The Week Ahead in Gold

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Is the next great financial crisis already in the making? That may be the question many investors are now asking, and recent economic and geopolitical developments seemingly suggest that the next major recession could hit as soon as next year.

The U.S. Fed is widely expected to clear the way for a July rate cut at its meeting later this week. A rate cut by the central bank would be the first in more than a decade and could set the stage for additional cuts in the months ahead.

An increasingly hawkish Fed had been a major risk for financial markets in recent months, but the central bank has now done a major about-face and turned increasingly dovish. The problem is, any action taken by the central bank may not be enough to stop the next financial crisis.

Among the key risks faced by global markets is the ongoing U.S./China trade war. Thus far, neither side has been willing to blink and hopes for some progress being made at the upcoming G20 meeting appear to be fading fast. If the situation escalates further, both nations could impose additional tariffs or take even more drastic measures. Imagine, for a moment, that China decides to close its markets to U.S.-based multinationals like Apple.

Such a scenario would be enough to send shockwaves throughout the global financial system and there would be little, if anything, that central banks could do to right the ship.

The war on trade isn’t the only problem. Oil poses another potential risk that could have a ripple effect on global markets. The U.S. has taken a hardline stance with Iran, and rhetoric between the two nations has grown increasingly tense. Last week, two oil tankers were attacked in the Strait of Hormuz, a key shipping lane that is one of the globe’s most strategically important choke points. Any shocks to the oil market could see prices increase rapidly by $7 to $10 per-barrel.

The combination of increasing tariffs and higher energy costs could potentially have a significant impact on disposable income. As consumer spending sees a sharp decline, companies would also likely begin to cut back on hiring, investment and expansion plans. This could set off a chain reaction that could force the global economy into recession despite any further action from the Fed or other central banks.

Clearly, some investors appear to be getting the message. The risks to the economy are on the rise, and now may be the ideal time to add diversity and to cut down on equity market exposure. Money managers have been increasing their bullish positioning in gold for the third straight week, and the market has seen an increasingly bullish technical posture.

The market is vulnerable to a pullback at this point, however, and some back-and-fill trade may even be a good thing before the market attempts to push higher. Against the current economic and geopolitical backdrop, gold appears poised to continue its recent ascent. The only major potential roadblock at this point could be if the Fed does not meet increasingly dovish expectations. Even if that is the case, prices are not likely to fall far, and investors may be happy to scoop up the metal on any significant dips.

Two Bullish Calls

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There were two notable bullish calls for the yellow metal this past week. One was from hedge fund manager, Paul Tudor Jones, and the other from DoubleLine Capital founder, Jeffrey Gundlach, who is regarded by some as the ‘bond king’ for his past forecasts.

Their investment outlooks for gold were related and echoing other large-scale investors over the past couple months. In Jones case, it’s based on the belief of the possibility the US could be headed for recession. In Gundlach’s case, after accurately forecasting the volatility in fixed income markets over the last couple months, he now sees a lower priced US dollar by year-end. The lower dollar will be the result of a US recession, interest rate cuts from the US Federal Reserve, and a towering US fiscal deficit.

These calls coincide with markets this week moving on investor expectations the US Federal Reserve will cut interest rates 3 times by year’s end. What’s head-shaking is how quickly this shift has taken place from the US Federal Reserve’s hawkish bias that was much more present into the beginning of 2019. At the close of markets Friday, investors were pricing in 68% odds of a rate cut at the Fed’s July meeting, and then two subsequent cuts by the end of the year.

What gives me pause during weeks like this, coinciding with a regain in confidence in the recent turmoil in equity markets, is asking the question, what’s changed?

Fed Chair Jerome Powell may have had his Mario Draghi moment a couple weeks back, when in a similar scenario back in 2012, European Central Bank President Draghi pledged to do “whatever it takes” to save the euro. What followed was President Trump’s threat of additional tariffs on $300 bln worth of Chinese imports to the United States. Alas, the US President may have succeeded in his wish that the US central bank, that’s supposed to remain apolitical, may be shifting to his corner in this escalating trade war.

Towards the end of the week, China’s economy showed continuing signs of softening. Manufacturing data for industrial output experience the slowest growth in 17 years as their export sector now shows clear signs of the impact and damage of US tariffs. Still, stimulus measures announced by the People’s Bank of China signal the Chinese government stands ready to dig in their heels. There is no shift in sentiment yet that tensions will ease between the world’s two superpowers, and thus the calls for a demand for safe-haven assets like gold.

Jones had a simple way of justifying his market outlook. To paraphrase, the cooperation and policies towards globalization and increases in global trade that fueled economic growth for the past 75 years are coming to an end. His forecast is for gold to take out $1400 US/oz and then not to wait too long to see $1700 US/oz. In some regards, it resembles a fearmongering depiction of the world, but it seems this scenario is becoming a little more prevalent again.

The Week Ahead in Gold

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The last week saw gold and stocks rallying together and that positive correlation could have some room to run still. Stock investors are now seemingly cheering on bad economic news as any misses in key data points could bolster the case for lower rates.

On Friday, the U.S. Department of Labor reported that the country added just 75,000 jobs in May. That figure was far below consensus estimates for a gain of 185,000 jobs while the unemployment rate was steady at 3.6 percent. Revisions were also made to March and April jobs figures that brought the three-month moving average of gains from 245,000 in January to a current reading of 151,000.

The weaker-than-expected non-farm payrolls report followed an ADP jobs report earlier in the week that showed the smallest increase in private sector employment in nine years. According to ADP, the U.S. added just 27,000 private sector jobs for the month.

As the economic data has become increasingly murky, stock investors have turned their hopes to the Fed and the potential for a series of interest rate cuts. Despite the poor labor market data, the Dow Jones gained some 4.7 percent for the week while the S&P 500 added nearly 4.5 percent. The tech-heavy Nasdaq didn’t miss much either, adding nearly 4 percent for the week.

The market appears to have entered a phase in which bad news is good news, and investors feel confident that the Fed will ride to the rescue as markets and the economy sputter.

The ongoing U.S./China trade war and an aging business cycle could keep the U.S. economy under pressure. The longer the war on trade continues, the more that pressure will increase. The Fed seems to recognize the effects that the trade war is having, and it would not be a huge surprise to see the central bank cut rates as soon as this month. Although an initial rate cut of 25 basis points seems like a sure thing at this point, it remains unclear if the Fed will have to be more aggressive.

The combination of weaker stocks, a decelerating economy and lower rates could be a great recipe for higher gold. These issues could all have a significant impact on the dollar index, which has likely kept gold prices in check in recent months. In addition to a slowing economy and lower rates, the U.S. currency may also have to contend with fading tailwinds from tax cuts and government spending. That same fiscal spending has also caused the U.S. deficit to skyrocket, and at some point, the mounting U.S. debt will become an area of focus.

Strong fundamentals and an improving technical posture could see the gold market gather further momentum. Recent data from the CFTC showed that money managers tripled their long exposure to gold in the most recent reporting period, and ongoing concerns over global growth are likely to keep the metal on the offensive.

Late Cycle Characteristics

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The performance of North American equity markets in May illustrated the escalating tensions between the worlds two biggest superpowers. The S&P 500 fell 6.5% for its worst month of the year and the Dow Jones Industrial Average posted its sixth straight weekly loss, which tallies the longest slump for the blue-chip index all the way back to 2011. All this is in part inspired by the free-spirited (or irresponsible) nature of the American president, and the level of unpredictability, to put it aptly, is astonishing. The continued surprises for financial markets are far beyond what could be imagined.

Beyond the headlines, though, I was struck by a couple of stories this week looking at corporate debt. The first was a headline from the world’s largest brewer, Anhueser-Busch InBev, who’s looking to venture further beyond beers sales in order to drive up sales or top line revenue. Essentially, the change in consumption habits by consumers of alcohol have seen declines in beers sales, putting pressure on select markets. Beyond the details of their business, it was a story of a major multinational company that was apart of a major debt financed acquisition in just 2016, and at the beginning of the year sat on over a hundred billion dollars in debt.

The theme or story for AB InBev doesn’t seem all that different from other multinationals that have taken on debt to finance acquisitions or growth. Companies with stalled or troubled top line growth like Kraft-Heinz, Sears, or General Electric come to mind. The notion was a simple one emerging from the financial crisis. A market was saturated and the easiest was to find profit growth was to acquire or merge with your competitor and create synergies and/or massive cost savings. It’s even what’s being proposed between Fiat-Chrysler and French automaker Renault this past week. The troubling part of the story could be when the cost savings don’t materialize.

Moody’s Investor Services came out with a warning this past week on how there could be potential trouble in the corporate credit markets. The lowest level of speculative grade debt represented the largest share of corporate debt issuance in 2018. At 44%, it was double the level it was in 2007, preceding the subprime mortgage crisis and a series of corporate debt defaults. With Moody’s warning was that the environment remained stable today; however, scenarios like slowing earnings growth or higher interest rates could be troubling and create additional financial pressures.

The Chief Investment Officers of PIMCO this week also issued similar warnings for the global credit markets and what they referred to as the riskiest credit markets ever. Like Moody’s, they don’t envision an imminent market triggering event, but they do see liquidity and quality issues in the credit market, and the question is certainly how that relates to the broader markets. Another part of PIMCO’s call was a continued flight to US treasuries because of a lack havens, quality and safety.

No imminent shock suggests a “status quo” environment for the time being, but phrases like a credit market with “late cycle characterises,” like 2005-2006 is a pretty loud warning for investors.

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The Week Ahead in Gold

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The gold market is on weaker footing in early action Tuesday as traders return from the long Memorial Day Holiday. Stronger stocks and a higher dollar are likely the primary culprits behind the selling today, and the market may see increased technical selling pressure if prices dip below the $1270 level.

 

The gold market has not seen a fresh leg lower in recent weeks, as any dips have thus far been aggressively bought. Patience on the part of buyers may be rewarded in the weeks and months ahead, however, as numerous issues come into focus that could drive demand for gold and other safe havens while putting a major dent into risk appetite.

 

The state of the U.S. economy will be a major influence on the markets and could potentially fuel a major reversal in equities. Although the economy remains strong overall, there have been some serious cracks showing up that could be cause for concern. Key indicators such as retail sales and factory output both declined in April. Durable goods orders also declined, further suggesting the economy is losing momentum. Several forecasters have already revised their Q2 GDP estimates lower, and any further disappointments in the data stream could force the Federal Reserve to spring into action.

 

Also adding to investor angst is the ongoing U.S./China trade war. After reportedly nearing a deal last month, talks fell apart rapidly. There are currently no scheduled meetings for President Trump and Chinese leader Xi Jinping to try to reach an agreement, although there is some optimism that the two leaders will have a chance to talk at next month’s G20 summit in Japan. Some reports have suggested, however, that the two sides are too far apart for a meeting to be productive at this point. China seems ready and willing to take a wait-and-see approach to negotiations, and the war over trade could escalate further with a lack of progress.

 

Other issues that could potentially fuel demand for gold include the ongoing uncertainty over Brexit, European elections, North Korea and Iran.

 

With the recent resignation of Prime Minister Theresa May, the ongoing Brexit saga has gotten even messier. Although the gold market has not shown much interest in Brexit thus far, that could change in a hurry if a no-deal Brexit looks likely. Recent elections may suggest that the next Prime Minister could be willing to leave without a deal, and tensions could rise further as the October 31st extension date gets closer.

 

The dollar may also play a key role in the weeks and months ahead. The greenback has been stubbornly hovering near its recent highs around the $98 level and has thus far not shown much weakness. That could change in a hurry, however, as the Federal Reserve could be forced to start cutting rates. In addition to an increasingly dovish Fed, the currency could also come under pressure as the effects of tax cuts and government spending fade further.

 

Looking at the bigger picture, there are numerous issues at work that could benefit gold. Given the likelihood of another recession, a no-deal Brexit and a further escalation of the war on trade, it may simply be a matter of time before gold sees a sharp and significant upside breakout.

 

Trade Talks, Part…

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There has been no shortage of headlines over the past several weeks that have continued to unsettle financial markets and maintain focus on the trading relationship between the world’s two biggest economies. Last week ended with China’s crown jewel, Huawei, being added to the US Commerce Departments entity list, restricting US businesses relationships with the Chinese firm. Immediately, the impact was seen in US chip suppliers that provide parts to the hardware giant, and questions arose around Huawei’s phone sales outside of China as their devices would no longer be supported by proprietary apps from Google.

Beyond the company specific impacts, the sentiment in the market has been that the United States and China continued to be further apart than initially assumed, and as confirmed by the US President, Huawei will be used as a prop to reach a trade deal.

The central predicament that will shape investment themes into the summer and through the rest of this year is determining just how likely a trade deal may be. Akin to the very end of December when US equity markets had found a bottom, it was around the timing of a delay in the imposition of tariffs on China that supported stock markets moving higher this spring. And as progress between the two nations was assumed, investors’ appetite for risk continued to grow.

To circle back to this week’s topic, however, there remains no shortage of headlines that have thus created a more than a little concern. Nouriel Roubini wrote earlier in the week of potential consequences and fallout from a US-China Cold War. He details a scenario that sees an ultimate disruption to global trade, and other nations around the world required to pick a side with regards to whom they maintain a trading relationship. Reading the Roubini column on the West coast of Canada certainly creates a lot of shock-value given British Columbia’s export reliance to Asian economies and the investment currently going into LNG.

There are also arguments being made over how much short-term pain a centrally planned Chinese economy would endure to win a long-game negotiation with the United States. Where China lays out multiyear plans for the state’s role in the county’s industrial development and growth, the United States is subject to polarizing political rhetoric doomed and vulnerable to the next election cycle. One story in Bloomberg this week detailed a Chinese government expert opinion that talks could go on for the next 15 years.

Finally, and touched on Thursday evening in an announcement from President Trump, was the idea to impose tariffs on imports from nations that intentionally devalue their currency, which could include China. Beyond understanding how this is implemented and enforced, it circles back to an earlier theme of the last decade that’s been absent from headlines recently, but it is the notion of currency wars.

It centers around the idea of governments and central bankers opting for policy that directly or indirectly competitively devalues their domestic currency against their trading partners to boost their export sector.  It has been argued that this could be an added tool in China’s arsenal to prolong the impact of US tariffs by finally letting the Chinese yuan depreciate over seven-per-US-dollar, a situation we haven’t seen since 2008.

If there’s a lesson here, it may be the idea of short-termism versus playing the long game. There’s a lot of noise in the markets day-to-day, but investment themes like passive versus active investing, or having exposure to safe-havens like precious metals come to mind.

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The Week ahead in Gold

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The gold bulls will look to stabilize the market in early action this week after the metal saw some sharp declines late last week. The price of gold declined by around $35 per-ounce between Thursday and Friday and has once again found itself in a band of support in the $1280-$1290 region. The selling seen to end last week has caused some technical damage to the daily chart and the bulls will need to hold the $1280 area or risk seeing a fresh leg lower.

 

In early action on Monday, lower stocks and a weaker dollar index are giving the market a slight boost.

 

The ongoing U.S./China trade war has been at the center of market volatility and equity declines. After seemingly getting close to a deal in recent weeks, both sides have pulled back from the table. The U.S. raised tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. China retaliated, also hiking tariffs on some $60 billion of U.S. goods. It has seemingly become clear that China is willing to walk away from a deal, and negotiations could take considerably more time than previously thought. Any further negative news on the trade war could potentially send stocks lower while stoking market volatility and safe haven demand.

 

Perhaps the notion of a protracted and escalating war on trade was behind the recent bullish fund positioning in gold. According to recent data from the CFTC, large specs raised their bullish positions in gold by about 500 percent. Of note was the large increase in fresh longs for the latest reporting period, even as prices were rising. This would seemingly suggest that traders and investors are still looking to gold as a safe haven, and further equity volatility may fuel more buying in the metal.

 

The stronger dollar index has likely been a major barrier to higher gold prices, and this week’s Fed meeting minutes could potentially be market moving. The greenback has been in a firm uptrend since the first of the year and has not strayed far from the $98 level in recent weeks. An increasingly dovish Fed could, however, give the bears something to work with. The Fed took a decidedly neutral stance last month, indicating that it did not see reason to move rates one way or the other. Recent developments in the trade war could, however, force the Fed’s hand. If the trade war escalates further, it could have a serious effect on the economy and investor sentiment. Not only that, but it has become clear that the lack of a deal may cause further market volatility and equity declines. The Fed could be forced to cut rates in order to fight the negative effects of a lasting war on trade.

 

With the current economic and geopolitical backdrop being conducive to higher gold prices, a breakdown in the dollar index could be the catalyst for the next major rally. The gold market has shown it does not want to go down from current levels, so it may simply be a matter of time before the market starts a fresh ascent.

 

The Week ahead in Gold

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The gold market is finally seeing some significant flight-to-safety buying as the sell-off in stocks accelerates. In early action Monday, the benchmark Dow Jones Industrial Average is down by some 550 points for a decline of over 2 percent. The recent string of declines has been attributed to the lack of a U.S./China trade agreement and at this point a deal, which was previously reported to be imminent, appears to be a ways off.

 

The lines of communication will remain open; however, it is also possible that not much happens until President Trump meets with Chinese leader Xi Jinping. The two could potentially meet at next month’s G20 summit in Japan. For the time being, however, the two nations have again ratcheted up the war on trade. Last Friday, the U.S. hikes current tariffs on $200 billion of Chinese goods from 10 percent to 25 percent. China has now retaliated, saying that it will raise tariffs on $60 billion of U.S. goods starting June 1.

 

In addition to stoking significant market volatility and equity declines, the effects of the ongoing war on trade may potentially benefit gold in other ways. It has been suggested that the trade war could force the Fed to cut interest rates. Such a scenario does make a great deal of sense, as the war on trade could hurt the jobs market and put a major dent in consumer spending. An increasingly dovish Fed could weigh heavily on the U.S. currency, making gold less expensive for foreign buyers. The dollar may also be negatively affected if volatility expands further. The dollar is lower today, for example, as buyers flock to the perceived safety and stability of the Japanese Yen.

 

Rising tensions between the U.S. and Iran could also potentially impact global markets. The conflict has called into question Iran’s commitment to the 2015 nuclear deal it signed with several UN Security Council members and Germany. President Trump pulled the U.S. out of the deal last year and has re-imposed sanctions. Iran has reportedly indicated it may resume nuclear activities if other partners go along with the sanctions. The U.S. recently dispatched a carrier group to the region and tough rhetoric between the two nations is on the rise.

 

The gold price is up over $11/oz in early action. The market’s technical picture has improved significantly in recent weeks and a near-term bottom may now be in place. This would seem to suggest that the market is in position to trade sideways to higher, and that any dips will be bought.

 

Despite an improved technical posture, however, the market will need to maintain some gains to foster further upside. The metal has been frustratingly range-bound for some time now even as U.S./China relations become increasingly strained. The bulls will need to take out psychological resistance at the $1,300 level and then take out the April high around $1,314 to really get the ball rolling.

No Apparent Theme

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No Apparent Theme

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A week ago Friday, the US jobless rate fall to a 49-year low. Eleven years into the economic cycle the US labour markets continues to have legs. The takeaway was that with no change in wage growth month over month we are still yet to see and signs of rampant wage growth; therefore, the US labour market has further room to the upside. Additionally, Friday’s inflation data in the US was even weaker than expected. Vice Chair of the Federal Reserve Richard Clarida had to reiterate Chair Jay Powell’s view that the Federal Reserve see’s this drawdown in inflation as temporary and reinforces the view that higher rates may be on hold, but a rate cut is not in the cards.

 

In Canada, it looks to be a similar story. The jobs numbers on Friday were gangbusters. It was the largest monthly gain for jobs in 43 years. The labour market added 106,500 jobs. A simple back-of-the-envelope calculation comparing growth in the Canadian labour force to the United States would be the equivalent to their economy adding approximately 9 hundred thousand jobs in the month.

 

It raises two questions. One, what’s taking place in the Canadian labour market to account for the massive monthly surges in private sector hiring? The average monthly job gains over the last 12 months have been double the 40-year average. Second, why does there seem to be inconsistencies between strength in Western Economies labour markets (US, Canada, Europe) as another period of near disinflation and increased policy uncertainty from Central Banks is witnessed?

 

One attempt at answering the first question certainly speaks to the inconsistency in the Labour Force Survey (LFS) in Canada. One of the easiest comments to make on an anomalous monthly reading is ‘one month doesn’t make a trend.’ For the past couple years though, there has also been major discrepancies between the labour force survey and the more reliable, but less in the headlines, Payroll survey.

 

Canadian job growth was back around one percent in December (according to the LFS); in April, the labour force survey moved inline with the Payroll survey to show job growth above 2 percent. As monthly job data in Canada is certainly a catalyst for Canadian dollar volatility month in and month out, the ½ cent move in the dollar Friday pared back some of those gains at the close as it merely confirmed already known growth of the Canadian labour market.

 

The second question is more difficult. In both Canada and the United States its steady and muted levels of inflation right around 2%. And back into the headlines this past week, despite the deterioration in global trade that was supposed to be inflationary for the Canadian and US economies. The now much publicized false statement from President Trump last week was that the increased tariffs on Chinese exports will be paid for by the Chinese economy. That’s not the case as they are typically paid for by the importing business and passed on to the end consumer, but despite the breakdown in talks, the ripple effect seems indistinguishable.

 

Despite resilient job growth in the US and Canada and a robust stock market year to date that is currently seeing a bit of a pullback, there is still an underlying theme of caution. With heightened levels of uncertainty over whatever the policy topic of the week is, be it trade, pipelines, or any other economic story, it seems difficult to distinguish a apparent theme for the US and Canada. In terms of diversification, long term vs. short term strategies, our thought is this is a great moment to reflect on how and where to be invested.

 

Global Growth and Stock Market Melt Up?

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Global Growth and Stock Market Melt Up?

 

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There were similar patterns over the past few weeks in the first quarter GDP prints from China, the United States, and the European Union. Economic growth fared better than expected. This is notable given the two countries and one region account for over half the world’s output. Unfortunately, it’s not necessarily the case for Canada. The prospects for “better than expected” reports may not be as great and the most recent GDP data for February released last week aligned with the Bank of Canada’s very conservative forecasts.

 

For reference, China Q1 GDP grew ahead of expectations at 6.4% vs 6.3% forecast. First estimates for US GDP advanced by 3.2% vs 2.5%, and Eurozone annualized growth grew at 1.5% while the unemployment rate dropped to a 10-year-low.

 

Both the IMF and World Bank amongst other predominant voices have issued concerns over global growth in the beginning of this year. These warnings have been consistent with the reverse shift from Western Central Bankers including Federal Reserve Chair Jerome Powell who spoke of inconsistencies in US growth prospects last week, and Bank of Canada Governor Stephen Poloz whose concerns also echoed the threat of a global slowdown’s impact on the Canadian economy.

 

It certainly raises a question and is worth reconsidering why policy makers appear so cautious and dovish. Fed Chair Powell created a bit of a stir this week when he used the word “transitory” to refer to inflation. What was gleaned was the Fed sees the inflation slowdown in the US as temporary and for some analysts this raised the prospects of higher US interest rates in the latter half of the year. That said, Friday’s US job numbers saw the jobless rate fall to a 49-year-low at 3.6%, but as wage growth again failed to accelerate the suggestion was there is further room for this US labour market to accelerate.

 

To contrast the US and Canada though, it’s also worth noting the difference between Powell and Poloz. Whereas Powell almost sounded hopeful on trade relations last Wednesday, Poloz in an interview with Global News this past week stated trade as the biggest risk to the Canadian economy (the last policy statement from the BoC highlighted oil markets, household spending, and global trade as the three biggest risks, which aligns their ranking).

 

Earlier in the year, it was the notion that the waning impact of the Trump tax cuts, US stocks in a bear market, the trade disputes between the US and China, in addition to steal and aluminum tariffs, and potential for frictions between the US and Europe would all be added impediments to global growth. Certainly, the Canadian economy, stunted by a beleaguered resource sector, seems one step back, but prospects in the US and Europe, buoyed by a strengthening Chinese economy seem a little more optimistic. As the US Fed pointed out, some of the bearish data points could be a result of transitory factors.

 

Morgan Stanley and Bank of America recently issued a call to investors worried about under exposure to equity markets. They suggested using the options market to capture a sudden move higher in a momentum trade in equities. At the beginning of 2019, it might have seemed eleven years past the Great Recession, we were finally losing some steam, but the question is whether we’re amidst something to the contrary.