by Everett Millman – Gainesville Coins
ABSTRACT: After opening the week in negative territory, U.S. stock indices and the precious metals recovered together as the dollar softened against its major peers. Conversely, Chinese equities on the Shanghai index sank into a sudden–though nonetheless unsurprising–correction. Volatile swings have returned to the world markets as the Greek debt situation remains fluid.
GOVERNMENT & POLICY
News & Notes
Wednesday’s FOMC announcement is largely dovish, with no increase to the federal funds rate expected until at least September.
The FCC is set to fine AT&T a record-high $100 million for purposely slowing mobile data without adequately alerting its customers. Verizon and Sprint recently settled for $158 million regarding similar complaints. This comes after AT&T reached a settlement in October worth $105 million for applying unauthorized charges on free downloadable content.
Walmart (along with other big U.S. firms such as Starbucks, Apple, and Google) is coming under fire for using sophisticated forms of tax evasion in Luxembourg. Although Walmart paid $6.2 billion in corporate taxes last year, the company still holds an estimated $76 billion in offshore tax havens.
Per expectations, former Florida governor (and brother of 43rd president George W. Bush) Jeb Bush officially announces his candidacy for the 2016 presidential election. Far more surprisingly, real estate mogul Donald Trump boisterously joins the field for the GOP nomination after periodically flirting with a run for president for much of the last three decades.
Global Markets See Return of Volatility
Between the potentially disruptive influences of default in Greece, the approaching normalization of Fed policy, and the overheating of the Chinese stock market, there was increased volatility on the global markets this week. Where funds flow over the course of the summer months could have a great deal to do with how these risk factors play themselves out.
Although U.S. stock indices opened nearly 1% lower on Monday, the array of economic data released on the day was mixed. Mining and drilling activity fell for the fifth straight month, with oil drilling down 8%, and it was the third straight month of declining consumer energy production. The NY Fed Manufacturing index fell to its weakest levels in 2 years during June, while industrial production and overall factory output were dragged down in May by the strong dollar and weak oil prices. Meantime, housing indicators were strong: U.S. homebuilder confidence hit a 9-month high, while U.S. building permits rose to an 8-year high. Although housing starts fell 11% in May, this was still a signal of strength, as April’s numbers were practically off the charts. Automakers also gained on fresh demand for new cars.
The precious metals were mixed on Monday while the dollar held at 95.0 on the DXY index. The 10-year Treasury note rose, with yields down 4 basis points to 2.35%. After recently approaching an exchange rate of $1.50, the pound sterling recovered to $1.55 before strengthening further to $1.59 by week’s end. The pound also saw its best gains against the euro in three months.
The metals slid further on Tuesday, with platinum leading the fall by closing $8 lower. It maintained its $100 spread below spot gold, with the two metals at $1,083/oz and $1,183/oz, respectively. The dollar was only marginally lower, and 10-year Treasuries continued to see demand. Thanks to disruptions due to severe weather and flooding in Texas, WTI crude actually gained 0.4% to about $59.75/bbl while Brent crude fell 0.2% to $63.80/bbl. Ahead of Wednesday’s FOMC announcement, U.S. shares were 0.5% higher. Asian stocks were deeply in the red, with Shanghai down 3.5%, while European indices were slightly in the green.
As is often the case, the markets waited to swing until Fed Chair Yellen had wrapped up comments at her scheduled post-meeting press conference. Citing a dot plot of the various Fed governors’ expectations for the timing and pace of future rate increases, Yellen reassured the markets that the economy remains on track for a rate hike before the calendar year ends, but that subsequent rate increases will be shallow.
Both equities and the precious metals rallied on these ambiguously hawkish yet dovish conclusions, although palladium sank 1.5% to $725/oz and platinum hovered above a six-year lows. Silver closed 0.75% higher at $16.25/oz. The dollar and Treasuries were mostly flat.
With the FOMC no longer entering its monthly policy meetings with the express understanding that rates will not move, the month-by-month and data-dependent nature of the committee’s forward guidance promises to keep investors busy as they attempt to position themselves ahead of the rest of the pack leading up to the first rate hike. U.S. indices turned back positive from a 0.25% morning dip following Yellen’s comments, while European indices slumped into the red. Besides Japan, Asian shares all broke into positive ground. After a roller coaster day of trading, the crude oil benchmarks closed essentially flat on Wednesday.
Thursday again saw the metals and U.S. equities advance in tandem. Gold gained more than 1% to settle back at the $1,200/oz mark, while silver and platinum returned to their previous levels from Monday. Palladium lagged behind, even with the dollar softer at just above 94.0 on the DXY. As a result, crude prices and U.S. stocks both rose for the third straight trading session, helping the Nasdaq close at a 15-year high. Excluding Shanghai, shares were up across Asia and Europe.
The employment outlook in the States firmed up, with the most jobs added in May (280,000) in five months and a drop of 12,000 in weekly jobless claims. The Philly Fed Business survey registered far above expectations, signaling some momentum in manufacturing, and the current account deficit fell within the lower range of analysts’ predictions. Inflation remained muted, as CPI rose a modest 0.4%, with only 0.1% price growth for core items.
China’s Shanghai Composite index lost a staggering 6.4% on Thursday, making it a full-fledged 13% correction on the week for the index. Many shares hit the lower bounds of their daily trading limits, seemingly bringing an end to the index’s bull run that spanned nearly three years–far longer than past rallies for Chinese shares. Despite most analysts making calls for an imminent Chinese correction of late, analysts at JPMorgan suggested that this may represent a buying opportunity, because the government is likely to step in and keep stocks propped up if the correction becomes too painful.
Though U.S. shares spent most of Friday about 0.25% lower, some greater volatility and higher trading volumes occurred due to the quadruple witching, when stock options and futures, as well as stock index options and futures, all expire simultaneously and investors must decide how to close out their positions. The next gold options expiry will fall on Thursday of next week, June 25th. Though the dollar remained below 94.2 on the DXY on Friday, the crude oil benchmarks each slipped more than 2%. Treasuries continued to rise, with yields on the 10-year note sinking back to 2.27%. Both the euro and yen closed the week up against the dollar.
~Health insurer Anthem competes with Aetna and UnitedHealth for a takeover of rival Cigna, helping Anthem’s shares surge.
~CVS is slated buy Target’s pharmacy and clinic division for $1.9 billion.
~Cox Automotive absorbs the related digital marketing services company Dealertrack for $4 billion.
~The European Commission is still impeding General Electric’s takeover of French firm Alstom’s power turbines.
~The 180-year-old gunmaker Colt Defense files for Ch. 11 bankruptcy, and is ripe for acquisition.
~More mergers and acquisitions are expected in retail going forward.
GEOPOLITICS & WORLD EVENTS
Greece Deal Never Farther, Then Suddenly Near
A seemingly disastrous turn for the Greek debt negotiations was, yet again, apparently averted by surprising optimism and deadline extensions.
Early in the week, the prospects of a Greek default appeared a foregone conclusion; discussions on Sunday between the two sides had fallen through after a mere 45 minutes, and all that was left to sort out was how such a credit event would unfold.
The bad signs abounded. Bonds in Spain and Italy plunged, presumably due to contagion fears in the event of a Grexit. 10-year yields on Spanish and Italian debt jumped, and Greek 10-year yields ballooned nearly 100 basis points to 12.76%. Athens’ benchmark stock index slid 4.4% Tuesday, euro volatility hit a 3-½-year high, and “euroskeptic” political parties continued to gain ground not only in vulnerable southern European countries like Spain, Italy, and Portugal, but even in Germany and England. Meantime, money flowed out of Greek banks at a quickening pace, with an efflux of €3 billion over the four business days between Monday and Thursday alone; Greek bank stocks have lost 99% from their highs before the onset of the financial crisis six years ago. Murmurs of capital controls being imposed started to crop up.
All the rhetoric between the debt-ridden Mediterranean nation and its creditors pointed toward Greek Prime Minister Alexis Tsipras and his Syriza party merely looking for a way to avert blame when the default inevitably hit. Tsipras repeatedly lashed out at Greece’s various creditors, attacking the IMF and the finance ministers of the eurozone for seeking to “humiliate” his country. Talk of the euro area’s contingency plan for a Grexit became the center of discourse.
On top of it all, Tsipras again looked toward Russia–another nation in geopolitical and economic deadlock with Europe–for support. The media in both West and East seemed convinced that only a “miracle” could rescue the negotiations from total collapse.
Then came the release of more emergency liquidity to Greek banks by the ECB, and an optimistic (almost conciliatory) speech from Tsipras (albeit in St. Petersburg), and hope for a deal swiftly returned.
Both sides have their own reasons to keep the potential for an agreement on the table: As the inner circle of the Syriza administration perhaps realizes that its threats of a devastating eurozone contagion from Greece may be unfounded, leaders within the EU (such as German Chancellor Angela Merkel) still have much of their legacies tied to whether or not they can keep the eurozone together, and prove that the huge economic and political experiment of the EU has not been a failure. Moreover, both sides would likely prefer to avoid the messy work a bitter default and Grexit would entail.
Uncertainty over how the Greek situation will play out continues to drive the near-term outlook for the global markets, however. Greece may well still default, whether obstinately or amicably; although the odds of a deal being struck at an EU summit in Brussels next week suddenly have improved, there will have to be subsequent negotiations for short-term Greek debt relief. There’s not enough time left for the individual parliaments across Europe to approve a new repayment plan for Greece by its next ECB deadline, so this will undoubtedly be extended. The IMF debt also still looms, yet unresolved. In short, even if a deal is reached, its implementation is likely to drag out for some time.
News & Notes
Saudi Arabia opens up its stock market to foreign investment, but will only allow the biggest institutional investors (banks, brokers, fund managers) to participate.
Russia’s central bank cuts it key interest rate by 100 bp from 12.5% to 11.5%, but still voices concern about the possible economic disruptions of cutting rates too quickly.
A large group of Chinese investors lose more than $1 billion in a forex trading scheme linked to defunct Swiss firms that promised 10% monthly returns.
The People’s Bank of China finally joins the gold fix for the first time in the history of the fixing.
A LOOK AHEAD: Although GDP and PMI data (mainly from Europe) fills the middle of the week, Monday is a rather light day for market indicators, led by existing home sales in the U.S. and Flash Manufacturing PMI in Japan.