Week In Review: January 4-8, 2016
- The New Year started off with a flurry of news and activity. Events in Asia and the Middle East sent stocks plummeting as 2016 officially got under way this week. CNBC initially classified this week as the “worst start to a year since the financial crisis of 2008” but by Thursday had revised that to the “worst start to a year, ever”. Both the NASDAQ and the Dow Jones Industrial Average fell into correction territory this week.
- The number of Americans filing new claims for state unemployment benefits fell by 10,000 claims last week, falling to a seasonally adjust level of 277,000 claims. The previous week’s data remained unrevised and last week’s numbers will not factor into the final Non-Farm Payrolls Report for December which is due out on Friday.
- Friday’s Non-Farm Payrolls Report came in better than expected, with the U.S. economy adding 292,000 jobs in December. The unemployment rate remained unchanged at 5 percent and average hourly wages for workers were also relatively unchanged. December’s jobs report may have been skewed by the warmer than usual winter weather in the U.S. which appears to have led to an unseasonal boom in the construction industry. This week’s market meltdown had stock analysts predicting that the U.S. might be headed for another recession as global economies falter but the better than expected jobs report quickly quieted those concerns and discussions began once again on predicting when the next interest rate hike by the Federal Reserve would occur.
- China released a slew of economic data this week. Over the weekend, the manufacturing PMI numbers for December were released and came in at 48.2, down from 48.6 the previous month and showing economic contraction for the 10th straight month. Trading on China’s two main stock exchanges was halted by a “circuit breaker” for the first time as stock prices plunged following the release of the data. The Shanghai composite closed down 6.86 percent and the Shenzhen composite closed down 8.2 percent on Monday and the plunge seemed to spread panic into global markets with both Europe and the U.S. seeing their own stock plunges. On Tuesday, reports surfaced that China’s “National Team” was intervening once again in stock markets and buying equities with state controlled funds in an effort to halt the plunge in stocks. The People’s Bank of China (PBoC) also injected nearly $20 billion into money markets and authorities were also rumored to be intervening in currency markets to stop a rapid decline in the yuan, which hit five year lows against the U.S. dollar this week. Unconfirmed reports surfaced by late in the week that Chinese officials were pressuring the PBoC to allow the yuan to fall further against the U.S. dollar by as much as 10 to 15 percent.
- The Chinese foreign ministry confirmed on Saturday that a civilian aircraft conducted a test flight and successfully landed on one of the new runways on the artificial islands that China has been constructing in the Spratly Archipelago in the South China Sea. Vietnam issued a formal diplomatic protest and the Philippines was also apparently in the process of issuing its own protest. The Chinese foreign ministry said that the test flight was “intended to check whether the runway met civilian aviation standards and was completely within China’s sovereignty.”
- On Wednesday, the U.S. Geological Survey registered a 5.1 magnitude seismic event roughly 30 miles from a known North Korean nuclear test site. Shortly after the event, North Korea claimed that it had just tested a miniaturized hydrogen nuclear bomb “in the most perfect manner”. The test was immediately condemned by the U.S., Britain, Japan and even China, who has historically been more tolerant of North Korea’s belligerent actions. Experts analyzing the data all seem to agree that the size of the event is not consistent with the detonation of a hydrogen bomb, but that the device which caused the tremor was most likely nuclear in origin. North Korea’s latest nuclear test will likely result in the very thing it is most outspoken against: further cooperation between the United States and its allies in the Asian region and additional sanctions by the United Nations. The UN Security Council added its own condemnation of Wednesday’s test, calling it a “clear threat to international peace and security” and said that it would immediately begin working on new measures against North Korea.
- In the Middle East, Saudi Arabia executed 47 people it described as “members of a deviant group” on January 2nd, including a prominent Shiite cleric. Protests over the executions erupted in Iran, where the Saudi Arabian embassy was stormed and subsequently set on fire. Saudi Arabia immediately severed all diplomatic ties with Iran and ordered the Iranian ambassador to leave Saudi Arabia within 48 hours.
- In Europe, the migrant crisis sparked by the Syrian civil war and the spread of the Islamic State is having wide ranging effect on the ability to travel freely across Europe. Both Sweden and Denmark this week announced measures to try to control the flow of migrants. Sweden implemented identity checks for all passengers arriving by train, bus or ferry from Denmark and Denmark, in turn, implemented controls at its southern border with Germany, with the Danish prime minister saying “The new Swedish requirement for ID checks poses a serious risk of a large number of asylum seekers accumulating in a short time, for example in and around Copenhagen, threatening public order and safety. We do not want this.”
- Crude oil prices continued to see heavy pressure to the downside this week, dropping into the low $30-a-barrel range after the largest surge in U.S. gasoline inventories since 1993. The increasing tensions between Iran and Saudi Arabia also acted to push oil prices lower as analysts speculated that the rift between the two countries likely means that OPEC members will not come to an agreement on cutting production levels to boost prices any time soon.
- The euro began the New Year with a brief spike higher against the U.S. dollar but had peaked and begun a sharp reversal by mid-day on Monday, sending the battered currency lower against the dollar once more. On Wednesday, the euro began a recovery in a series of peaks and valleys and by Thursday the euro was back to positive for the week against the U.S. dollar. The Japanese yen trended higher against the U.S. dollar for the entire week and it appears set to close the week there.
2016 started off horribly for stocks as events in China, North Korea and the Middle East all acted in concert to cause a massive spike in global economic and geopolitical uncertainty. China started the week off with plunging stock markets that triggered new “circuit breakers” which resulted in China’s two main stock exchanges halting trading for the day. On Wednesday, North Korea announced that it had tested a “miniaturized hydrogen bomb” which it termed “the H-bomb of justice” accompanied by its usual belligerent stance towards the United States. The test was widely condemned by countries around the world. On Thursday, Chinese regulators abandoned their newly implemented stock market “circuit breakers” after the measures resulted in trading halts on Chinese exchanges twice in one week. Thursday was the shortest trading day in the history of China’s stock markets after the circuit breakers, designed to halt trading for 15 minutes after a 4% drop or halt it for the day after a 7% drop, sent traders home just a half an hour after markets opened and quickly hit the 7% limit. Part of the turmoil was apparently driven by the People’s Bank of China (PBoC), which devalued the yuan overnight on Thursday at its quickest pace since August’s shock devaluation which also roiled global markets back then. The panic quickly spread from Asia into Europe and the U.S. with their own stock markets plunging lower as Thursday progressed. The Dow Jones Industrial Average (DJIA) briefly fell into correction territory on Thursday, and the NASDAQ closed in correction territory in the aftermath. Friday saw the PBoC allow the yuan to rise against the dollar for the first time in nine days and, combined with the removal of the newly implemented stock circuit breakers, that seemed to act to calm Chinese and global stock markets back down for the moment. Friday’s better than expected Non-Farm Payrolls Report quieted talks of a recession occurring in the U.S. economy, but the data may have been affected by the warmer than usual winter in the U.S. which allowed the construction industry to continue working in areas that would normally be shut down due to snowy weather. Economists, media personalities and stock analysts will likely now pour all their energy into trying to predict when the U.S. Federal Reserve will make its next move higher on interest rates, despite what continues to be a clearly struggling global economy. Central banks across the planet, including the U.S., show no signs of hitting their inflation targets any time soon. The European Central Bank and the Bank of Japan will both likely continue to carry out their quantitative easing (QE) programs well into 2016 and a U.S. Federal Reserve that continues to raise interest rates in the face of the global monetary printing press that is QE will likely create even more recessionary stress on the U.S. economy. As we enter another weekend on the heels of a rattled Chinese stock market, it remains important that you monitor global news outlets for events that could trigger a resumption in stock volatility. Continued pressure on stocks could possibly lead to renewed interest in precious metals as a “safe haven” play once more. A sudden spike in demand amidst a market that has seen a serious decrease in supply as prices have remained suppressed could result in a sudden surge higher, as that reduced supply is quickly depleted. 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.