Developed Markets - Especially US:
The domestic stock market was volatile this week with the S&P 500 Index losing 1.72 percent. The figure below shows the performance of each sector in the index for the week. One sector managed a small increase, and the other nine sectors declined. The best-performing sector for the week was materials which increased 0.23 percent. Other top-three sectors were healthcare and technology. Financials was the worst performer, down 5 percent. Other bottom-three performers were energy and telecom services.
Within the materials sector, the best-performing stock was CF Industries Holdings, which rose 14.69 percent. Other top-five performers were Newmont Mining, Monsanto, Sigma-Aldrich, and Praxair.
Strengths
•The fertilizers & agricultural chemicals group was the best-performing group for the week, up 6 percent, led by CF Industries Holdings. The U.S. Department of Agriculture lowered its U.S. corn and soybean production forecasts sharply this week. This news was supportive of agricultural product prices and fertilizer equities.
•Three of the top-ten outperforming groups were real estate investment trusts (REITs). Residential, retail, and office REITs rose between 3 percent and 6 percent. At least two brokerage firms published reports pointing out that the spread between the dividend yield on REITs and the yield on the 10-year U.S. Treasury note is above the historical average spread, implying that REITs are attractive.
•The broadcasting group outperformed, gaining 5 percent. All three of the group members (CBS, Discovery Communications, and Scripps Networks Interactive) reported earnings the prior week which exceeded the consensus analysts’ estimates.
Weaknesses
•The education services group underperformed, losing 10 percent, led down by Devry. The for-profit educational firm warned that new student enrollment is lagging due to the economy, new government regulations regarding higher education, and an industry-wide reversion toward historical levels of enrollment after several years of exceptional enrollment growth.
•Several financial-related groups (regional banks, investment banking & brokerage, thrifts & mortgage finance, real estate services, and other diversified financial services) underperformed, falling from 8 percent to 11 percent.
•The construction materials group lost 10 percent, led down by its single member, Vulcan Materials. A major brokerage firm reiterated its “sell” rating on the stock, citing macro concerns and the uncertain impact of government spending on infrastructure continuing to weigh heavily on the stock.
Opportunities
•There may be an opportunity for gain in merger and acquisition (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
Threats
•A mid-cycle slowdown in the domestic economy would be negative for stocks.
•An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.
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Gold Market
For the week, spot gold closed at $1,746.95, up $83.15 per ounce, or 5.0 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 5.4 percent. The U.S. Trade-Weighted Dollar Index was essentially unchanged for the week.
Strengths
•As reported on Mineweb, precious metals analyst David Morgan anticipates that silver could reach $65 to $75 an ounce. He attributes the main demand for silver coming from the East, where silver demand is growing for both industry and as an investment.
•Year-to-date, demand for silver in China and India is up 30 percent. Silver demand in China and India has increased sharply in recent years as more investors use silver as a store of value. About 70 percent of China’s silver demand comes from the industrial sectors. Albanian Minerals President and CEO Sahit Muja said, “Silver demand in China and India is set to rise 40 percent in 2012.”
•Reuters reported that gold available in exchange for cash has been drying up as prices are rising even higher. In Mexico City, it has been noted that fewer customers have been coming into the shops that buy bullion from local residents. The success of the cash-for-gold industry over the past three years has left fewer and fewer people with any “old gold.” For those who did cash out in 2008, they missed a three-year bullion boom in which prices doubled.
Weaknesses
•On Thursday, exchange operator CME Group raised margin requirements on gold futures by 22 percent, to $5,500 per contract from $4,500 per contract, which is the first time gold margins have been raised since November 15, 2010. Following this announcement, we saw gold settle to $1,764 per ounce.
•Rising margin requirements put a damper on gold prices on Friday, too, with prices slipping another $17.
•Overall, the gold stocks held up pretty well with the pullback in bullion prices.
Opportunities
•Eric Sprott believes gold has been the metal of the past decade, while silver is the metal of the decade to come. He says there is a large imbalance between demand and supply and that the metal is set for a major re-rating which will, in turn, bring the gold-to-silver ratio down to much lower levels.
•BlackRock’s investment strategist, James Holt, has said that the group will use profits from gold and bond investments to shop for bargains among the falling global equity markets. He stated that the firm will be seeking to put its resources into asset classes that are getting cheaper and cheaper, namely equities. BlackRock, one of the world’s largest money managers, holds 5 percent of its $83 billion global allocation fund in gold equities and gold exchange traded funds (ETFs). This could have a substantial positive effect on the gold equity market.
•Goldman Sachs and JP Morgan raised their gold price forecasts for the year, expecting the commodity to continue its surge as the sovereign debt issues in the U.S. and Europe intensify. JP Morgan now expects spot gold to soar to $2,500 an ounce by year end.
•Investors have been flocking to seek refuge in bullion amid economic concerns triggered by a downgrade of the U.S. debt.
Threats
•The last time we saw increased margin requirements for silver, just over three months ago, we saw silver fall from close to $50 an ounce back to below $34. Depending on market response, this scenario could be a possibility for gold as well, although there was much more leverage in the silver space compared to gold.
•The Ecuadorian President Rafael Correa has said that his government is demanding that mineral companies pay an 8 percent in mining royalties before “starting to extract the mineral.” His main driver behind this new policy is to assure that mining operations are “environmentally friendly and socially responsible,” with residents of the cities, parishes and communities near mining projects being the primary beneficiaries. Royalties to the extent of 8 percent have never been seen before and can make a project potentially uneconomic.
•Resource nationalism is one of Ernst & Young’s main concerns in its list of top ten risks facing the mining sector. As many governments struggle with budget deficits, the continuing boom in commodity prices has made the mining and metals sector an easy target as a source for increased revenue.
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Emerging Markets - especially China
Strengths
•China retail sales in July were up 17.2 percent year-over-year, and 1.26 percent month-over-month. Investors in Hong Kong and the Association of Southeast Asian Nations (ASEAN) stock markets have supported the stock price of consumer stables and luxury goods.
•China’s July industrial production was up 14 percent year-over-year, and 0.9 percent month-over-month, showing China is in a safe soft landing.
•China’s July exports were up 20.4 percent year-over-year, while imports were up 22.9 percent. July’s export numbers broke the monthly export record set in June. In spite of slowing growth in the U.S., Europe, and Japan, China export numbers show some hopeful signs that global trade is still resilient. From January to July, China’s total global trade surplus was $76.2 billion, but China runs a $29.5 billion trade deficit with Japan, and $12 billion with ASEAN countries.
•Korea’s central bank left its benchmark interest rate at 3.25 percent.
•China’s renminbi (RMB) rapidly appreciated during the week. The RMB, for the first time, closed at 6.3898 to the dollar. While a strong RMB is making Chinese consumers and corporations richer, it also helps other countries to sell more to China. Particularly in a world where there is a lack of growth, this will be able to help the U.S. and European countries with their economic recovery. A strong RMB is also positive for commodity producers, Chinese airlines, and Chinese tourism.
•China fixed asset investment grew 25.4 percent from January to July, showing robust activities.
•The Turkish Statistical Institute announced the industrial production indices for June 2011. The industrial production index increased 6.7 percent in June 2011, compared to the same month of 2010.
•Walmart, the world’s largest retailer, is said to be exploring a bid for Carrefour’s Brazil business to help bolster its scale in Latin America.
Weaknesses
•China’s July CPI was 6.5 percent, 0.01 percent higher than in June. Pork alone contributed 1.46 percent to the monthly number. Economists and analysts believe China’s inflation has peaked and expect CPI to come down slowly. This may not force the People’s Bank of China to further tighten the money supply by raising interest rates, but it won’t be enough to make the central bank ease the current policy. However, China’s National Development and Reform Commission (NRDC) said, after the inflation number was released, that China’s inflation is at an inflection point. It further said that China’s economy will be able to make a soft landing.
•China’s auto production and sales in July were up 1.26 percent and 2.18 percent year-over-year, respectively, but were down 6.69 percent and 11.19 percent month-over-month, respectively. Passenger car sales were one million units in the month, up 6.74 percent year-over-year, but down 8.78 percent from June.
•Hong Kong’s second quarter GDP grew 5.1 percent, less than the market estimate of 6 percent. Hong Kong residents are buying gold and houses to protect their wealth under the pressure of the dollar’s weakness.
•The combined outflows from all emerging market funds was $7.8 billion, with total outflows of $14 billion year-to-date. Country-wise, Russia saw the largest redemptions over the last 60 days.
Opportunities
•China tax revenue is increasing as a percentage of GDP and in absolute amount. Normally, higher tax income may not be a good thing for the economy, but this time is different. This huge revenue can provide the Chinese government with the means to handle the economy in case the global economy retreats into recession.
•Poland’s inflation rate unexpectedly fell in July on lower food prices, adding to arguments for the central bank to hold off on tightening monetary policy for the rest of the year.
•Finance ministers from across South America are discussing the creation of a fund to provide the region a safety net and ward off the effects of the global financial crisis, Brazilian Finance Minister Guido Mantega said. Officials are meeting in Buenos Aires to discuss creating a new stability fund or strengthening an existing mechanism, known as the Fondo Latinoamericano de Reservas. The $4 billion FLAR pools foreign currency reserves from five Andean nations plus Costa Rica and Uruguay to help member nations that run into balance of payment problems.
Threats
•Chinese premier Wen JiaBao asked the Ministry of Railway to lower the speed across all the high speed trains. China is now suspending approval for new rail projects. In addition, rumor has it in China that the government will reduce 20 percent of the affordable housing units planned for 2012. These events will affect the demand for building materials, such as steel and cements, and will be a headwind on the sector in the short term.
•Due to the U.S. government debt fiasco and European sovereign debt crisis, the probability for the world to go into a recession has increased. The market, therefore, is reasoning that the global economic environment may make the Chinese central bank think twice before implementing another rate increase, or not increase the rate at all. Should the PBOC go ahead and increase interest rates this month, the market likely will become volatile.
•Ukraine is keen to revise its Russian gas contract, looking for another $100 per cubic meter discount to Russian gas prices, which would bring Ukraine down to levels paid by Belarus. The discount would cost the Russian gas monopoly Gazprom $4 billion by JP Morgan estimates.
•Colombia is “very worried” about the possibility that the U.S. Federal Reserve will start a third round of asset purchases, known as quantitative easing, to boost the economy, Finance Minister Juan Carlos Echeverry said. He is worried that should the Federal Reserve do so, “It could bring another phase of the currency war.”
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