Week In Review: January 18-22, 2016
- It was another abysmal week for stock markets this week as economic data from China continued to drag and oil prices hit fresh lows.
- The number of Americans filing new claims for state unemployment benefits surged by 10,000 claims last week to a six-month high of 293,000 claims. The previous week’s data was revised to show 1,000 fewer claims. The surge took economists by surprise; they had expected claims to fall from the previous week. The Federal Reserve will be paying close attention to the upcoming Non-Farm Payrolls Report for January, especially in light of the horrible performance global stock markets have displayed so far this year. Approaching severe winter weather in the eastern United States may affect the weekly unemployment claims reporting for next week as massive snowfalls force people to stay indoors and off roads.
- In Japan, the Nikkei entered bear market territory on Wednesday this week when it fell close to 4 percent lower overnight. Wednesday’s slide sent the Nikkei more than 20 percent lower from the peak that it reached in June of 2015. Any fall greater than 20 percent is considered a “bear” market.
- In China, the People’s Bank of China (PBoC) announced on Tuesday that it would inject 600 billion yuan ($91.22 billion U.S.) into the economy in an effort to ease liquidity fears prior to the arrival of the Lunar New Year in February. The Lunar New Year typically sees an increase in volatility and liquidity crunches in the banking system in China and the PBoC pledged to keep liquidity in China’s banking system “reasonable and adequate” and to keep interest rates stable during the holiday period. Regulators in China are also said to be setting limits on cross-border yuan transactions in order to prevent capital outflows as the yuan continues to fall against the dollar. According to Reuters, “people with direct knowledge” said that regulators have asked banks in Chinese coastal cities to “strictly abide by regulations on cross-border outflows from their yuan-denominated capital pools and imposed the requirement that at no time can outflows exceed the size of those pools, resulting in a negative position.”
- In Europe, it appears that the costs of the escalating migrant crisis were woefully underestimated. The head of Eurogroup finance ministers, Jeroen Dijsselbloem commented to CNBC at the World Economic Forum in Davos, Switzerland this week “We need to spend a lot more in dealing with the migrant crisis in the region where the vast majority of the refugees still are, in Syria, in Jordan, in Lebanon. That requires extra money and many member states have put it up. We have made money available from the EU budget but we’ll have to do more. That we need to open up more budgets for the crisis is very clear to me.”
- European Central Bank President Mario Draghi, speaking at a news conference on Thursday after the ECB decided to leave interest rates on hold again, warned that risks to the downside were increasing. Mr. Draghi said “It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in March.” Mr. Draghi’s comments were interpreted as an implication that the ECB would add more monetary stimulus in March and that immediately sent the euro lower against the U.S. dollar and also appeared to have triggered a rally in U.S. stocks Thursday morning as the markets processed the information.
- Crude oil prices continued declining this week, with U.S. crude oil dropping below $28 a barrel, its lowest price since 2003. The ongoing decline in oil prices could soon result in thousands of jobs being cut by oil and energy companies, particularly in the U.S. where it is more expensive to drill for, as their profits disappear.
- The euro traded basically sideways against the U.S. dollar for much of the week. Comments made by European Central Bank (ECB) President Mario Draghi at a news conference following the ECB’s monetary policy meeting sent the euro plunging lower on Thursday. The Japanese yen drifted lower against the U.S. dollar through Tuesday and then began staging a comeback. The yen had peaked against the dollar by Wednesday and began declining through the end of the week and it appears set to close the week slightly lower against the U.S. dollar.
Next week the U.S. Federal Reserve will hold its first Federal Open Market Committee meeting of 2016 and the global stock market gyrations and further global economic slowdown since the start of the year are likely to be main topics of discussion. As the economic slowdown continues in China and the price of oil dips lower, the U.S. economy is likely to begin to suffer greater stress. The U.S. Consumer spending boom that analysts were predicting would be triggered by lower fuel costs as oil prices fell has simply not appeared. Recent economic data shows that the manufacturing sector in the U.S. may already be in a recession. Speculation is already running rampant that the interest rate hike implemented by the Fed in December was a mistake. With the European Central Bank contemplating introducing further stimulus perhaps as early as March and Japan and China both following up with their own stimulus programs, the pressure will be on the Fed to delay implementing another interest rate hike due to the changing global economy. Some analysts are even suggesting that the Fed might be forced to re-implement quantitative easing as a global economic downturn forces the U.S. economy closer to recession. The continued drop in price for crude oil is increasingly placing severe economic pressure on heavily oil dependent economies such as Venezuela, Russia, and even Saudi Arabia. Iran has apparently complied with its part of the nuclear agreement reached last year and, as a result, economic sanctions have been lifted, allowing it to bring its oil back to the global marketplace once more. One of the first things Iran announced following the lifting of sanctions was an increase in oil production of 500,000 barrels a day. Iraq also announced an increase in oil production this week of roughly 400,000 barrels a day and US crude stockpiles saw another rise of over 4 million barrels according to data released this week. Venezuela has called for an emergency meeting of OPEC members to address the possibility of cutting production to prop up the price of oil, but most oil analysts feel that such a meeting is not likely to happen soon. Shale oil production in the U.S. is unsustainable at current oil prices and energy companies have been forced to cut back on exploration projects and are now announcing layoffs as they cut costs to try to weather out the prolonged period of oversupply. As global stock volatility increases, investors looking to diversify their portfolios away from stocks may once more turn to precious metals as a “safe haven” for their hard-earned investment cash. Mining companies have suffered equally as much, if not more, than energy companies in the prolonged price suppression of precious metals. Similar to energy companies, mining companies have delayed exploration projects and shut down unprofitable mines as precious metals prices have languished at levels that are simply not profitable for miners. The reduced availability of supply that has resulted from this slowdown in production will likely not be able to keep up with any sudden surge in demand for physical metals. Wise investors have continued their plans to purchase physical precious metals as part of a well-diversified investment portfolio as prices have continued to consolidate around current levels. 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.