As May comes to a close, both market and political volatility have increased; it’s hard to separate the two. The Trump presidency seems to be self-destructing with Trump tweets, allegations of interfering with a Federal investigation and a former FBI Director being appointed as a special council/prosecutor sent the Dow falling 370 points in one day. The establishment candidate Macron won in France, but the anti-EU party gained more seats than ever before, just like in the Netherlands two months earlier. In Italy, anti-EU populist candidate Beppe Grillo has consistently led in all the polls. On May 18th, Brazilian markets fell because their current PM, who less than a year ago replaced the previously impeached PM, paid hush money and it looks as though he will be forced to resign.
Ex-FBI Chief Mueller Named Special Counsel on Russia Probe (5-17-17)
Dow Falls 370 Points, Bonds Rally on Trump Turmoil: Markets Wrap (5-17-17) https://www.bloomberg.com/news/articles/2017-05-16/yen-climb-to-weigh-on-japan-stocks-gold-gains-markets-wrap
Brazil Markets Plunge as President Caught in Scandal (5-18-17)
A Populist Storm Stirs in Italy (5-12-17) WSJ
In the UK Prime Minister May called early elections on June 8th to strengthen her negotiating position in their divorce from the EU, while at the same time issuing the Tory manifesto that no deal is better than a bad deal and setting a stage for a hard Brexit. The EU is regularly warning the UK that they do not have the upper hand and will suffer if they don’t relent. German Chancellor Merkel (also running for reelection) arrogantly warned that there will be repercussions if the UK refuses to allow free and unhindered immigration. In my opinion these negotiations are going nowhere.
U.K.’s May Commits Tories to Hard Brexit Stance in Manifesto (5-18-17) https://www.bloomberg.com/politics/articles/2017-05-18/u-k-s-may-commits-tories-to-hard-brexit-stance-in-manifesto
U.K. Picks New Fight With EU Over Citizens’ Rights, Brexit Bill (5-12-17) https://www.bloomberg.com/politics/articles/2017-05-14/u-k-picks-new-fight-with-eu-over-citizens-rights-brexit-bill
EU Rejects May’s Charge of Election Meddling, Appeals for Calm (5-4-17)
EU Throws Down Brexit Gauntlet to U.K. as Talks Edge Closer (4-29-17) https://www.bloomberg.com/politics/articles/2017-04-29/eu-throws-down-brexit-gauntlet-to-britain-as-talks-edge-closer
The EU is a mixed bag of economic reports. Bloomberg reported:
“U.S. protectionist measures and China’s economic adjustment may risk Europe’s recovery. The European Union raised its 2017 economic growth forecast Thursday, saying the bloc’s revival is strengthening despite geopolitical risks that could undermine its fifth year of recovery. Gross domestic product in the 28-country EU will grow by 1.9% in both 2017 and 2018.”
Italy’s recovery is 0.9%, but Greek estimates were pared to 2.1%, as their economy slipped back into recession in the first quarter. EU officials are optimistic, pointing to declining unemployment and positive French elections. France’s unemployment numbers dropped to the best level in five years. Germany’s GDP grew at 0.6%, or 2.4% in annualized terms, comfortably outpacing the U.S., which expanded by 0.7% annualized in the first quarter.
Greek Economy Limps Onto Launchpad After Late-Night Vote (5-19-17) https://www.bloomberg.com/politics/articles/2017-05-19/greek-economy-limps-onto-launchpad-after-late-night-budget-vote
France’s Unemployment Rate Falls to Lowest Since 2012 Chart (5-18-17)
German Growth Outpaces U.S. on Rising Exports, Construction (5-12-17) WSJ
EU Raises Growth Forecasts but Warns on Threat from Brexit and Trump (5-12-17)
Australia is not without problems, but conditions seem to be improving. The value of the Australian Dollar has fallen, but business confidence has risen to its highest level in seven years. Employment surged in March, along with the biggest gain in full-time jobs in almost 30 years, as a recovering jobs market joined a spike in business conditions to suggest a stronger economy. The recovery in Australia’s labor market, coupled with the best business conditions since 2008, as well as the improvement in full-time employment, could lead to a November rate hike. Chairman Lowe said:
“My overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks. Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Both from an individual and an economy-wide perspective, we need to pay attention to how the higher level of debt affects our resilience to future shocks.”
Lifting interest rates to pop the bubble is too risky: it would threaten the recovery given slack in the labor market and already record-low wage growth.
Australia’s Full-Time Employment Surges Most in Nearly 30 Years (4-12-17) https://www.bloomberg.com/news/articles/2017-04-13/australian-employment-surges-in-march-on-full-time-jobs-rebound
Surging Debt Has Weakened Australia’s Resilience, RBA’s Lowe Says (5-3-17) https://www.bloomberg.com/news/articles/2017-05-04/rba-s-lowe-says-surging-debt-has-weakened-economy-s-resilience
Australian Business Confidence Jumps to Highest in Seven Years (5-7-17)
The Australian Dollar’s Outlook Darkens (5-15-17)
Emerging-market companies have increased their borrowing by a staggering $17 trillion since 2008, according to the Institute of International Finance. Worry grows over impact on repayments if global growth eases or interest rates increase. Emerging-market companies are binging on U.S. Dollar debt and that could become a source of trouble in some parts of the world if growth slows, interest rates rise or the USD resumes its ascent. China continues to deal with its spending and debt problem, but still has 6% GDP growth. India is also dealing with debt problems and is still reeling from its prime minister’s attempt to change from a cash economy to a banking economy; however its growth rate is 7.2%, better than China and dwarfing the US at 1.8%.
RBI Says Infusing Funds Into India Lenders Won’t Solve Debt Mess (5-9-17) https://www.bloomberg.com/news/articles/2017-05-19/rbi-says-infusing-funds-into-india-lenders-won-t-solve-debt-mess
Inflation Drop Unlikely to Sway India’s Hawkish Central Bank (5-19-17)
Flood of Dollar Debt Could Come Back to Haunt Emerging Economies (4-23-17) WSJ https://www.wsj.com/articles/flood-of-dollar-debt-could-come-back-to-haunt-emerging-economies-1492945204
The Federal Reserve is planning to raise interest rates in June, and to begin to unwind their balance sheet, which means not purchasing new bonds and allowing their current holdings to mature and fall off the books. In a WSJ interview, “Bank of Japan Gov. Haruhiko Kuroda defended the drastically expanded monetary stimulus he has overseen. The BOJ holds more than 40% of outstanding Japanese government bonds, its policy centers on keeping interest rates very low through enormous bond purchases—as well as trillions of yen worth of Japanese shares, so many investors have a stake in the unwinding. Mr. Kuroda said a policy divergence between Japan and the U.S.—where the Federal Reserve has begun to raise interest rates—is a “natural” phenomenon. Europe and Japan are “lagging behind” the U.S., he said.” The minutes of the ECB’s latest policy meeting underlined that a minor change in language could cause investors to quickly price in a completely new policy path toward higher interest rates.” Whatever course is chosen, the combined balance sheets of the US, Japan and the EU, total over $13 Trillion and the unwinding will be a massive undertaking and will certainly affect global markets.
ECB Wary of Repeat of Fed’s Taper Tantrum (5.18.17) WSJ
Bank of Japan Chief: Unwinding Stimulus Won’t Bring Turmoil (5-16-17) WSJ
Warsh Calls for Fed-Treasury Plan to Smooth Balance-Sheet Unwind (5-5-17) https://www.bloomberg.com/news/articles/2017-05-05/warsh-calls-for-fed-treasury-plan-to-smooth-balance-sheet-unwind
Fed Sticks to Gradual Rate-Hike Approach Despite Slowdown (5-3-17)
Markets Start to Ponder the $13 Trillion Gorilla in the Room (4-19-17)
US markets and world markets are based far more on perception than they are on reality. As long as consumers and investors keep spending and investing, things will continue to move forward. However, this can be problematic, because “no fear” can cause investors to invest stocks with high PE (price to earnings) and many stocks are already 50% overvalued. This means people would lose a lot in a downturn. Bloomberg reported that Global shadow banking assets grew to an estimated $80 trillion in 2014, with $36 trillion of that deemed risky to the financial system, by the Financial Stability Board. However, trying to regulate it would create more problems than it solves and could severely damage commerce which has relied on alternative banking for centuries. The Chinese and U.S. stock markets are going in opposite directions. The divergence means the two markets are the least in tune since August 2008 – just before the collapse of Lehman Brothers Holdings Inc. unleashed chaos on the global financial system. On a final note, China’s President Xi will be hosting a Summit with the leaders of over 30 nations this weekend, however, the US wasn’t invited. I have no doubt the US will be one of the main topics of discussion. I have included two articles from Simon Black which I found quite illuminating, one on banking and the other on silver. Like it says in Mathew 24 & 25, we need to be watchful and pay attention.
Beijing Puts Its Best Foot Forward for Xi’s Summit (5-14-17) Bloomberg News https://www.bloomberg.com/politics/articles/2017-05-14/beijing-suddenly-has-blue-skies-clean-air-as-xi-hosts-summit
Market’s ‘Fear Gauge’ Nears 1993 Low (5-8-2017) WSJ
Mining CEO Explains Why Silver Could Reach $136.67 (5-8-17) SMC
I Never Knew How Screwed up Global Banking was Until I Started my Own Bank (5.2.17) SMC https://www.sovereignman.com/trends/i-never-knew-how-screwed-up-global-banking-was-until-i-started-my-own-bank-21494/?inf_contact_key=0240d362cd9efe62fa004640b004eb1ff6654304520e20ce16520eb2921c68cd
Shadow Banking (5-19-17) https://www.bloomberg.com/quicktake/shadow-banking
China’s $8.5 Trillion Shadow Bank Industry Is Back in Full Swing (4-18-17) https://www.bloomberg.com/news/articles/2017-04-18/china-s-8-5-trillion-shadow-bank-industry-is-back-in-full-swing
World’s Biggest Stock Markets Haven’t Been This Split Since 2008 (4-25-17) Bloomberg News https://www.bloomberg.com/news/articles/2017-04-25/world-s-biggest-stock-markets-haven-t-been-this-split-since-2008