By Gainesville Coins….
It was a largely flat week for equities as trading volumes dropped ahead of the holiday weekend in the U.S. Large investors seem to be staying on the sidelines in the stock market, while the bond market remains uncertain after last week’s sell-off. The precious metals gave back much of last week’s gains, but remained above key support levels.
GOVERNMENT & POLICY
Fed Announcement Overshadowed by Forex Manipulation Fines
Most of the attention in the financial markets was expected to focus on the release of the Federal Reserve Open Market Committee (FOMC) meeting minutes this week. While the minutes did have an appreciable effect on the expectations of analysts and market participants, they nonetheless were drowned out of the business news cycle by the billions of dollars in regulatory fines that the various “Too Big To Fail” banks have agreed to.
Five of the world’s largest financial institutions–Barclays, JPMorgan Chase, Citigroup, Royal Bank of Scotland, and UBS–will pay a total of $5.6 billion in fines to various authorities in the U.S. and U.K. for their roles in manipulating the forex market (currency trading). This doesn’t even include the $3.5 billion in fines for Deutsche Bank (the most among the TBTF thus far), nor Barclays’ $2.4 billion (and counting) for attempts to goose the ISDAfix (now known as the ICE Swap Rate).
The important point, we’re told, was that the banks accepted criminal charges for their behavior. Ignore for a moment that little comes of the charges–the institutions can still conduct business as usual without the typical restrictions placed on convicted criminals–besides a dent in each bank’s bottom line and a few scapegoated employees thrown under the bus.
Though the timing is coincidental, it’s a shame that the financial media’s gaze would be distracted from the FOMC. The committee’s statement slipped in a comment about how High-Frequency Trading (HFT) has caused greater volatility in bonds, recognizing the role of HFT in increasingly speculative market behavior by non-automated participants. Additionally, although the FOMC transcripts revealed many committee members tended to believe that the forms of drag on first-quarter growth were only transitory, the statement nonetheless prompted more analysts to push back their expectations for the first rate hike by the Fed to September.
It’s probably a more compelling proposition at this point to speculate as to which will come first, a rate hike from the Fed or the next series of fines for major banks?
Gold Pares Last Week’s Gains
With continued uncertainty about the U.S. economy spilling over into Europe and Asia, equities traded sideways this week while a growing number of major market participants are calling for an inevitable correction of an oversold stock market.
Among others, Bank of America Merrill Lynch is now telling its investors to escape the “Twilight Zone” of equities, which are by certain measures overvalued, in favor of uncorrelated tangibles like gold. The fact that the total value (in shares) of the S&P 500 is 10% over and above the actual aggregate value of those company’s assets does indicate that the stock market may be approaching a liquidity crunch even as U.S. indices continue to trade near all-time highs.
With trading volumes somewhat lower due to the approaching holiday weekend in the States, stocks saw a fair amount of intraday volatility this week only to close on Friday essentially unchanged. It’s unlikely traders wanted to open large positions ahead of the long weekend. The Dow Industrials settled just below 18,300; the S&P was solidly above 2,100; and the Nasdaq reached as high as 5,100. As usual, action picked up on Wednesday afternoon following the release of the FOMC’s April meeting minutes, but whatever signals investors took from the committee’s statement proved inconsequential by week’s end.
The FOMC did reveal that volatility in the bond markets “may be greater . . . in view of the increased role of high-frequency traders,” finally acknowledging the questionable practice of using high-speed automation to derive an advantage in trading. Treasuries, as well as government debt around the developed world, have seen considerable fluctuations of late as the markets remain uncertain of where monetary policy and growth outlooks around the globe are headed. After oscillating throughout the week, yields on the 10-year Treasury settled near 2.20% by Friday’s close.
Somewhat encouraging economic news in the U.S.–along with the unresolved Greek crisis in Europe hurting the euro–helped the dollar resume its bullish rise, vaunting past 95.0 and then 96.0 on the DXY scale at midweek. According to the CPI reading, core consumer prices rose during April, while home sales for the month were up 17% year-over-year. As some fresh confidence buoyed the dollar, crude oil benchmarks were predictably soft. Despite this downward pressure, West Texas Intermediate and Brent crude still hovered around unchanged for the week at $60/bbl and $65.50/bbl, respectively.
The precious metals weathered the profit-taking storm after last week’s rally, paring their gains but holding above important support levels. Gold gave up about $20 over the week but found footing above $1,205/oz, avoiding similar fire sales earlier in the year when confidence in the global economy ran higher.
Spot silver continued to be rather robust despite falling from a 4-month high of $17.50. By the close of markets on Friday, the argent metal remained above $17.10/oz.
The Platinum Group Metals charted divergent paths, with platinum falling through the $1,160 and $1,150 levels, marginally widening its gap with spot gold. Though platinum is often seen as a precious metal alternative to gold, it has nevertheless attracted a lot of action on the short side anytime the gold price has pulled back in 2015. Interestingly enough, palladium was able to stand pat at $790/oz, perhaps because it has enjoyed demand as an alternative to platinum. It is telling that investors may now be seeking “alternatives to alternatives” in a market showing little upside in either risk assets or fixed income classes.
GEOPOLITICS & WORLD EVENTS
The Middle East’s Biggest Rivalry Intensifies
The tensions between Saudi Arabia and its neighbor Yemen have sent shock waves beyond the Arabian Peninsula, stirring up geopolitical strife throughout the region. While the Saudis remain embroiled in a conflict with Houthi insurgents in Yemen, Iran has sent cargo ships with aid–food, medical supplies–into the Gulf of Aden to help the Yemeni rebels.
The situation is reminiscent of Russia’s support for rebels in Ukraine’s eastern provinces. Like Russia’s tiff with the International Red Cross, Iran is hesitant to allow their Saudi rivals to inspect their aid package; understandably, the Saudis are skeptical that the aid is in fact a Trojan horse for military supplies and the like to be smuggled into the country. As a result, the Iranian cargo ship plans to submit to international inspections in Djibouti in East Africa before heading to a Yemeni port at Hodaida.
With the Arab World dissatisfied with the Obama Administration’s concessions and negotiating tactics as part of the nuclear deal with Iran, the regional rivalry between Iran and Saudi Arabia has intensified. In the same way that a robust Iranian nuclear program–even a non-weaponized one–could prompt nuclear proliferation across the region, Tehran’s cultural and political influence over strategic weak points such as Yemen and Syria is sparking a response from the Saudis.
In parallel to the stand-off between Pakistan and India to the east (one that has, at intervals, terrified the international community), the rivalry between Iran and Saudi Arabia goes beyond a regional power struggle, or clashing cultural identities between Sunni and Shia Islam, and has the potential to ensnare the globe in a broader battle of divergent worldviews.
ISIL Running Amok
While President Obama further insists that we’re not losing the battle with the so-called Islamic State, referred to as “Daesh” in Arabic, the band of militants have yet again wrested control over an important archaeological site, placing the artifacts and history residing there in peril.
The town of Palmyra, located in central Syria, was overrun by ISIL militants Thursday morning. It is a UNESCO World Heritage Site, boasting 2,000-year-old ruins and impressive colonnades that allude to Rome’s pervasive influence on the ancient world. Untold amounts of priceless relics and valuable archaeological data are protected in Palmyra at a landmark that the Syrians call “The Bride of the Desert.” Prior to the outbreak of the ISIL insurgency, thousands of visitors toured the site annually for a glimpse into the world and culture of antiquity.
During the past week of fighting in Palmyra, some 462 have been killed between the radical Daesh militants and the Syrian military. Although Kurdish fighters have managed to push back ISIL in the northeast portion of the country, the rogue group nonetheless now controls virtually all of Syria’s oil wells.
As one site among many with great historical and cultural importance located in the Cradle of Civilization, the potential desecration of Palmyra is another example of these extremists’ attempt to eradicate history. If it seems like their goal is to simply send society back to the Bronze Age (or even earlier), that’s because it is.
Flash Crash for Chinese Solar Maker
Chinese solar panel maker, Hanergy Thin Film Solar, saw a staggering loss of $19 billion in market capitalization in under 30 minutes this week after persistent questions about the company’s rapidly climbing share price led to a “flash crash” sell-off. Equally worrisome–especially in the business culture of Hong Kong–was the absence of Hanergy’s CEO, Li Hejun, at a subsequent shareholder’s meeting.
Hanergy is currently under multiple investigations by China’s regulatory authorities because the company’s fundamentals simply aren’t strong enough to justify such an astronomically high stock price in the first place. The company is not even listed on the Hang Seng or Shanghai indices, remaining relatively obscure among the region’s stock analysts. Yet, its shares rose some 500% over the past year before this week’s collapse.
While the solar panel market is indeed seen as ripe for growth, Hanergy is one of just three firms that specialize in thin film solar technology. For all of the industry’s potential, the company itself has very little in the way of active projects. Yet, after a fantastic six-month rally that began last fall, the company boasted a $40 billion market value–more than Japan’s Sony, and far bigger than any solar company in the U.S.
The revelation that Li may have actually been shorting his own firm’s shares is only stoking the flames of the controversy. The flash crash adds still more fuel to the argument that China’s exuberant equities market may be a proverbial house of cards, towering to new heights only as long as observers can hold their breath.
A LOOK AHEAD: U.S. markets were closed on Monday for the Memorial Day holiday. A slew of U.S. economic data will be released on Tuesday, however, including durable goods orders and new home sales for April; the Case-Shiller Home Price Index; the Dallas Fed manufacturing survey; and the latest consumer confidence measures.