control economic
activity. Government apparatchiks can however, fudge the economic data, in order to influence
market psychology and the public’s perceptions.
Goldman Sachs; Treasury Market no Longer reacts to Economic Data; Once upon a
time, markets actually used to respond to macro-economic data. That includes both stocks as
well as the market that has been historically considered “much smarter than equities,” - the
Treasury market. Sadly, after central banks took over, and began rigging, the significance of
economic data declined until it virtually stopped mattering. Typically, Treasury yields rise on
news of stronger-than-expected economic growth as investors anticipate either higher inflation
and/or tighter monetary policy, and fall on news of weaker growth as markets discount lower
inflation and/or easier monetary policy. In recent months, however, yields have had a much
smaller reaction than normal to these types of data surprises.
Today, almost eight years since the Fed first launched QE, and ZIRP; Goldman Sachs asks
“Does the Treasury Market Still Care about Economic Data?” What it finds is simple; “No.” As
Goldman’s Elad Pashtan writes, “the sensitivity of US Treasury yields to economic data
surprises has declined to near record-lows over the last two years. So if it is not the
economy, then what does the “market” respond to? Treasury yields have reacted more
strongly to Fed communication, (ie; jawboning) at least according to one measure of
policy surprises, while the sensitivity of foreign exchange rates to “macro economy”
news has increased. When the funds rate was at the zero lower bound (ZLB) and the Fed
was easing policy through forward guidance and QE, investors rightly saw little prospect of
near-term rate hikes, even if the economy got stronger. The responsiveness of Treasury yields
to data surprises picked up after the Fed began liftoff last year, but has since retreated back to
ZLB levels, since it no longer believes the Fed is no longer an independent body.
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August 5, 2016
The market’s traditional role of processing a near infinite amount of information
about the future, no longer does that and instead, is simply responding to the latest
leak to the media by the Fed or other central banks. Which is why, the free market no
longer exists. As such, everyone is trying to anticipate the next wave of liquidity injections.
The outlook for the federal funds rate can be found in the yield curve of the futures markets.
Looking the fed funds contract for Jan ’18 delivery is priced to yield 0.57% today, or
slightly higher than the current midpoint at 0.375%. That’s pricing in a 75% chance of a
+25-bps rate hike to 0.625% by Jan 2018. At the start of 2015, fed funds futures traders were
pricing in the likelihood of Fed rate hikes to 2%, by the end of 2017. But today, the Fed isn’t
expected to hike the fed funds rate at all. That’s enabled the yield on the 10-year T-note to
stay lower for longer. It’s currently hovering at 1.57%.
Japanese bonds <JGB’s> suffer worst sell-off in 13 years; In a world of globalization, no
single market operates in a vacuum, rather they are inter-connected. On July 29th for example,
the Bank of Japan rocked the global bond markets, by keeping the pace of it government
bond purchases, steady, at ¥80-trillion per year, and defying expectations it would
ratchet up its purchases to 100-trillion /year. Even more interesting, the BoJ made bond
traders nervous saying it would re-evaluate its QQE and NIRP policies in September.
Some traders see the policy review as a tacit admission that more than three years of QQE
could be reaching the limit of its effectiveness. In late January, the BoJ shifted to negative
interest rates <NIRP>. But Japan’s 10-year yield jumped +23-bps higher to -8-bps in recnet
days, on growing speculation that the BoJ may begin to taper its QQE injections to
less than ¥80-trillion per year. The BoJ said it will conduct “a comprehensive assessment”
of its policies at its next meeting in September. Instead, the BoJ is increasing its purchases of
exchange traded funds, linked to the Nikkei-400 stock index. But it refrained from cutting
banks’ deposit rates deeper into negative territory from the current target rate of minus -10bps. Upon second thoughts, it dawned on market players that if the BoJ had been confident
about going deeper into negative territory, it could have done so already. With an interest cut
seen as off the table, shorter maturities with negative yields were sold across the board.
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August 5, 2016
Outlook for G-7 Bond Yields, Traders say a tapering of the BoJ’s bond purchases may be
inevitable as it will run out of bonds to buy from markets. It already owns one third of the JGB
market, and is buying far more JGB’s than increases in net issuance. If the BoJ decides to
concentrate on buying more Nikkei ETF’s – while scaling down its purchases of JGB’s, markets
will perceive it as tapering QQE. If that happens, the 10-year JGB yield is likely to return to the
positive territory. If correct, an increase in JGB yields could exert upward pressure on
US T-note yields and across many bond markets around the world. If 10-year JGB
yields climb above zero, for instance, the yield on the US’s 10-year T-note could climb towards
2-percent from 1.57% today.
BoE Resumes QE with £50-Bln in Gilts; £10-bln in Corp Bonds; new target = £435Bln; On July 29th, the BoE’s Martin Weale hinted at additional monetary stimulus, after a set of
gloomy data suggested the impact of Brexit uncertainty could be taking its toll. The flash PMI
survey showed the UK factory and services sectors had slumped at its fastest rate since the
financial crisis. Weale hinted he would vote in favor of an interest rate cut - at the BoE’s
meeting on August 4th. It marked a rapid U-turn from Weale. And as expected, on Augst
4th the BoE voted unanimously to lower its base lending rate for the first time since the
financial crisis, by -25-bps to a record low 0.25%. Furthermore, the BoE said it would buy
£60-billion of Gilts in the months ahead to lift its bond holdings to £435-billion, in a
6-3 vote, and for the first time, will buy £10-billion of corporate bonds.
The dovish decision, providing more monetary stimulus than expected, - instantly knocked the
British pound -2-cents lower to $1.31, and pushed 10-year Gilt yield to a record low of -64bps. The pound hit a post Brexit low at $1.29 on July 7th, having already discounted an easier
BoE policy. “We took these steps because the economic outlook has changed markedly,” BoE
chief Mark Carney told reporters in London. “Indicators have all fallen sharply, in most
cases to levels last seen in the financial crisis, and in some cases to all-time lows.”
Carney declared that all elements of the stimulus can be intensified, including taking
the rate close to zero if needed. The scheme includes a plan to buy £60-billion of
government bonds over six months, as much as £10-billion of corporate bonds in the next 18
months and a £100 billion loan program for banks.
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August 5, 2016
The target for the BoE’s bond portfolio is now £435 billion, up from an existing stock of £375
billion built up under former BoE chief, Mervyn King. The BOE’s plan to buy non-financial
investment grade corporate bonds “issued by firms making a material contribution to the UK
economy.” The interest-rate reduction to 0.25% marks the first change since March 2009, at
the height of the financial crisis. Should their forecast prove correct, “a majority of members
expect to support a further cut in bank rate to its effective lower bound” later this year, the
Boe chief said. Carney insisted that this outlook didn’t mean a negative interest rate.
“The MPC is very clear that we see effective lower bound as a positive number, close
to zero, but a positive number,” he said. “I’m not a fan of negative interest rates,” he
added, noting that they had produced “negative consequences” elsewhere.
For the current quarter, the BoE predicts an expansion of just +0.1%. While the referendum
result has darkened the growth outlook, it’s also knocked the British pound about -12% lower,
pushing up costs for importers and potentially stoking inflationary pressures. That prompted
the central bank to revise up its inflation forecasts. Still, the BoE plans to ignore the currencydriven inflation spike and won’t tighten monetary policy in response. It said action to counter
the pound’s impact on inflation would only hurt growth and push up unemployment.
UK sees biggest Monthly drop in Consumer Confidence in 26 years after Brexit vote;
A poll by market researchers GfK recorded the biggest slide in consumer confidence for more
than 26 years in July. The group said people were on average gloomier about their own
finances, the broader economy and whether now was a good time to make big purchases such
as furniture and household appliances. Confidence index fell to -12 in July, from -1 in June,
because of uncertainty about jobs, pay and the economy. That was the sharpest month-tomonth drop since March 1990, shortly before the UK fell into recession. Growing worries about
the economic outlook also dented the confidence of UK manufacturers, in every region of
England and Wales. The GfK report on household reactions to the Brexit vote adds to evidence
that consumers could rein in spending amid higher uncertainty about jobs, pay and the UK’s
economic health. The researchers surveyed 2,000 people between July 1st and 15th, and yet,
despite the economic gloom, the FTSE-250 index moved in the opposite direction, - higher!!
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August 5, 2016
If you think the prospect of an economic recession in the UK is a reason for selling the FTSE250 index, - think again. The ultra-easy monetary policies of the last seven years have
distorted the capital markets to the point that the single most important item is no longer
developments in the real economy, but instead, how the central banks will respond to an
economic downturn. Let us take a moment to digest that. Before 2008, for the most part,
markets would tumble lower in reaction to negative economic news. But today, stock markets
often rally on bad economic news from Brexit in anticipation of an easier money policy.
On August 2nd, the Reserve Bank of Australia <RBA> lowered its cash rate -25-bps to an alltime low of 1.50%; its second rate cut this year, as it seeks to prevent the local economy from
slipping into the trap of deflation. Following the rate cuts by the BoE & RBA this week,
global central banks have lowered their lending rates; 666-times since the collapse
of Lehman Brothers. Data out last week showed consumer price inflation slowed to
+1% in Q’2, - a 17-year low. That’s well short of the RBA’s long-term target band of +2%
to +3%, suggesting the economy needs to grow faster if disinflation is not going to become
the new norm. Neighboring New Zealand is already stuck in that trap, with inflation at just
+04% and its central bank under intense pressure to cut rates at a policy meeting next week.
Japan, long locked into deflation, is now re-thinking its policy of flooding world markets with
cheap yen, and the damage that negative interest rates in Japan is doing to Japan’s banking
network. In Sydney, Australia, some of the largest investors globally, doubled down
bets on a rally in Australian bonds, and pushed Australia’s 10-year T-bond yield to
below 1.85 this week, - the lowest ever recorded. “Deflationary pressure has been
washing around the world and it’s finally arrived in Australia,” the fixed income analysts at BT
Investment Management said on May 2nd. “China is suffering from high debt, slowing
demographics and deflation. That’s a fairly nasty combination, as it lends itself to weak
growth. And Australians are going to feel it.” Powerful life insurance companies from Japan,
where negative interest rates have caused 10-year JGB yields to collapse, returned in force to
Australia after spending many years away. However, the BoJ’s decision to stay pat with QQE at
¥80-trillion per year, for now, and most importantly, ordering a review of its radical policies,
sent Japan’s 2-year yield sharply higher, from a record low of -35-bps to -19-bps today.
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August 5, 2016
Likewise, the upward spike in short-term Japanese interest rates helped to put a floor under
Australia’s 10-year T-bond yield at 1.85% this week, before it closed at 1.96% today. If the
BoJ begins to taper its QQE policy in the months ahead, it could also signal the end of the
historic bond market rally in Sydney. Borrowers are also returning to the bond market in
Australia, and fueling a surge in Kangaroo bond issuance, especially after the shock of Brexit.
Apple <AAPL> and Coca-Cola <KO> were among the biggest corporate borrowers, issuing
A$1.425-billion and A$1-billion in Kangaroo bonds respectively in July. Kangaroo bonds are
issued by non-Australian issuers in the Australian market and are denominated in
Australian dollars. They offer higher coupon rates and yields than Australian government
bonds. The total value of outstanding Kangaroo bonds is A$160-billion. That compares to
A$430-billion of Australian T-bonds and A$247-billion of provincial bonds. Borrowers
sold $7.2-billion of Kangaroo bonds in Q’2, - up +22% compared with a year ago.
Gold ended lower this week after US-jobs data beats forecasts; and showed more jobs were
created in July than expected, and lifted the US$ against the European currencies and the
Japanese yen. US labor apparathiks said nonfarm payrolls increased by 255,000 jobs last
month, beating expectations of 180,000. Traders can expect the Labor department to report
better than expected number ahead of the upcoming elections on Nov 8th in order to improve
the odds for the Democrats. Spot Gold fell -$26 /oz to close at of $1,335 /oz. It finished the
week down -0.9%. Deutsche Bank analysts said that investors will now monitor movements on
10-year real yields. The benchmark 10-year US Treasury yield rose to session highs of 1.59%.
Deutsche Bank expects a single Fed rate hike this year, in December.
Silver fell -2.5% to close at $19.77, on track to close the week down -2.9%. The rally in silver
found stiff resistance near $21 /oz, where it made a double top pattern. The upward spike in
Japan’s interest rates this past week, may have been the catalyst that caused hedge
funds and money managers to decrease their net long position in COMEX silver
contracts in the week to August 2nd, taking it off the previous week’s record high, the CFTC
said. They cut their net long position in silver by 4,040 contracts to 92,541 contracts.
12
August 5, 2016
Silver prices soared as much as +50% this year, and reversing three years of losses,
before running out of steam at $21 /oz. However, history shows investors jumping
on aboard the bandwagon should be wary, after it shot up by almost a third in one month
alone. On the face of it, Silver has a lot of appeal. It tends to track Gold prices, but its low
liquidity usually leads it to outperform the move in gold by around 1.5-times. Ultralow global interest rates - in an environment where $11.7-trillion of government bonds are
yielding less than zero percent, has provided fertile ground for Gold and Silver. And it is Japan,
which is at the epi-center of the negative interest rate market, where more than $7-trillion of
Japanese notes are yielding less than zero percent. However, if the BoJ should decide to taper
its QQE injections in the months ahead, it could push Japanese interest rates, and global bond
yields higher, which in turn, would be a bearish development for the metals.
On top of that, Silver is a hybrid, more than half of demand comes from industrial
users, chiefly in the electronics sector. So moves such as silver's +32% jump from $15.94
an ounce on June 1st to as high as $21.10 on July 4th are still difficult to justify in economic
terms, meaning buyers should beware. Silver tends to move erratically. Anything that goes up
+30% in a month looks overstretched, and there is greater possibility of a reversal, because
the global economy is still looking shaky. While Gold is a traditional "safe haven" investment in
times of turmoil, Silver rarely plays this role due to its volatility and erratic nature. The losses
can be even more spectacular than the gains. In Sept ‘11, Silver shed a third of its value in
just three days. Earlier that year, it slid -30% in 10 days after reaching record highs near $50
/oz. For now, GMT expects the price of Silver to gyrate between support at $19.20 /oz
and $21 /oz, until the next BoJ rolls around in September. As a note of caution, any possible
decline below horizontal support at $19.20 /oz could trigger a round of profit-taking, and
briefly knock the white metal to the next horizontal support level at $17.60 /oz.
Tale of Two different labor markets; Not surprisingly, with 3-months to go before the Nov
8th US-elections, US-government apparatchiks are saying the US-economy is an island of
prosperity onto itself - amid a sea of a slowing world economy. According to the script, USemployers added a healthy 255,000 jobs in July, even amid sluggish economic growth of +1%
for the first half of 2016. At the same time, average hourly is +2.6% higher than it was a
year ago, matching the fastest pace since the recession. With the unemployment rate
low, that suggests that employers are being forced to compete with one another for new hires
by offering higher pay. Public perceptions of the economy are key during this election season.
A top adviser to Donald Trump says anemic GDP growth rate of just +1% is "catastrophic."
Hillary Clinton gives credit to Obama for rescuing the economy from the Great Recession.
However, north of the US-border, Statistics Canada said its jobless rate rose +0.1% to 6.9% in
July. The Canadian economy lost 31,200 net jobs in July, an unexpectedly steep decline that
included the biggest one-month drop in full-time work in nearly five years. A 71,400
decline in full-time positions was offset by an increase of 40,200 part-time jobs. Meanwhile,
Canada’s exports fell -4.7% in Q’2 to C$124-billion, the steepest slide since Q’2 of 2009. In
turn, Canada's trade deficit rose to a record C$10.7-billion in Q’2, up from C$6.4-billion in Q’1.
The trade deficit is going to subtract from growth in Q’2 and is basically reinforcing a view
point that Canadian GDP actually contracted about -1.5% annualized in Q’2.
13
August 5, 2016
There are also Signs of slowdown in the Asian economy; Hong Kong's retail sales
plunged -10.5% in the first half - the worst drop in 17-years; - dragged down by the persistent
tourism and economic downturn. But the rest of year could see a slight pick-up in retail
numbers, as the lower base last year would make growth easier, according to analysts at investment house CLSA. They are forecasting a -6% decline for the whole of 2016 In June,
retail sales declined -8.9% compared with a year ago, the 16th consecutive monthly
contraction, following a dip of -8.4% in May. During the Asian financial crisis in 1999, retail
sales dropped -11% in the first six months of the year. The city's once-booming retail sector
showed signs of stabilizing, but lay-offs and store closures could continue in the second half of
2016. However, any growth could be technical, purely due to the lower base effect. It wouldn’t
be genuine growth.
The June decline was led by jewelry, watches and other luxury items – usually popular with
mainland visitors - which plunged 20.4 per cent in sales. This was followed by department
store goods and clothing, down 10.5 per cent and 0.6 per cent respectively. Retail sales in
electrical goods and photographic equipment suffered a 25.7 per cent dip. Despite the signs of
a severe contraction in Hong Kong’s retail sales, the Hang Seng index has continued to
rebound from its January low, reaching the 22,000-level this month.
South Korea is the first major exporting economy to report monthly trade data and is
home to global chip suppliers such as Samsung Electronics <005930.KS> and SK Hynix
<000660.KS>. Korea’s exports fell for record a 19th straight month in July. All of its top-13
export industries saw declines in July. With the exception of computers, exports to key
trade partners, notably China, the US, and the European Union, all fell. Exports of ships, also
part of the top 13, plunged -42%. Exports to China, - Korea’s biggest customer, have
fallen for more than a year as China restructures its economy and manufactures more
products that South Korea previously supplied. A strike at Hyundai Motor Co <005380.KS>,
the world's fifth-biggest carmaker, bit into July exports. Exports fell -10.2% on-year to
$41-billion while imports slumped -14% to $33.3-billion. Exports posted the biggest
fall since April this year. In June exports fell -2.7% and imports fell -7.7%, respectively, and
indicative of a significant slowdown in the world economy. The trade surplus fell to $7.8 billion
in July from a revised $11.5 billion surplus in June.
14
August 5, 2016
While US labor apparatchiks might fudge data on the jobs market in the months ahead, the
most persuasive indicator of a stronger US-economy comes from the auto sector. U.S. auto
sales increased modestly in July, rising +0.7% to 1.52 million, translating to a
seasonally adjusted annualized selling pace of 17.9 million. Sales for the top three auto
makers selling in the U.S. slipped in July as the strong growth rate that defined the past six
years slows to a crawl, another indication the industry is entering its first sustained plateau
since the decade leading to the financial crisis. Declines at General Motors, Ford Motor, and
Toyota Motor overshadowed increases by smaller rivals, including Nissan Motor and Honda
Motor. Embattled German automaker Volkswagen had another tough month, sales were down
-3.8% in July, with the company's namesake brand posting an -8.1% sales decline. The
company is grappling with the fallout of its emissions scandal, which has prevented dealers
from selling diesel vehicles for nearly 11 months.
The auto industry’s recovery has been a bright spot for the US- economy, with high factory
utilization spurring new jobs, and wage growth for Detroit’s auto workers. Car buyers spent
$49 billion on light vehicles in July, according to TrueCar Inc., up 1% thanks to longer loan
terms and a boom in subsidized auto leases, even as sticker prices go up. Still, purchases
made by individual customers in showrooms have stalled this year.
Automakers turned to discounts to jolt US auto sales in July, but saw relatively flat sales for
the month, suggesting that the industry may be entering a period of heightened competition
for market share. Amid increasing signs that the auto sales market has hit a plateau — albeit
near record-high levels; manufacturers increased average incentives to $3,300 per
vehicle, up 12.5% from a year earlier, according to Kelley Blue Book. But with buyers
paying an average of $30,601 in July, up +2% compared to a year earlier, rising
discounts could undermine automakers' profitability. Still, the near record auto sales
growth is a clear indication that retail sales growth remains healthy and will keep the USeconomy out of recession, at least until after the Nov 8th elections. As such, the Russell-2,000
index – made up of smaller US-companies that derive around 80% of their income from within
the US, is recovering from its January lows, although lagging behind the blue-chip SPX.
15
August 5, 2016
Disclaimer: SirChartsAlot.com’s analysis and insights are based upon data gathered by it from various
sources believed to be reliable, complete and accurate. However, no guarantee is made by
SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed.
SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis
for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make
recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant
to be investment advice or solicitation or recommendation to establish market positions. Our opinions are
subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research
relevant to decisions and verify facts from various independent sources. Copyright © 2005-2016-SirChartsAlot, Inc. All rights reserved.
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