Courtesy of Everett Millman and GainesvilleCoins.com ……….
ABSTRACT: Signs from China that its economy is slowing spelled a down week for the stock markets around the globe, while governments and central banks continue to explore ways to avoid a recession. U.S. indices closed higher, but were more volatile, than their European and Asian counterparts due to oil’s unrelenting slide.
GOVERNMENT & POLICY
Europe, U.S. Charting Divergent Paths
A fairly consistent narrative has emerged in 2014 that will undoubtedly color the economic outlook for 2015 and beyond.
While there is much to say about the structural differences between the economies of the Occident and the Orient, and how approaches to monetary policy differ between the West and the East, there is perhaps an even more important contrast developing between the two largest cogs in the Western establishment, the United States and the European Union.
This growing rift was borne out of the varying steps the two superpowers took in order to deal with the financial crisis of 2008-2009. While this author may not agree with the Federal Reserve’s massive money-creation program known as quantitative easing, and would point out that we’re not “out of the woods” yet in regard to QE’s inflationary risks, I must still begrudgingly admit that using this unwieldy thingamajigger from the Fed’s fiat toolkit sooner, rather than later, is preferable to merely delaying its implementation.
Yet, the ECB is now boxed into the latter approach. Almost five years removed from the onset of the financial calamity, Europe is hardly better off than when the ordeal started. If money-printing (asset purchases by central banks) was an inevitable response to deflationary pressures, then Europe is simply behind the curve by having waited.
Atlanta Fed President Dennis Lockhart said last week that, unlike some of his more hawkish peers, he sees risks in raising interest rates to more normal levels to soon. Lockhart would prefer to see the Fed stick to its “considerable time” forward guidance for a while longer, and expects the rate hike to come sometime in mid-2015. This would certainly be cause for celebration on Wall Street, but the more important point is that Lockhart feels he must say it. It means the pressure is mounting to increase rates sooner, perhaps a sign that economic conditions in the U.S. are poised to normalize.
So, while the U.S. is on track to gradually return to a pre-crisis economic environment, the EU is just now beginning the process of combatting stagnation and recession. While the Fed now judges the financial system to be healthy enough to impose greater capital requirements on large banks, the European Central Bank is scrambling to pump its banks with bailout capital, abandoning austerity. The issue is fracturing the continent politically, maybe enough to irrevocably dismantle the EU’s currency union as it currently stands.
Alas, things have only improved so much, even in the States. Though the Senate hearings over the CIA’s use of torture have garnered most of the media’s attention, the omnibus bill that includes next year’s budget (with $1.1 trillion in spending measures) is being debated in the Senate after narrowly passing in the House. While Congress will likely avoid a government shutdown, the bloated bill now has a provision allowing banks to continue to trade in swaps (derivitives trades) with federal backstops–essentially, with government insurance. An omnibus bill like this, where many resolutions are crammed together in a wholesale vote, creates odd bedfellows: Ted Cruz finds himself in the same camp as Nancy Pelosi and Liz Warren in opposing the bill.
Though the U.S. must still address the banking system’s ills and the government’s spending problem, I must say I’d much rather be at the tail-end of a risky stimulus program than at its beginning. The perils of QE aside, the divergent policies of the Fed and the ECB will likely guide the course of the world economy over the next two years.
Stocks Consolidate While Metals Rally
Stock markets in the U.S. opened the week in the red as crude oil prices continued to crash. Even after West Texas Intermediate slid below $64 on Monday, prices were pulled down further by the persistent signs that energy demand is waning and a global economic slowdown is taking hold in a number of developed markets.
Equities were down almost across the board in Europe, Asia, and the Americas on Tuesday when whispers that China will soon intervene in its economy in order to stave off the current decline in its GDP growth became manifest. Chinese regulators announced that they will tighten lending rules by no longer accepting junk bonds as collateral for repurchase agreements (short-term cash loans).
The announcement had the effect of cooling off the markets everywhere but the U.S., where all three indices staged midday reversals as crude prices got a brief reprieve on overestimated shale supplies. This pushed the S&P 500 and the Nasdaq into positive territory while the Dow Jones closed barely lower.
Wednesday saw the opposite happen: stocks tracked with falling oil prices in the U.S., and European markets rose as investors made value purchases in light of weak safe haven demand for other assets. The boost was short-lived, however, as WTI crude broke below $60 on Thursday and much of the rhetoric of gratitude over cheaper oil shifted to the alarm of seeing no bottom in sight for prices. U.S. gas prices have fallen for 10 straight weeks, and areas of the country are seeing gas prices south of $2 per gallon. This has modestly hurt the dollar, which slid about 0.9% from Monday’s level above 89.0 on the DXY index to 88.35 on Friday morning.
Meanwhile, precious metals spiked in response to the downturn on Tuesday. Gold rose more than 3% intraday and silver added more than 5%. After trading in a relatively tight range between support ($1,184) and resistance ($1,204) over the last week or so, gold broke through and closed near $1,230 on Thursday. Silver managed to move past the $17 mark for the first time in 6 weeks and held there, establishing new support. Platinum and palladium also rose modestly this week, though the two platinum group metals will likely not feel the effects of this year’s persistent miners’ strikes (and the resulting lack of production) until sometime in 2015. Not unexpectedly, the metals consolidated a bit on Friday morning after the week’s advances.
Although the American economy is no doubt being held back by the weakness in growth abroad, it has had the advantage of moderately optimistic economic data in recent months. The Job Openings and Labor Turnover Survey (JOLTS) report was steady for October, while November saw jobless claims decline; consumer spending numbers have been favorable already in December, thanks in no small part to a jump in Cyber Monday retail sales. Equity markets have experienced greater volatility of late, as the Dow undulated up 200 points midday Thursday before dropping about 1% on Friday morning. European stock indices fared worse, all down almost 3% Friday afternoon, while the S&P and Nasdaq were only slightly lower.
GEOPOLITICS & WORLD EVENTS
Surviving the Slowdown
More than ever, the world economy is an integrated network of relationships and connections, overlapping allegiances, and strategic partnerships. The economic well-being of nearly every country in the world is in some way interdependent on developments in other states, even its geopolitical nemeses. One thing everyone can agree on in this giant web of power relations is that a widespread slowdown for major economic players is a very bad thing.
This common ground notwithstanding, how states decide to combat the slowing of the metaphorical (and literal) machinery of manufacturing and commerce is still a point of contention. We may all be interdependent, but our economies are not necessarily correlated; the realities in Country X, or the outcomes of actions by Country Y, are not felt equally by every other nation. It’s a balancing act at times, a tug-of-war at others.
What’s clear is that we will see just about every known strategy employed to deal with the slowdown. China is set to tighten rules for its overheated financial sector with the expectation that weaker growth is on the horizon. In response, Chinese stocks hit their daily trading limit by losing 10% in roughly 100 minutes overnight on Tuesday, pulling the Shanghai index down more than 5%, the worst day for the index in 5 years. Elsewhere in Asia, Japan is mired in chronic disinflation, much like Europe, and is now implementing its zillionth round of monetary easing.
In contrast to the “inflation creation” model, the Belgian government is responding to the impending slowdown by calling for the repatriation of its foreign-held gold reserves. With no options for Eurozone countries to debase their currency, a similar strategy of gold repatriation is being pursued by France, Germany, the Netherlands, and Switzerland.
Russia, which is probably feeling the worst effects of the sluggish world economy, is also looking toward tangible assets to reverse its fortunes. Purchases of luxury automobiles in the country have skyrocketed as investors try and put their money into something that will hold its value. Demand for Porsches in Russia is up 55%, and demand for Lexuses is up 63%. Some observers are characterizing this panicked spending spree as a “Weimar Effect,” citing the failed German republic that crumbled under hyperinflation in the early 1920s. The situation is somewhat analogous: Russian central bank Governor Elvira Nabiullina is running out of policy options to save the ruble after recently raising interest rates five separate times. The currency continues to slide regardless, and further action from the central bank would jeopardize Russia’s credit, which has already taken a serious hit.
As Russia suffers from outside the Western economic establishment, Greece has been struggling within it. The country was plunged back into a recession this week when the Greek ASE stock index tumbled by 13% on Tuesday alone. This coincided with the yield on 3-year bonds jumping 119 basis points to 9.49%, increasing the likelihood that Greece will default on its bailout loans. Along with Spain, Portugal, and Italy, the Eurozone is being dragged down by the fledgling economies of Southern Europe.
The current economic and geopolitical landscape will not be cured of its ills overnight, and the eventual resolution will not benefit every sovereign state equally. What can be said with certainty is that everyone has a stake in the game, and nobody–in an economic, rather than geographic, sense–is an island.
News & Notes
- Sales of American Silver Eagle coins break last year’s annual record, with more than 43 million troy ounces of silver sold by the U.S. Mint.
- McDonald’s stock plunges after the fast food giant reports its worst U.S. sales in over a decade.
- Stock buybacks by S&P 500 companies totaled $145 billion in 3Q, the second-highest ever.
- Brazil’s state-run oil company Petrobras joins the oil selloff amid a serious kickback scandal.
- Hong Kong’s student demonstrations were “swept away” by authorities, finally clearing the streets after 75 days of Occupy-style protests.
A LOOK AHEAD:
Wednesday is the big day to circle next week, with the meeting of the FOMC and the release of November’s Consumer Price Index. Housing and manufacturing data in the U.S. will be reported on Monday and Tuesday. Investors will be watching Thursday’s first-time jobless claims report to see if Fed Chair Janet Yellen is satisfied with the level of slack on the labor market to move toward raising the federal funds rate.