Precious metals spot gold and silver continue to be hard hit by the strengthening US dollar, with both metals closing -0.37% & -0.62% weaker overnight. Spot gold has now closed down through the key psychological support level of US$1,200 per oz, a bearish sign. Typically when gold prices fall as a result of the strengthening US dollar the Australian dollar tends to fall as well, providing a cushioning effect. However the first chart below shows the Spot Gold Australian Dollar rate which extended declines by -0.61% overnight with the Australia dollar performing relatively well against the USD thanks to higher commodity prices. This has reduced the cushioning effect which would otherwise be greater with the Aussie down -1.21% while spot gold in Australia dollars is down -10.34% since July 1st. This is unfortunate for Australian gold miners who are receiving less Australian dollars per oz they sell than they otherwise would be.
The yen is -0.80% weaker against the US dollar and that should continue to add to recent gains for Japanese equities which has broken out of their doldrums from earlier this year. We have CPI data released around 10:30am this morning which will be closely watched for any signs of ending a deflationary spiral. Despite the Bank of Japan’s extraordinary monetary policy in recent years it has failed to have any sustained boost in either actual or expected inflation. The problems facing Japan cannot be fixed entirely with monetary policy given they are more secular, in that they will take years or decades to address. Such issues predominately relate to demographic issues but also the inflexible nature of the workforce.
Once set a deflationary mindset is very difficult to change, which only compounds the problem. If prices are expected to be lower tomorrow, why buy today? Falling prices also squeeze business margins and increases the burden of debt. Despite the largest amount of government debt (+229% of GDP) it would be great to see the government rally boost fiscal spending especially with ten-year yields around 0%. Typically government announces increased measures, although these are generally just repackaged programs that have already been announced, so there is little new spending.
In comparison it’s truly amazing to see the impact on inflation expectations that have happened in the U.S. simply as a result of Donald Trump becoming elected. A common measure of these expectations is the difference between 5 year US government bonds and 5-year US treasury inflation protected securities, with the difference comprising of the expected difference in inflation. This reading has increased from 1.86% on November 7th to 2.05% currently. Inflation expectations when anchored actually flow through into actual inflation, if you truly believe prices will be higher tomorrow you are more likely to spend today. Fiscal spending is a powerful tool and hopefully Japan will be able to follow in Donald’s playbook.
With US markets closed on Thursday for the Thanksgiving holidays the focus was on Europe with the notable data release being German GDP. For the third quarter Europe’s largest economy grew at +0.2% as forecast down from +0.4% the prior quarter and year-on-year expanded at 1.5% in line with estimates. Growth was primarily driven by domestic demand which increased to +0.5% from -0.1% previously as government spending rose by +1% and household spending increased +0.4%. Net foreign trade actually subtracted -0.3% from GDP as exports fell more than forecast, down -0.4% vs -0.3% anticipated and imports rose +0.2%. Both capital investment & construction investment remained weak (+0.0% vs +0.3% & +0.3% vs +0.6%) in a sign business investment remains weak, although they improved from the decline the previous quarter.
The German IFO institute also released a number of survey’s overnight with the business climate survey (MoM Nov) remaining stable at 110.4 missing expectation of a slight increase to 110.5. The Current assessment increased to 115.6 more than the 115.0 forecast and future expectations missed with a reading of 105.5 vs 106.0.
These IFO surveys are an important indicator of the German economy’s health and with German being the largest contributor the European GDP (roughly a fifth) it is also an important indicator for the Euro-zone. Overall while the data modestly missed expectations, the business survey is still the highest in nearly two and a half years suggesting confidence remains strong.
Expectations are for a fourth quarter rebound of 0.4-0.5% or +1.9% year-on-year GDP according to the survey with weakness in the third quarter likely to be temporary. This is supported by the Markit Flash PMI report earlier this week that also saw increased new orders, higher employment, wages and costs.
This week we also had the ECB semi-annual financial stability report where it highlighted concerns over economic shock from the Italian referendum and upcoming elections in 2017 in France & Germany. ECB Vice President Vitor Constancio said that “depending on the degree of that shock, then we have to see if we have anything to do or not”. The spread between German & Italian bond yields continues to widen, with the perceived risk around the Italian referendum vs the safe haven benchmark that is German bonds. The yields on German two-year debt fell -3.2 basis points to -0.733% and ten-year yields declined -1.5 basis points to +0.265%. Conversely Italian two-year yields rose +3.2 basis points and the ten-year yield was unchanged at +2.139%.
With the ECB’s bond buying program having distortionary effects on bond yields we look to the euro as a gauge of sentiment. Shown on the second chart below the currency touched the lowest intraday levels since March 2015. Equities markets however managed gains with both the Euro Stoxx 600 & DAX30 up +0.31% & +0.25%.
The third chart below shows the Turkish Lira (inverse) which declined -1.48% against the U.S. dollar overnight despite the Turkish Central Bank hiking interest rates more than anticipated. The market had been forecasting a 25 basis point increase, however the central bank raised it by 50 basis points to 8%. This is certainly a sign as to both how domestic conditions have deteriorated for Turkey forcing the central bank to act. Certainly weighing on the currency are comments from President Erdogan who continues to criticise the central bank, stating “I have nothing against the independence of the central bank, but I cannot allow my people’s will and rights to be taken away with high interest rates”. Comments like this increase the political risk, we do not know what Erdogan will do and we have already seen thousands of arrests following a failed coup earlier this year. The positive note is that the central bank is seen as willing to take the hard decision and act.
In oil news Russian Energy Minister Alexander Novak said overnight that Russia was considering freezing output at current levels despite plans to raise production next year. In an attempt to pass this off as a cut rather than a freeze stating that equated to a cut of 200,000-300,000 barrels per day. Crude Oil prices were little changed as a result, WTI crude gained +0.04% while Brent fell -0.18%.
Locally the S&P/ASX 200 closed flat on Thursday, up just +0.01% however we can expect to take a positive lead from Europe overnight with ASX SPI200 futures up +14 points in overnight trading.
Data releases:
· Japan CPI (YoY Nov) 10:30am AEDT
· U.K. GDP (QoQ & YoY Q3) 8:30am AEDT
· U.S. Advance Goods Trade Balance (MoM Oct) 12:30am AEDT
· U.S. Wholesale Inventories – Preliminary (MoM Oct) 12:30am AEDT
· U.S. Markit Services & Composite Flash PMI (MoM Nov) 1:45am AEDT