1. It was a shortened trading week in the U.S. due to the President’s Day holiday this week. Ongoing price slides in oil and concerns over the state of banking in both China and Europe continue to appear to be the primary driving forces for market moves.
2. The number of Americans filing initial claims for state unemployment benefits fell by 7,000 claims last week, dropping to a new “seasonally adjusted” level of 262,000. The previous weeks’ data was unrevised. The four-week moving average of claims, considered a better measure of the state of the labor market by most economists, also plunged by 8,000 claims. Despite the better than expected unemployment data last week, manufacturing in the U.S. continued to be sluggish and the ongoing slump in oil prices is heavily pressuring U.S. companies in the energy sector to consider further cutbacks in production and refining which could lead to a sharp spike in job cuts in that sector.
3. The U.S. Consumer Price Index (CPI) rose by the most in nearly four and a half years in January, climbing higher on the back of rising rents and healthcare costs. The “core” CPI, which excludes food and energy costs due to their volatility, rose by 0.3 percent in January, following a 0.2 percent rise in December. The U.S. Federal Reserve is watching more than just the “core” CPI however, and falling gasoline and oil prices will likely outweigh the upticks in only the “core” CPI for January and December.
4. Japan’s economy contracted 1.4 percent in the final quarter of 2015 according to data released by the Cabinet Office on Monday. The slump was bigger than an expected decline of 1.2 percent and came on the heels of a revision for the third quarter’s data showing an increase of just 1.3 percent. Data released by the Ministry of Finance this week also showed that Japan’s annual exports in January fell by the most since the start of the global financial crisis as weakening global demand took its toll. According to the data, Japan’s exports fell by 12.9 percent year-on-year in January, the largest such decline since October of 2009. A ministry official blamed the rout in oil prices and delayed shipments due to the timing of the Chinese New Year holiday for some of the slump in January’s exports, but weakening global demand is likely to continue to weigh on exports for the foreseeable future.
5. On Wednesday, Reuters reported that China had deployed an “advanced surface-to-air missile system to one of the disputed islands it controls in the South China Sea.” Taiwan defense ministry spokesman Major General David Lo told Reuters that the missile batteries had been set up on Woody Island, which is part of the Paracels chain. According to Reuters, the island has been under Chinese control for over 40 years but is also claimed by both Taiwan and Vietnam. Fox News broke the story on the missile batteries, saying that imagery obtained by civilian satellite company ImageSat International shows two batteries of eight surface-to-air missile launchers and an accompanying radar system. China has claimed in the past that it does not intend to militarize any of the islands and reefs it claims in the South China Sea and this week’s move is likely to inflame tempers further.
6. Moody’s Ratings Agency released its quarterly Global Macro Outlook report on Thursday for 2016-17 and in the report the agency said that the slowdown in China and the ongoing decline in prices for commodities such as oil were hampering global growth and that central banks are running out of options to combat the problem. Moody’s said “Where government budgets are hit by lower commodity prices and depreciating currencies fuel inflation, room to mitigate the downside risks is limited. In Europe and Japan, elevated government debt continues to constrain fiscal policy while the efficacy of multiple rounds of quantitative easing is already being tested.” In its statement, Moody’s said “GDP will shrink again in Brazil and Russia, by 3 percent and 2.5 percent respectively, growth will fall to close to zero in South Africa and will be around 1.5 percent, the lowest in decades, in Saudi Arabia.”

7. Despite persistent rumors of a possible production cut by OPEC members and Russia, oil could not maintain a price above $30 this week. The continued uncertainty over exactly how much crude oil Iran might still bring to the market, amid a massive and ongoing global supply glut of oil continue to keep prices mired at current low levels.

8. The euro spent the entire week trending lower against the U.S. dollar as concerns over the state of the banking system in Europe continued into this week. The euro will close the week lower against the U.S. dollar. The Japanese yen began the week moving sharply lower against the U.S. dollar but experienced a short surge higher on Tuesday that then saw the yen trend higher against the U.S. dollar for the rest of the week. The yen will close the week higher against the U.S. dollar.

The European Central Bank (ECB) said, in the minutes from its latest policy meeting which were published on Thursday, that “Inflation had continued to be weaker than expected, mainly owing to the renewed sharp fall in oil prices, but also to persistently subdued underlying price pressures. Weaker than anticipated growth in wages, in conjunction with declining inflation expectations, could also signal increased risks of second-round effects.” The ECB meets again on March 10th, and the meeting minutes released on Thursday may indicate that the group is considering additional monetary easing and perhaps a move deeper into negative territory for interest rates. Another cut in interest rates that are already in negative territory would follow on with the recent moves by both Japan, who shocked economists by moving rates negative several weeks ago, and Sweden, who cut their interest rates deeper into negative territory last week. Also on the table at the next ECB policy meeting would be an extension, or even an expansion, of its bond purchasing program, commonly known as quantitative easing. According to the Financial Times (FT) this week, in China “A series of loan frauds has ripped holes in the balance sheets of a range of lenders, from the large – Agricultural Bank of China – through to the phalanx of small commercial lenders.” The FT reported on Wednesday, citing the China Business Journal that the Bank of Liuzhou discovered $4.9 billion in fraudulent loans to a single, unnamed, businessman and his relatives late in 2014 after the individuals forged evidence of collateral and proof of business operations. The total value of the bad loans would be more than 40 percent of the bank’s total assets at the end of 2014 and the impact may mean that Beijing has to step in to protect the bank. The bank has yet to post results for 2015, and apparently refused to comment to the FT on the matter when contacted. The Bank of Liuzhou was just the largest example cited in the article. Several other smaller banks suffered similarly fraudulent loans of smaller proportions. Kyle Bass, founder of Hayman Capital, commented on this very phenomenon in a letter to investors which we reported about in our memo last week. Mr. Bass commented that “Banking system losses – which could exceed 400 percent of the U.S. banking losses incurred during the subprime crisis – are starting to accelerate. China’s system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay. Instead, loan decisions are political decisions made by the state.” A collapse of the Chinese banking system would cause widespread panic in global markets. In the U.S., speculation is once again running rampant on whether the Federal Reserve will decide to conduct another increase in interest rates, despite growing evidence that the state of the global economy is forcing their counterparts elsewhere across the globe to move in the exact opposite direction. In the face of ongoing uncertainty over the true state of the global economy, it remains important to monitor news events on a global basis, particularly as Asian markets open for trading on what will still be Sunday night in New York. An increase in geopolitical and macroeconomic uncertainty over the weekend could continue to trigger massive volatility spikes in global stock markets. Wise investors continue to diversify their investment portfolios to protect themselves from overexposure to stocks, continuing to stick to their plans to acquire additional physical precious metals for their portfolio when they find buying opportunities to do so. Remember that precious metals should always be viewed as a long-term investment and that the key to profitability through the ownership of physical precious metals is to actually acquire and own the physical products and to hold them for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long term.

– Trading Department, Precious Metals International, Ltd.