While European and Asian markets continued to get a boost from quantitative easing measures, U.S. stocks indices pulled back sharply at midweek. This erased all of equities’ gains in 2015 before stocks staged a considerable recovery by week’s end. The precious metals continued to slide lower on a runaway rally for the U.S. dollar.
By Gainesville Coins….
GOVERNMENT & POLICY
All Signs Lead to Easy Street
On Thursday, South Korea joined the far from exclusive “QE Club” when the Bank of Korea decided to cut its benchmark lending rate by 25 basis points to 1.75%. This brings our tally to no less than 27 different countries of economic entities that have engaged in similar rate-cutting and monetary easing policies over the last year. In alphabetical order, the list of the club members is as follows:
Albania; Australia; Botswana; Canada; China, this March; Denmark, four times, now negative; the eurozone; Egypt; India, this March; Indonesia; Israel; Japan; Kenya; Mexico; New Zealand; Pakistan; Peru; Poland, this March; Romania; Russia; Singapore; Sweden; Switzerland; Thailand, this Wednesday; Turkey, three times; and Uzbekistan.
Many forex analysts have suggested that Malaysia could be the next country to jump on the easing bandwagon. In some of the above cases, central banks have had no choice but to cut their rates in order to remain competitive with their regional rivals. One can see a bit of a Domino Effect taking place as, one after another, the monetary authorities in various nations become ensnared in the “race to the bottom” set into motion by the so-called Currency Wars. To those whose jobs center around making sense of central banks’ behavior, a task that is undoubtedly becoming increasingly difficult, these policies would seem be Faustian bargains: short-term gratification in exchange for long-term doom.
As a consequence of all this attempted stimulus, we are now witnessing new all-time low bond yields (many of them negative) all across Europe: Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal, and Spain.
At the same time, the U.S. is expected to join just seven other countries that have actually raised rates over the same span: Trinidad & Tobago, Brazil, Belarus, Moldova, Ukraine, Armenia, and Georgia have all chosen a more protective approach to monetary policy. In the current environment of deflation-fighting currency devaluation, taking the contrarian approach of raising rates could have the effect of warding off speculators and malinvestment, but at the loss of potential revenue and market share on the export market.
In the trade-off between protecting the purchasing power of your currency in the longer run and inflating your current account to avoid a painful recession today, this author would prefer a sturdier boat on choppy waters over a distended vessel merely trying to stay afloat in a stagnant, man-made lake.
MARKETS
Precious Metals Tumble On Runaway Dollar Rally
U.S. stock markets saw some renewed volatility this week due in part to uneven economic data and mounting uncertainty from the Federal Reserve. Market participants are again pensive about how soon the Fed will raise its benchmark rates; although as soon as June has been the prevailing sentiment, the quickening climb of the dollar is complicating the central bank’s outlook, at least in the eyes of investors.
The dollar rallied all week, jumping as high as 99.5 on the DXY index. This marked a 12-year high for the measure and would confirm that the greenback remains firmly in a strong cycle. (Alternating cycles of a relatively weak and relatively robust dollar, as gauged by the DXY, have recurred over the four decades since the index began with the end of Bretton Woods.)
The dollar did ease up by Thursday’s close, but remained solidly above 99.2 by Friday’s open. For reference, the DXY was registering near 80 at this time last year. The index was originally set at 100.0 in 1973, but the weighting of the basket of currencies against which the dollar is compared has changed since then.
All of the precious metals, especially gold and platinum, were held down by the strength of the dollar, extending further into the red for the calendar year. After sinking to yearly lows earlier in the week, the metals largely flattened out. Spot gold traded around $1,155 by week’s end, maintaining an uncommon $30 spread above the platinum price. The relative strength of palladium, which slipped but held support near $800/oz, is no doubt related to its industrial replacement potential for, and its attractiveness as an alternative investment to, its Platinum Group cousin. Silver broke below $15.50/oz before making a modest rebound.
A ninth consecutive week of record high oil supplies in the U.S. kept WTI crude stuck below $49/bbl. A confluence of macroeconomic realities continue to conspire together to push the dollar higher. The crude oil benchmarks appear to have gotten into a pattern of rising during the early hours of trading only to slide back into the red by the time markets close in New York. Brent crude has been somewhat stronger than its counterpart across the Atlantic, maintaining a $10 spread with WTI.
Treasuries fluctuated a bit, seeing demand early in the week that drove 10-year yields down from 2.14% to 2.05%. ByFriday morning, the 10-year T-note had fallen back to 2.11%. Meanwhile, the stock markets swung from a 330-point spill down the hill for the Dow Industrials on Tuesday to a 260-point rally for the index on Thursday. The S&P 500 followed along at a bit lower level, while the Nasdaq’s late-week recovery was even more modest. Apple’s move from the Nasdaq to the DJIA has somewhat reversed the fortunes of the two indices, while the S&P continues to spend most trading days in the middle ground between them.
WIth the ECB now buying Italian and German sovereign debt as part of its unconventional monetary stimulus plan, eurozone shares continued to trade near their recent highs while the currency itself fell further. The euro is fast approaching dollar parity, as it has already devalued to just $1.06. In fact, the euro has eased up so much that the gold price is actually some 14% higher priced in euros thus far in 2015.
Asian shares got a tremendous boost this week following the news that South Korea joined the crowd of countries that have cut their central bank’s benchmark rate. The 25 bp adjustment helped the Shanghai Index rally nearly 2% on Wednesday, and pushed Japan’s Nikkei 225 to a 15-year high. With the dollar’s strong showing, of course, the yen weakened to 121 per USD.
GEOPOLITICS & WORLD EVENTS
News & Notes
Ukraine is approved for $17.5 billion in emergency assistance from the IMF. Fighting continues with pro-Russian rebels as the Ukrainian economy collapses. The longer the Russians can drag out the conflict and frustrate her Western adversaries, the more plausible an admittedly undesirable East-West partition of the country, similar to post-WWII Germany, becomes.
Greek officials were welcomed into Russia by Vladimir Putin amid ongoing negotiations to resolve Greece’s debt crisis with the EU. The meetings between the Greeks and Russians are seen as a way for the former to leverage the ECB for continued loan payments without making certain austerity reforms and for the latter to gain an ally that is a voting member of the EU. (Any new sanctions against Russia by the euro area require unanimous approval.) It is worth noting that Greece and Russia have historically shared both political and cultural connections that trace back to at least the early 19th century.
A LOOK AHEAD
Monday sees the announcement of industrial production data, the Housing Market Index, and the Empire State (New York) Manufacturing Survey in the U.S. Meantime, abroad, the Bank of Japan holds its monthly policy meeting, while the Royal Bank of Australia will release its meeting minutes for March. In China, adjusted retail sales numbers along with the Producer and Import Price Index will be announced.
