EM Weakness Spurs Spending and Stimulus Plans (May 28, 2012)

Sunday, May 27th, 2012

Emerging Markets Radar (May 28, 2012)

Strengths

• The State Council, China’s cabinet, on Wednesday called for more economic policies to encourage growth. The new policies are expected to include support for big infrastructure projects, tax cuts for businesses, more loans for small and medium-sized enterprises, and programs to boost domestic consumptions.
• Chinese infrastructure companies rallied after the market heard the government plans to hasten approval of infrastructure construction projects to improve the economy.
• Russian equities earnings yield is at the highest level it has been since 2008 after the recent selloff.

Weaknesses

• The HSBC China flash PMI dropped to 48.7 in May from 49.3 in previous month, a consecutive seventh month below 50, indicating that industrial activities are contracting. Particularly worrisome is the new export order index that dropped to 47.8 from 50.2 in April, indicating strongly that export businesses are declining.
• The big four banks’ new loan growth was at RMB 30 billion as of May 20, versus a quota of RMB 250 to 280 billion, and  their deposits fell RMB 270 billion as of May 20 versus the end of April. Mid- and long-term corporate loans remained weak, and retail loans also showed signs of sluggish growth, further signals that may force the central bank to cut interest rate and reduce the bank reserve ratio.
• The faster-than-anticipated sell off of the Brazilian real has exposed several economic vulnerabilities and has triggered government and a corporate debt sell off.

Opportunities

• The Russian central bank is ready to enlarge its balance sheet to protect the banking system if needed in a “Russian equivalent of QE.”
• Thailand is most involved in exporting to the low income Association of Southeast Asian Nations (ASEAN) economies of Laos, Vietnam, Myanmar and Cambodia. As these countries grow at an exponential rate, Thai companies stand to benefit the most in exporting manufactured goods and exploring natural resources, according UBS research.
• The end of the presidency of France’s Nicolas Sarkozy, a staunch opponent of Turkey’s EU membership, has revived hopes for the country’s accession to the bloc, after little progress since the EU opened entry talks with Turkey in 2005.

Threats

• China’s premier Wen Jiabao warned at a State Council meeting this week that global growth has deteriorated and pressure has increased on domestic growth. There is a need to accelerate railway and other infrastructure projects. The State Information Office is forecasting that second-quarter GDP growth could fall to 7.5 percent.
• The threat of nationalization in Latin America is not isolated to Argentina, according to Business Monitor International.  Actions by the Argentine authorities to reverse its trade deficit with Brazil have also seen retaliations from the Brazilian authorities, who introduced tighter restrictions on perishable imports. Should the trade spat escalate, more Brazilian companies are likely to suffer.
• The uncertainty surrounding the Greek political situation raises the risk that the country’s exit from the eurozone could happen as early as this year and that it could be disorderly.

Tags: Association Of Southeast Asian Nations, Brazil, Corporate Debt, Corporate Loans, Earnings Yield, Exponential Rate, Export Businesses, Infrastructure Companies, Infrastructure Construction, Infrastructure Projects, Laos Vietnam, Loan Growth, Reserve Ratio, Retail Loans, Russian Central Bank, Russian Equities, Russian Equivalent, Selloff, Sluggish Growth, Southeast Asian Nations, Thai Companies
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Gold Market Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Muammar Gaddafi’s golden gun

Gold Market Cheat Sheet (October 24, 2011)

For the week, spot gold closed at $1,642.38, down $38.35 per ounce, or 2.28 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 6.88 percent lower. The U.S. Trade-Weighted Dollar Index slid 0.49 percent for the week.

Strengths

• The performance of the gold funds was in line with benchmarks and peers for the week, despite a jittery market. A handful of companies made positive gains. Among them is Detour Gold, up 4.4 percent, which is being driven by hedge funds going long Detour Gold and shorting Osisko Mining, down 9.4 percent. Rubicon Minerals was also up 4.0 percent on takeover speculation for the week.
• Further to the original agreement of C$92 million as a cash-share takeover of Grayd Resources, the takeover offer was sweetened to C$183 million cash instead. Since the announcement of the takeover on September 19, Agnico-Eagle shares have plunged more than 30 percent; it can be understood why Grayd would ask for more cash than shares.
• The European sovereign debt crisis is still dominating sentiment. Ultimately the money-printing solution should be positive for gold and the companies that control large resource bases of high grade reserves. The Russian Central Bank noted they will continue acquiring “huge volumes of gold.”.

Weaknesses

• Bullion continued the recent trend, and outperformed equities for the week by 2.28 percent. The ongoing trend of weakness in junior mining companies relative to the seniors continues. The Market Vectors Junior Gold Mine ETF finished down 7.67 percent for the week, while the Market Vectors Gold Miners ETF closed down 6.87 percent.
• The plunge in Agnico-Eagle’s share price this week is reflective of how nervous investors are in the current economic environment. The write off of Goldex, Agnico-Eagle’s lowest grade operating mine, is a classic case of the street assigning too much value to low quality assets. The write down to the balance sheet is about $170 million but the market trimmed the valuation by $2.7 billion. Low grade assets have a much lower probability of delivering a dollar of profit to the bottom line.
• Only two mining companies have yet to meet consensus and guidance on gold production on their earnings this quarter. With no exception to the trend, Newcrest Mining’s gold production for September fell 16 percent to 587,286 ounces, being heavily affected by heavy rain and maintenance shutdowns at its mine in Papua New Guinea. Political instability, royalty concerns, strikes and weather influences have all been affecting the industry as a whole for the third quarter.

Opportunities

• The EU Summit meeting will take place this weekend. There are some expectations that a bank recapitalization could be worked out and this would take a lot of uncertainty out of the market. China, which Europe’s largest, trading partner, could see some benefits out of this. With Chinese consumers being the destination of about 60 percent of all commercial gold sold today, some stability would be a welcome relief.
• India’s festival, Diwali, takes place next week. With the festival around the corner, a slight dip in gold prices has presented a great buying opportunity for the metal. Traders are speculating that gold jewelry buying and smaller denomination coins will surge during the Indian festival of lights, with sales already picking up significantly.

Threats

• In response to weak mining sector growth and criticism over the industry’s contribution to economic growth, Tanzania is said to raise gold royalties by year end as the country continues restructuring the sector, the Minerals and Energy Minister William Ngeleja said on Wednesday. Despite Tanzania’s annual gold exports tripling to $1.5 billion in the past five years as the price of gold has risen, the government revenues have remained stagnant around $100 million a year.
• With talk of higher taxes, it is no wonder that Tanzania’s mining sector growth slowed to 5.8 percent for the second quarter this year in contrast with the 20.5 percent growth of the second quarter last year. Down from 28.3 percent in the first quarter of 2010, the sector only expanded to an annual of 2.1 percent in the first quarter of this year. Ongoing uncertainty over government policies, a prolonged power crisis and limitations within infrastructure were all contributing factors to this decline.
• Negotiations surrounding mining export and foreign investments bans for Eritrea were scheduled to begin Tuesday among UN Security Council members. The new draft resolutions, which stated in part that “all states shall prohibit investment by their nationals, persons subject to their jurisdictions and firms incorporated in their territory or subject to their jurisdiction in the extractive industries and mining sectors in Eritrea,” also calls on all states to prohibit the import of gold and other raw materials from the country, Reuters reported. Eritrea has been under considerable scrutiny from the international community for its reported affiliation with Somalia and funding armed terrorist groups, linked to al-Qaeda.

Tags: Agnico Eagle, Debt Crisis, Dollar Index, Gold, Gold Bullion, Gold Funds, Gold Market, gold stocks, Golden Gun, India, Infrastructure, Junior Gold, Market Vectors Gold Miners, Money Printing, Muammar Gaddafi, Nyse Arca, Printing Solution, Quality Assets, Rubicon Minerals, Russian Central Bank, Share Takeover, Sovereign Debt, Spot Gold, Takeover Speculation, Vectors Gold Miners
Posted in ETFs, Gold, India, Infrastructure, Markets | Comments Off

Trichet Goes Ballistic, Walks Out of Meeting Over the Term “Soft Restructuring”; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet

Thursday, May 19th, 2011

The ECB comedy show continues. Jean-Claude Trichet went ballistic and walked out of a meeting over Jean-Claude Junker’s use of the terms re-profiling and “soft restructuring”.

Adding to the tenseness, huge infighting is in progress over who will replace Dominique Strauss-Kahn who just resigned as IMF chief. Some suggest outgoing ECB president Jean-Claude Trichet.

IMF Head Strauss-Kahn Resigns, Succession Fight Begins

Bloomberg reports Strauss-Kahn Resignation Kicks Off Succession Fight at IMF

Dominique Strauss-Kahn’s resignation as the 10th leader of the International Monetary Fund kicks off a contest on his successor, as European officials seek to retain the job amid a lack of unity among emerging-market nations.

European officials, who have picked the IMF heads for 65 years under a deal that gives the U.S. the lock on running the World Bank, moved to retain their privilege. Sweden’s finance minister endorsed his French counterpart Christine Lagarde, while Dutch central bank Governor Nout Wellink suggested outgoing European Central Bank President Jean-Claude Trichet.

South Africa and Russia said yesterday the next head of the IFM should come from an emerging economy. Trevor Manuel, head of South Africa’s National Planning Commission, is “highly respected in the world,” Finance Minister Pravin Gordhan said in an interview in Pretoria.

Russian central bank Deputy Chairman Sergei Shvetsov said a developing country should be given the chance to run the IMF to better reflect the role of those economies in global trade. South Korea’s central bank governor made similar remarks before the announcement late yesterday that Strauss-Kahn would resign.

Trichet Goes Ballistic Over Junker’s Reprofiling Suggestion

Euro Intelligence reports ECB goes ballistic on reprofiling

The confusing debate about “reprofiling” or soft restructuring pays testimony to the sheer incompetence of eurozone’s finance ministers, who are now effectively talking Greece into a damaging, and most likely contagious default. The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest at Juncker’s proposals to reprofile Greek debt.

FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity. (This is something we suspected would happen. A reprofiling would be considered by the rating agencies as a default, which would lead to an instant downgrading of all Greek securities, government and banks, to C, which would make them no longer acceptable to the ECB.) This means that the ECB will effectively boycott Juncker’s silly plan. That, in turn, would force Greece to quit the eurozone within days.)

Other ECB executive board members also went nuclear on this issue. Jürgen Stark said a restructuring would destroy the capital of the Greek banking system, and Greek bond would no longer count as acceptable collateral. Lorenzo Bini Smaghi called the term “soft restructuring” an empty slogan.

Trichet the Ostrich

Euro Intelligence thinks Junker’s idea is silly. I disagree. The terms reprofile and “soft restructuring” are silly, but the idea Greece will default is certainly isn’t. Suggesting default is one of the more sensible things Junker has said recently.

Greece is going to default and the longer the ECB and IMF attempt to forestall that event, the worse the situation will become.

For further discussion, please see ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed “Re-Profiling” Greek Debt, Now He Wants “Soft Restructuring”; Targeting Short-Selling

Trichet’s Poor Sovereign Debt Decision

Trichet made a huge mistake buying sovereign bonds of Greece. The idea was to “show support” for the bonds and suppress yields. The strategy worked for about a week. Now the ECB is stuck with a pile of garbage and the yield on 10-year Greek bonds is close to 16%.

Former German central bank head Axel Weber warned Trichet about buying sovereign debt but Trichet went ahead anyway. Instead of admitting mistakes, Trichet wants to kick the can down the road one more time. Unfortunately for Trichet, the bond market says “no”.

The real fireworks begin as soon as market participants shun Spanish government bonds . That can happen at any time.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Bloomberg Reports, Central Bank Governor, Christine Lagarde, Comedy Show, Dominique Strauss Kahn, Dutch Central Bank, European Officials, Finance Minister, French Counterpart, Imf Chief, Infighting, International Monetary Fund, Jean Claude Junker, Jean Claude Trichet, National Planning, Nout, Pravin, Russian Central Bank, Trevor Manuel, World Finance
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Gold Market Highlights

Sunday, January 24th, 2010

Gold Market
For the week, spot gold closed at $1,093.35 per ounce, down $37.58 or 3.32 percent. Gold equities, as measured by the Philadelphia Gold & Silver Index (XAU), fell 8.10 percent rise for the week. The U.S. Trade-Weighted Dollar Index (DXY) jumped 1.24 percent.
Strengths

• The Financial Times has reported the Russian central bank has already started buying Canadian dollars and securities in a bid to diversify its foreign exchange reserves. Analysts have said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments in commodity-linked currencies.
• Russia’s central bank increased its gold reserves last month by 800,000 troy ounces, or 4.1 percent, from 612.73 tonnes to 637.62 tonnes. The increase in dollar terms was equivalent to $22.4 billion as of January 1.
• Liu Yuhui, an economist at the Chinese Academy of Social Sciences, has said China may scale back purchases of U.S. debt again on concerns the dollar will decline. A Treasury Department report shows China trimmed holdings by $9.3 billion in November to $789.6 billion.

Weaknesses

• The week was dominated by risk-aversion as the U.S. dollar strengthened because of news that China’s economy expanded by 10.7 percent in the fourth quarter of 2009, modestly above consensus. As a result, China has been asking banks to curb lending, restricting overall credit growth to tame inflation because of an over-heated economy. Also, European sovereign credit risk fears continue to grow as Greek credit default swaps widened by 33 bps to 348 bps.
• Commodities across the board were hit on the news that China’s tightening would lead to less demand for raw materials. The head dealer at a prestigious brokerage firm in Chicago said that China was the driving force behind commodities and that there is now a wave of asset liquidation that triggered more profit-taking.
• The dollar was also buoyed after Republican Scott Brown won a U.S. Senate seat in Massachusetts and vowed to prevent healthcare reform in Congress, which eased concerns that the cost of the proposal would lead to higher debt levels.

Opportunities

• Inflation expectations have risen sharply in the U.S. and Europe in the past three months against a background of economic growth. Demand for inflation-indexed government bonds continues to rise amid expectations that interest rates will rise this year to subdue rising prices.
• The world continues to look to China as the main driver of growth. The World Bank has raised its forecast for the global expansion in 2010 to 2.7 percent from 2 percent last June and also predicted 9 percent growth in China.
• Dennis Gartman, Editor and Publisher of the Gartman Letter, has rescinded his remarks over a stronger dollar outlook made last December, and has said that President Obama’s remarks on financial overhaul, which limit bank proprietary trading and other activities, will cause capital to seek investment elsewhere. Gartman suggests a positive material shift in sentiment towards gold as the U.S. dollar may weaken further over uncertainty in the financial system.

Threats

• At the start of the year the consensus for most market strategists was for a strong first half in 2010 with some weakness expected in the second half of the year. The recent bout of profit taking may have to run its course and would impact all asset classes, but just as in 2009, gold based assets were some of the best investments to own.
• The Federal Housing Administration will raise the up-front Mortgage Insurance Premium, which is paid by borrowers, from 1.75 to 2.25 percent, marking the second time in two years it has raised its premium. New borrowers will also be required to have a minimum FICO score of 580 to qualify for the 3.5 percent down payment program, otherwise borrowers will have will be required to put down 10 percent.
• Australia’s Secretary to the Treasury Ken Henry has recommended that individual state levies on miners be replaced with a uniform tax expected to be 40 percent. This could narrow the profit margins for some of the miners.

Tags: Academy Of Social Sciences, Asset Liquidation, Bank Assets, Brokerage Firm, Canadian Market, China, Chinese Academy Of Social Sciences, Commodities, Credit Default Swaps, Dollar Index, Dxy, Emerging Markets, Foreign Exchange Reserves, Gold, Gold Equities, Gold Market, Gold Reserves, Philadelphia Gold, Risk Aversion, Russia, Russian Central Bank, Senate Seat, Silver Index Xau, Spot Gold, Tame Inflation, Yuhui
Posted in Canadian Market, China, Commodities, Markets, Outlook, Silver | Comments Off

SWOT: Gold Market

Sunday, December 13th, 2009

Gold Market

For the week, spot gold closed at $1,115.40 per ounce down $46.00 or 3.96 percent. Gold equities, as measured by the XAU Gold & Silver Index lost 5.23 percent for the week. The U.S. Trade-Weighted Dollar Index gained 0.84 percent.
 

Strengths

• The Moscow Times has reported that the Russian central bank plans to continue to increase gold reserves to diversify the structure of its reserves, and to seek alternatives to a weakening dollar. Analysts at Renaissance Capital in Moscow estimate that Russia’s gold reserve probably rose by $790 million to $23.1 billion in the week ended Nov 27.
   
• BullionVault has reported that Sri Lanka, whom has already purchased 10 tonnes of gold from the International Monetary Fund, is keen to buy more gold to increase its gold reserves.
   
• Zhu Min, vice-governor of the People’s Bank of China, has said that China is experiencing a clear V-shaped recovery and added that the economy was well on track to meeting or possibly exceeding the government’s target rate of 8 percent growth this year.

Weaknesses

• Gold fell during the week as risk-averse investors sought the safety of the U.S. dollar amidst rising credit problem concerns in Greece, Spain, Italy and Dubai. Fitch ratings lowered Greece’s credit rating one step to BBB+. Similarly, Standard & Poor’s cut Spain’s credit rating outlook, sustaining the selling of currencies in favor of the U.S. dollar.
   
• Also contributing to the resurfacing of risk-aversion are intentions from both Japan and the United States to expand quantitative easing aimed at preventing the economy from tipping back into recession as deflation persists. Treasury Secretary Geithner has decided to extend the Troubled Asset Relief Program until next October and the Japanese government has unveiled an additional $81 billion economic stimulus package.

   

• The world’s largest bullion-backed exchange-traded fund has shed almost 14 tonnes of its reserves in the first few trading days of the week as the dollar strengthened but its holdings was stable thereafter.
   

Opportunities

• David Rosenberg, Gluskin Sheff Chief Economist & Strategist, sees gold going as high as $2,623 per ounce if China follows through on its plans to begin stockpiling the precious metal and sees increased jewelry demand in the country being a further driver in the gold price.

   

• Billionaire investors John Paulson recently spoke at a luncheon presentation at the Japan Society and noted his concern about high rates of inflation in the future and his concern about holding assets denominated in U.S. dollars, “So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency.”
   
• Bloomberg has reported that Russia is considering an easing of mining laws designed to attract foreign investors by offering tax breaks and increase compensation should the state decide to take back assets.
   

Threats

• Due to the recent agreement between the United States and Colombia permitting the U.S. to increase its military presence within the state to subdue narcotics, Venezuelan President Hugo Chavez has raised border tensions with neighboring Columbia on assumptions Washington and Bogota are working together to engage in a military offensive against Venezuela.
   
• Politico has reported that Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than having to face the issue during election season and has also added that the legislation sets no specific targets for deficit reduction.
   
• According to the Tax Foundation, one-third of those filing tax returns in 2007 paid zero income tax, while about half of those received money from the government. This translates into almost 62 million workers that paid no income tax in 2007.
   

Tags: Bank Of China, China, David Rosenberg, Economic Stimulus Package, Emerging Markets, Geithner, Gold, Gold Bullion, Gold Equities, Gold Market, Gold Reserve, Gold Reserves, International Monetary Fund, Japan And The United States, Moscow Times, Problem Concerns, Renaissance Capital, Risk Aversion, Rsquo, Russia, Russian Central Bank, Silver Index, Spot Gold, Target Rate, Treasury Secretary, Vice Governor
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