Week In Review: June 27-July 1, 2016
- Uncertainty continued this week in the wake of the so-called “Brexit” vote last Thursday, when the United Kingdom (U.K.) voted to leave the European Union (E.U.). U.S. markets will be closed on Monday next week in observance of the Independence Day holiday, which will mean that U.S. markets won’t be able to immediately react to any unforeseen news events that might occur over the long weekend.
- The number of Americans filing initial claims for state unemployment benefits surged by 10,000 claims last week to a new seasonally adjusted level of 268,000. The previous week’s unemployment data was revised downward by an additional 1,000 claims. This marks the 69th consecutive week that claims have remained below the 300,000 level closely watched by economists. Analysts will now be intently focused on next week’s Non-Farm Payrolls Report for June which, given the reality of the vote by the U.K. to leave the E.U., may have absolutely no bearing on the Federal Reserve’s decision to conduct another interest rate hike when it meets this month to determine its next move in monetary policy.
- In news that was nearly buried by the news surrounding the U.K.’s exit process from the E.U., Puerto Rico was on the verge of defaulting on $2 billion in debt payments that are due to its creditors this Friday. The island’s Governor, Alejandro Garcia Padilla, issued executive orders on Thursday that suspended payments on general obligation bonds and declared a state of emergency for several of the island’s agencies that would “ensure the residents of Puerto Rico continue to receive essential services while the Commonwealth continues to face a delicate financial situation.” The U.S. Congress passed a bi-partisan bill this week, which President Obama signed into law, that created an oversight committee which will apparently negotiate with Puerto Rico’s creditors and attempt to restructure the island’s $70 billion worth of debt.
- Treasury yields in the U.S. plummeted to record lows on Friday as the bonds were snapped up by panicked European investors who are apparently fleeing the nearly $12 trillion in negative yielding debt that has been spreading around the globe as the rest of the world’s central banks adopt, continue, or even expand their negative interest rate policies. Andrew Brenner, head of international fixed income at National Alliance, described the situation on Friday to CNBC by saying “This is buying coming from Europe. It started around 2 in the morning. This is all about flight to quality, flight to quality in duration. It was absolutely panic buying. Panic buying shows up more as a panic when you’re at one of the more illiquid days of the year, when you’re at a skeleton staff, which is what you are today. I don’t use those words lightly. This thing at 2 a.m. shot up right off the bat.”
- In a story that surfaced on Friday, and seemed to have been oddly downplayed by most major media outlets, Reuters news agency reported that the Taiwanese military, in a bizarre accident, had misfired a supersonic ballistic anti-ship missile when preparing for a military exercise. The missile headed toward mainland China before striking a Taiwanese fishing trawler 40 nautical miles away. The missile did not explode when it struck the vessel, but the impact killed the captain and injured 3 additional crew members before the projectile then plunged to the bottom of the sea. The Chinese military did not make any moves to retaliate for the erroneous launch and a Taiwanese Defense Ministry spokesman said “That this is politically motivated, or this is to create crisis in the surrounding situation, this is not the case.” The “surrounding situation” the spokesman referred to is likely the fact that China is celebrating the 95th anniversary of the founding of its Communist Party. The Taiwanese military is investigating the incident and making attempts to retrieve the misfired projectile.
- In Asian economic news this week, Japan continues to fight deflationary effects from falling consumer prices. Japan’s industrial output for May dropped significantly more than expected., which could be a sign that demand for Japanese exports is falling, adding further downward pressure to their already struggling economy. Manufacturing in China also plunged in June, falling to a four-month low, which could signal a continued fall in demand for Chinese exports as well. The data from Asia could mean that both the Bank of Japan and the Peoples Bank of China could engage in additional monetary stimulus in the very near future.
- In the U.K., Bank of England (BoE) Governor Mark Carney warned on Thursday that the Central Bank could embark on further stimulus measures as soon as this summer, following the country’s historic vote to leave the E.U. Mr. Carney said in a speech that he gave this week in London that “The economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. In August, we will also discuss further the range of instruments at our disposal.” The BoE next meets on July 14 and will apparently be assessing its options at that time.
- Crude oil hovered in the upper $40-a-barrel range this week as analysts continued to try to determine the effect of the U.K.’s upcoming exit from the E.U. on future oil demand. Uncertainty surrounding the impact to oil demand of the so-called “Brexit” will likely continue through the foreseeable future as negotiations eventually begin to take place between the U.K. and Brussels on how to implement their exit in the least damaging way possible. Production in Canada and Nigeria has rebounded in recent weeks and that fact, along with OPEC production levels which reached a record high in June may all work to counteract the “Brexit” fears and send prices lower again as the likelihood that the world will see another supply glut increases.
- The euro opened the week with a vertical plunge lower against the U.S. dollar as the effects of the “Brexit” vote continued to move through markets. The euro had reached a floor by late Monday and began moving higher. The euro continued to move higher through Thursday when it experienced another plunge to the downside which was short-lived. The euro clawed its way back to positive in early Friday trading, but a steep drop prior to market close appears set to see the euro close the week slightly lower against the U.S. dollar. The Japanese yen saw choppy trading at the start of the week, surging higher and then plunging back lower in a series of steep moves that continued through late Monday. The yen began drifting lower on Tuesday and continued to trend lower through late Thursday, when a reversal took place. The yen could not gain enough momentum to move back to positive for the week and will close lower against the U.S. dollar.
– Trading Department, Precious Metals International, Ltd.