That didn’t take long.
After little more than two weeks, President Donald Trump’s honeymoon with Wall Street appears to have been put on hold—for the moment, at least—with major indices making only tepid moves since his January 20 inauguration. That includes the small-cap Russell 2000 Index, which surged in the days following Election Day on hopes that Trump’s pledge to roll back regulations and lower corporate taxes would benefit domestic small businesses the most.
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And therein lies part of the problem. Although the president managed to sign an executive order this week requiring the elimination of two federal regulations for every new rule that’s adopted (and today ordered a review of Dodd-Frank and former President Obama’s fiduciary rule), other campaign promises that initially excited investors—tax reform and an infrastructure spending deal among them—might have already hit a roadblock.
According to Reuters, a three-day meeting in Philadelphia between President Trump and congressional Republicans ended in a stalemate, with it looking less and less likely that tax reform will happen during Trump’s first 100 days in office—perhaps even the first 200 days. As for infrastructure, several Republicans were reportedly wary of committing to such an enormous spending package before more complete details become available.
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Meanwhile, Trump’s seven-nation travel ban has received a lukewarm—and, in some cases, hostile—reception from many in the business world who have traditionally depended on foreign talent. That’s especially the case in Silicon Valley, where close to 40 percent of all workers are foreign-born, according to the 2016 Silicon Valley Index. (Around the same percentage of Fortune 500 companies were founded by immigrants or children of immigrants, including Steve Jobs, whose biological father was Syrian.) One of the more dramatic responses toward the travel ban was Uber CEO Travis Kalanick’s dropping out of Trump’s business advisory panel, following an outcry from users of the popular ride-sharing app who saw his participation with the president as an endorsement of his immigration policies.
I’ve shared with you before that the media often take Trump literally but not seriously, whereas his supporters take him seriously but not literally. I think it’s evident that the market is finally coming to terms with the fact that Trump, unlike every other politician before him, actually meant everything he said on the campaign trail, including his more protectionist and nationalist ideas.
Although I don’t necessarily agree with Trump’s plans to raise tariffs, withdraw from free-trade agreements and restrict international travel, it might be easy to some to see why he feels American companies need protecting from foreign competition. This week I’ve been attending the Harvard Business School CEO Presidents’ Seminar in Boston, and among the topics discussed is China’s ascent as an economic and corporate juggernaut. Take a look at the chart below, using data from Fortune Magazine’s annual list of the world’s 500 largest companies by revenue. Whereas the U.S. has lost ground globally over the past 20 years, China’s share of large companies has exploded, from having only three on the list in 1995 to 103 in 2015. The number of Japanese firms, meanwhile, has more than halved in that time.
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I will say, while I’m on this topic, that the uncertainty and unpredictablilty surrounding Trump has given active management a strong opportunity to demonstrate its value in the investment world. Assessing the risks and implications of his actions, policies and tweets, which change daily, really requires a human touch that fund managers and analysts can provide.
Dollar Down, Gold Up
One of those implications is the U.S. dollar’s decline. Following Trump’s comment that it was “too strong” and hurt American exporters’ competitiveness, currency traders shorted the greenback, causing it to have the worst start to a year since 1987.
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This, coupled with a more dovish Federal Reserve, expectations of higher inflation and growing demand for a safe haven, has helped push gold prices back above $1,200 an ounce. January, in fact, was the best month for the yellow metal since June, when Brexit anxiety and negative government bond yields sent it to as high as $1,370.
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Demand for gold as an investment was up a whopping 70 percent year-over-year in 2016, according to the World Gold Council. Gold ETFs had their second-best year on record. But immediately following the November election, outflows from gold ETFs and other products accelerated, eventually shedding some 193 metric tons.
But now, just two weeks into Trump’s term as president, the gold bulls are banging the drum, with several large hedge fund managers taking a contrarian bet on the precious metal.
Inflationary pressures are indeed intensifying. U.S. consumer prices rose 2.1 percent in December year-over-year, their fastest pace since 2014, and inflation across the globe is beating market forecasts, with the Citi Global Inflation Surprise Index turning positive for the first time since 2012. Anything above zero indicates that actual inflation is stronger than expectations for the month.
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OPEC Making Good on Production Agreement
Among the commodities showing resilience right now is oil, especially on reports that the Organization of Petroleum Exporting Countries (OPEC) is 60 percent of the way to reaching its output target after agreeing to cutting production in early December for the first time since 2008.
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Of course, this news is tempered by analysts’ expectations that U.S. producers will export more crude than four OPEC members combined in 2017. According to Bloomberg, the U.S. could sell as much as 800,000 barrels a day overseas, which is more than Libya, Qatar, Ecuador and Gabon produced in December.
Index Summary
- The major market indices finished mix this week. The Dow Jones Industrial Average lost 0.11 percent. The S&P 500 Stock Index rose 0.12 percent, while the Nasdaq Composite climbed 0.11 percent. The Russell 2000 small capitalization index gained 0.52 percent this week.
- The Hang Seng Composite lost 0.69 percent this week; while Taiwan was up 0.08 percent and the KOSPI fell 0.50 percent.
- The 10-year Treasury bond yield fell 1 basis point to 2.46 percent.
Gold Market
This week spot gold closed at $1,219.83, up $28.53 per ounce, or 2.39 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 5.58 percent. Junior tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index climbed just 1.19 percent. The U.S. Trade-Weighted Dollar Index finished the week down by 0.77 percent.
DateEventSurveyActualPrior
| Jan-30 |
Germany CPI YoY |
2.0% |
1.9% |
1.7% |
| Jan-31 |
Eurozone Core CPI YoY |
0.9% |
0.9% |
0.9% |
| Jan-31 |
U.S. Consumer Confidence |
112.8 |
111.8 |
113.3 |
| Feb-1 |
U.S. ADP Employment Change |
168k |
246k |
151k |
| Feb-1 |
U.S. ISM Manufacturing |
55.0 |
26.0 |
54.5 |
| Feb-1 |
FOMC Rate Decision |
0.75% |
0.75% |
0.75% |
| Feb-2 |
U.S. Initial Jobless Claims |
250k |
246k |
260k |
| Feb-2 |
Caxin China PMI Mfg |
51.8 |
51.0 |
51.9 |
| Feb-3 |
U.S. Change in Nonfarm Payrolls |
180k |
227k |
157k |
| Feb-3 |
U.S. Durable Goods Orders |
-0.4% |
-0.5% |
-0.4% |
| Feb-2 |
U.S. Initial Jobless Claims |
250k |
246k |
246k |
Strengths
- The best performing precious metal for the week was gold, followed by silver, with a 2.03 percent gain. Nearly $1.6 billion went into the 10 precious metal-backed ETFs that have attracted the most money in January, reports Bloomberg. Frankfurt-listed Xetra-Gold drew in more than any other commodity ETF.
- The Royal Mint in London reports that coin sales are on the rise amid political turmoil, with sales to Germany more than doubling in volume last year and sales to the U.K. rising by over a quarter. Chris Howard, the director of bullion at the Royal Mint, says that coin and bar production is up 50 percent compared with a year ago. The group expects similar growth this year through expansion in the U.S. and German markets.
- Political concerns from the EU to the U.S. sent gold rebounding to a three-year high in 2016. According to the World Gold Council, purchases through exchange-traded funds helped global demand climb about 2 percent to 4,309 metric tons last year. This was driven by inflows into gold-backed ETFs of 532 tonnes, offsetting a decline in coin and jewelry demand.
Weaknesses
- The worst performing precious metal for the week was palladium, rising just 1.11 percent. Russia’s Norilsk Nickel noted that they plan to increase production of palladium in 2017.
- Underwriters that announced a bought deal price of $7.95 per share to raise $250 million for Alamos Gold experienced a hung deal early in the week with few investors requesting allotments. The shares were subsequently repriced to $7.25 a share to clear the order books later in the week, according to two people familiar with the offering who told Bloomberg.
- Gold Resource reports the suspension of operations for up to 48 hours this week, after an employee died in a heavy-equipment accident in the Arista mine in Mexico, reports Bloomberg. In an unrelated accident, another Arista mine worker died as a result of a ground fall event.
Opportunities
- Gold is sending a “canary in the coal mine” signal for the U.S. dollar, reports Bloomberg, and a lot of it has to do with President Trump rattling the markets. Some of the Trump administration moves this week include the following: A dust-up with Australian Prime Minister over a refugee-resettlement deal, a trade adviser to Trump saying Germany is benefitting from a “grossly undervalued” currency – sending the euro up, and Trump’s firing of the nation’s acting attorney general for criticizing his immigration travel, just to name a few. This sent investors searching for gold as a safe-haven. Joni Teves, the top LBMA forecaster with UBS, says she sees the metal rising in 2017 to an average of $1,350 an ounce.
- Argentina’s Federal government is said to be drafting a bill with state governors to attract mining investment in the country. Such a bill would reconcile federal and state legislation, reports Bloomberg. The government wants a final draft by next month to send to Congress for approval by March 1. Some provinces have bans on certain mining processes which are more restrictive than at the federal level, and potentially some stalled projects may be able to move forward in the permitting process.
- Strategists at BMO Capital Markets think President Trump may be spending all of his political capital on his initial moves a little too fast, and burning bridges in the process. The group’s theory is that this may hinder the push through of Trump’s pro-business agenda; also lowering the probability of meaningful fiscal stimulus anytime soon, reports Bloomberg. As the Fed deals with Trump uncertainty, prices and trading volumes surged Thursday on call options, as seen in the chart below, giving holders the right to buy bullion at higher prices. Similarly, on Wednesday investors poured $413 million into the largest ETF backed by gold, recouping almost half of the money that exited last month, Bloomberg data shows.
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Threats
- At least 10 bills to limit protests have been introduced in recent months by Republicans in statehouses across the U.S., reports Bloomberg, with the goal of regulating public dissent as demonstrators take to the streets to protest Trump. The bills range from a possible protection in North Dakota for motorists who unintentionally kill protestors blocking roads, to a bill in North Carolina which would call for imprisoning people who taunt ex-officials. “I’ve been monitoring free speech legislation for about a dozen years now, and I’ve never seen anti-protest legislation in the states anywhere near as large as we’re seeing now,” Lee Rowland, senior staff attorney for the American Civil Liberties Union said.
- A New York federal appeals court overturned the dismissal of a lawsuit alleging traders at JPMorgan Chase & Co manipulated the silver-futures market, writes Bloomberg. In an order on Wednesday, the appeals court said that U.S. District Jude Paul Engelmayer demanded too high a level of evidence for an independent silver and gold futures trader to overcome the bank’s request for the suit to be thrown out. Similarly, the judge “engaged in impermissible fact-finding” by questioning the plaintiff’s data analysis, Bloomberg continues. JPMorgan isn’t the only Wall Street bank in this situation – many others have been pegged with allegations of silver-market manipulation for nearly a decade. Maybe the system isn’t rigged as opinion polls have suggested? Nah!
- Following an environmental audit, 23 mines in the Philippines have been shut down, reports Bloomberg, and five mines are under suspension. One of the companies affected by the Philippines suspension case is OceanaGold, whose Nueva Vizcaya province is the subject of a proposed suspension order citing alleged declining agricultural production. Following the news, Oceana tumbled as much as 18 percent in overnight trading in Australia, the most since February 2009, but fared better when Canadian markets opened. B2Gold also has a mine in the region that has been subject to review.
Emerging Europe
Strengths
- Turkey was the best performing country this week, gaining 5.4 percent. Investors might be buying Turkish equites with an expectation that the worst is over after Fitch downgraded the country and now all three rating agencies rate it below investment grade. The Executive Presidency referendum is still on the agenda for the beginning of April.
- The Turkish lira was the best performing currency this week, gaining 4.9 percent against the U.S. dollar. The lira strengthened over the past few days, but many analysts believe that its recovery won’t last without a sharp rate hike. The UBS team predicts the lira to weaken by another 5 percent by the end of next month and is far from being undervalued.
- The real estate sector was the best performing sector among eastern European markets this week.
Weaknesses
- Russia was the worst performing country this week, losing 1.7 percent. Despite strong economic data being published, Russian equities underperformed with the biggest losses noticed in Tatneft, Transneft and Severstal. Brent crude oil appreciated 2.3 percent.
- The Czech kurona was the worst performing currency this week, losing 75 basis points against the U.S. dollar. The Czech central bank won’t rush to exit its Swiss-style currency cap and sticks to its mid-2017 time frame for the move, even as it forecasts higher inflation for this year.
- The energy sector was the worst performing sector among eastern European markets this week.
Opportunities
- Eurozone Manufacturing PMI hit a new 69-month high, reaching 55.2 in January, mainly driven by strong readings in France and Germany. The chart below shows the eurozone, German and France PMI well above the 50 mark, which separates growth from contraction.
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- Russia’s gross domestic product contracted 0.2 percent last year, beating forecast estimates for a 0.5 percent drop and edging closer to exiting its longest recession in almost two decades. Industrial production rose an average 0.5 percent last year, after dropping 3.4 percent in 2015. Russia’s Manufacturing PMI rose to the highest level in almost six years in January. The country estimated 0.6 percent GDP in 2017.
- The U.S. Treasury Department amended former President Obama’s most recent slate of Russian sanctions to allow U.S. technology companies to export products to Russia. American companies will be allowed to seek licenses from Russia’s Federal Security Service (FSB) to export its goods as long as the products are not used in Crimea and do not violate pre-existing sanctions. FSB was one of several entities sanctioned by Obama in December related to Russian hacking into the Democratic political organization.
Threats
- European Union President, Donald Tusk, listed the Trump administration as a threat alongside China, Russia, terrorists and radical Islam, saying that the new American administration makes the eurozone’s future highly unpredictable. If the EU doesn’t come together, it will come apart. It is a really difficult moment, he said.
- The Romanian government issued an emergency decree decriminalizing abuse-of-office offenses that resulted in less than 200,000 lei ($48,000) of damage. Europe’s second poorest nation ranks fourth worst for graft in the EU, and in the past two years alone sent more than 1,000 people to trail for the abuse of the office seeking to recover more than 1 billion euros. In the biggest street protests since the fall of Communist rule in 1898, Romanians demand the resignation of government officials.
- Reports suggest that Greece has not completed much more than a third of the measures that were agreed upon in order to release the next aid tranche from the 86 billion euros package. According to Marc Chandler from Brown Brothers Harriman & Co. the official creditors expect Greece to hit its fiscal target, but the problem is 2018, when the primary surplus (budget balance before debt servicing) needs to increase to 3.5 percent of GDP versus estimated 2.3 percent in 2016.
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