ZAK WAS THE WEEK THAT WAS: ENDING AUGUST 23 2013: SUB(E)MERGING MARKETS
It is probably just as well that the taxi that was to take me to CNBC on Friday did not arrive on time given the new macro revelations I was about to make. They are very topical in terms of this week’s financial news headlines, over and above the way that the annual Jackson Hole central banker event that was not populated by any of the “A- Listers” such as Messrs Bernanke and Draghi.
Cynics like myself would argue that this is perfectly understandable given the lack of anything fresh to throw on the monetary policy fire. Bernanke is widely speculated to be the “instigator in chief” of the Fed’s $85bn bond buying program imminent taper whilst ECB President Mario Draghi looks like he will, for the moment, be able to enjoy the “easy (money” ride” going into the tail end of 2013 given that we are still in the midst of a brutal Southern Eurozone recession)
In fact, the seeds of the recession in the EU were, in my view, sewn in the aftermath of the U.S. Sub Prime debacle which led to directly to the Credit Crunch. The recession was not necessarily caused by any intrinsic design fault within the EU Project – even the inclusion of everyone’s whipping boy – Greece. The credit crunCh was of course a classic example of the old cliché that “when the U.S. sneezes, the rest of the world catches a cold!” Although in this case, the sneeze passed on not a cold, but flu and pneumonia!
I would argue that if there had been no Sub Prime disaster we would not have seen the PIIGS disaster. The explanation for the Sub Prime debacle really originates, not as many would have you believe, in the US housing market, but in the ever growing U.S. deficit which needs to attract money flows in order for it to be financed. The Euro edging towards being the world’s reserve currency in the mid 2000s was probably the real cause of the Credit Crunch. The Eurozone crisis was great for the U.S. because its bonds and currency became a safe haven, helping, usefully, to feed the deficit. But the end of this crisis has of course burst the bond bubble and now it is the turn of emerging markets to get the PIIGS treatment so that the day of the U.S. fiscal Armageddon is delayed, yet again…
We have seen the Indian Rupee collapse again this week, with the market all of a sudden remembering (or realising), that far from being a shiny new economy for the 21st century, we are in the aftermath of a bubble here which was based on a system where only three per cent of the population pay income tax, and reforms required to get the nation anywhere near developed world standards could still be years away. Presumably non tax paid cash is flowing away from the Indian economy to buy U.S. real estate (and a little prime London real estate) as well as, yes you guessed it – T Bonds!
But, in the run up to what is being described as ‘Septaper’, one wonders if India’s loss will be the U.S.’s gain to any material extent. Going from ultra low rates back to normality is simply not a part of the cycle that many investors would want to be involved in – whether long or short. It may actually be noting the words of Morgan Stanley Chief Economist Vincent Reinhart, and who stated: “Only a bad payrolls report, or market blow-up, will prevent September taper.” I would not rule out both happening. Until the QE fiscal life support machine is taken away we have no way of knowing the true health of the economic patient. When we do find out it may be painful whichever side of the health spectrum it is at…
KEY MARKET DRIVING NEWS:
Markets were left none the wiser after Wednesday’s Minutes from the Federal Open Market Committee’s July 30-31st meeting as it contained no firm timeframe for the Fed’s tapering of QE. “By the end of the year” was the best offered as a guide, and coming off the back of an improving labour market and stronger economic growth.
Chinese manufacturing PMI rose from 47.7 to 50.1 in August, above the 48.2 consensus forecast – boosting financial markets on Thursday. The preliminary Eurozone composite PMI was up from 50.5 to 51.7 in August – the best for 2 years, whilst the ‘flash’ US manufacturing PMI edged up for August from 53.7 to 53.9, slightly less than the 54.2 forecast.
GDP in the UK expanded at a 0.7 per cent quarter-on-quarter clip in the second quarter, one-tenth of a percentage point better than expected, while Germany enjoyed a 0.7 per cent expansion in second quarter GDP, helped by a rebound in investment.
European Central Bank Governing Council Member Ewald Nowotny said the recent “stream of good news” in the eurozone has removed any need to cut interest rates any further, Bloomberg
In the U.S. the highlights included Moody’s warned that it had placed ratings on the six-largest US banks on review for a possible downgrade. However, New US home sales stalled to an annualised rate of 394,000 in July well below the 490,000 consensus.
MAJOR MARKETS ACTION:
The Dow lost only 0.5% on the week to 15,010 , but this meant it has now put in athird straight week of declines. In contrast, the more broad based S&P 500 added 0.5% to 1,663.50, Tapering and Treasury yields heading towards 3 percent were the obvious drags on sentiment, some would say both issues are now verging on being an obsession.
The Gold price shot higher on Friday, breaking what has been described as key resistance through $1,377 as a lower-than-expected July new home sales report provided some hope that tapering could be delayed.
Sterling was undermined by the idea that Bank of England Governor Mark Carney will use a speech mid week to elaborate upon his forward guidance policy. That said, the UK currency has still maintained its position above the 200 day moving average at $1.5515. However, the UK currency was hurt versus the Euro in the wake of a better than expected numbers out on Eurozone consumer confidence
The euro came off a six-month high of $1.3453 on the back of German GDP data at 0.7 percent in the second quarter, although further gains are seen as being limited given that we are now in the run up to the German General Election at the end of September.
Crude Oil bounced back above $105 per barrel on Thursday in the wake of strong PMI number in the big economies of China, Europe and the United States. These gains were stretched through $106 by the end of the week on poor U.S. housing data, as it was assumed that the current Fed stimulus pace could be maintained just that much longer.
MAIN STOCKS ACTION:
Premier Oil (PMO) was hurt by its own extended timeline for development in the Falklands as well as Goldman Sachs lowering its valuation on the Sea Lion prospect it now shares with Rockhopper (RKH) off the back of this. The 12-month price target was cut to 520p, although a buy rating was maintained.
Oil and gas explorer Afren’s (AFR) first-half profits fell 16% year-as it took one off charges. The fact that production was much higher, and revenues overall edged up 2%, was not enough to prevent a share price dip.
Oil engineering firm Kentz (KENZ) had the luxury of being able to reject two takeover proposals: one from AMEC (AMEC) and one from Germany’s M&W Group). So far Kenz has around £680m on the table, but the chances are than an eventual takeout could cost £800m plus.
Copper miner Kazakhmys (KAZ) took a $823 million charge on its 26 per cent stake in ENRC (ENRC) plunging it into a half-year loss of $962 million versus a $122 million profit last year. The interim dividend was scrapped.
Tesco (TSCO) revealed it was in talks to take over a Hong Kong Park’n’Shop with its Chinese partner, China Resources Enterprise (CRE). The price tag is said to be $3bn-$4bn (£1.9bn-£2.5bn) and it is to be hoped that Tesco does better in the Far East than it did in the U.S.
KEY POINTERS FOR NEXT WEEK:
Bank of England Governor Mark Carney has a speech scheduled for Wednesday in Nottingham and in which he is expected to reaffirm his ‘forward guidance”. This is even though this policy has so far received a relatively lukewarm response from the MPC Committee and the markets.
Chicago NAPM manufacturing sector survey data and the University of Michigan’s final reading on consumer confidence is due. US durable goods – scheduled for release on Monday – and gross domestic product [GDP] – on Thursday – will also be closely watched. Tuesday’s main event in Europe is the reading of German business confidence, courtesy of the IFO Institute.
As far as companies in the news this week are concerned, it could very well be that alleged Government contract over chargers (!) G4S (GFS) – the security group and Serco (SRP) the outsourcing specialist are in focus above all others on the updates front. This is especially so in the wake of all the controversy the financial press has drummed up in a time of alleged austerity for the masses. Otherwise, we have a selection of speculative resources plays such as Gold miner Petropavlovsk (POG) and Ruspetro (RPO), Heritage Oil (HOIL) and Hunting (HTG) all revealing how trading has been going. However, the winner in the resources area at least in terms of its market cap will be Antofagasta (ANTO) and whereMorgan Stanley recently maintained its ‘underweight’ position on the Chile-focused copper mining group as it doubts current operating momentum can be sustained.
Otherwise we have online gaming company Bwin.party (BPTY) who last month said its revenue since April had been “softer than expected” also reporting. The group said lower than anticipated “gross win” margins in sports betting did the damage, but that it is on course to achieve €70m of cost savings in 2013.
STANDOUT SITUATION: BUY GOLD – ABOVE $1,360 TARGETS $1,500 PLUS
RECOMMENDATION SUMMARY
No apology is made for including gold again as the weekly standard situation, even though the last occasion was just a few weeks ago. This is because it would appear we are now looking at a major reversal to the upside for the metal driven by a number of technical and fundamental factors. As far as the fundamental side is concerned, it can be said that the dumping of speculative holdings in the metal by leading hedge fund managers (but certainly not Richard Jennings, our esteemed former editor, now in situ at what he hopes will be a leading hedge fund at Titan and who not only called gold lower last year when around $1800/oz, but successfully launched his Titan Precious Metals fund almost to the day of the low. Respect!) did lead to a selling climax earlier this year, and the market is recovering well from what was clearly an overshoot to the downside. Ahead of likely Federal Reserve tapering news in September it seems likely to me that the recent squeeze higher will accelerate.
TECHNICAL ANALYSIS
It can be said that the seeds of the recovery for gold came in three distinct phases: July seeing a higher low above former June support under $1200,;August seeing a recovery of former April support at $1321, and the 3rd main driver in the past week being the way that on two occasions, support for the metal came in above former July resistance at $1348. The set up on this market currently is that it seems we have a classic bull flag breakout, and one that should be powerful enough to lead us towards the present region of the 200 day moving average on the daily chart at $1507. This is expected to be the near-term destination for gold even if after that we see a period of consolidation.
SIGNIFICANT NEWS
August 23rd Sales of new single-family homes in the United States fell more than 13% in July to their lowest level in nine months. The Commerce Department data was much weaker than expected, with gold additionally helped by three Fed officials expressing differing views on when to reduce the $85 billion monthly bond buying. Demand from top buyers India and China has been subdued ahead of the traditional major gold-buying events in Asia, such as India’s Hindu festivals and the wedding season.
August 19th Bill O’Neill, co-founder of LOGIC Advisors said that the worst was over for gold after hedge fund managers John Paulson and George Soros liquidated positions in the SPDR Gold Trust ETF earlier this year. However, this month has seen the ETF enjoy positive inflows for the first time since December. Rising demand from India and China as well as possible supply disruptions from South Africa in September is also seen as backing the metal near term.
August 15th Overall supply in the gold market is falling as recyclers hold back from turning in the metal in reaction to sharp drops in the gold price during the second quarter of this year. Meanwhile a rationalization of gold production by miners is also underway and could persist for some time. Global gold supply fell in the second quarter as lower prices gave less incentive to gold recyclers to bring metal to the market, the World Gold Council.
July 31st Gold fell back to $1320/oz as new data showed the US economy expanding faster-than-expected. Second quarter GDP rose 1.7% in real terms from a year earlier, the Bureau of Economic Analysis. Inflation in consumer goods and services fell to 0.0%.
FUNDAMENTALS
It can be said without much fear of contradiction that fundamental setup in gold currently is one of the more fascinating that can be found anywhere in the financial markets. This is judged on the basis that, at first glance, we have a situation where the end of QE can quite legitimately be regarded as potentially ending the prospect of any lasting recovery in the yellow metal.
The logic would be that if a period of ultra-low interest rates and easy money has seen this market decline from over $1900 to under $1200 at its worse, taking away the so-called ‘punchbowl’ should only make matters worse. However, there are at least a couple of mitigating factors. Recent weeks have seen a collapse in confidence in terms of emerging markets, especially India where its currency the Rupee has suffered a meltdown. Given the way that India itself is one of the world’s largest buyers of gold it is likely that a flight to safety in that country will involve significant physical buying of the metal.
Another major factor to take into consideration is that we have seen hedge fund capitulation here, notably from John Paulson who may effectively have been the forced seller who delivered the floor in this market after a sharp post-September 2011 retreat. Finally, it would also appear that in the run-up to likely September 2013 tapering of QE, those who are short of this market will be forced to cover their positions. This is understandable given the way that going into the summer there was such a dive for the metal anticipating the event and a prime example once more of how the market always confounds and that it is frequently “better to travel than arrive”.
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