Dear PGM Capital Blog readers,
As can be seen from below figure, in a referendum called "BREXIT", held on Thursday June 23, approx. 51,9 percent of the people of the United Kingdom has voted in favour of Great Britain to leave the European Union, shocking the world and revealing a divided country.
That means that in the coming months, British and European leaders will begin negotiating the terms of Britain's departure.
After a lengthy and bad-tempered referendum campaign, Britons voted to sever the country’s 43-year membership of the EU, sending tremors across Europe and triggering financial market turmoil across the globe.
A COUNTRY DIVIDED:
A closer look at the Brexit Vote reveals a country down split down in the middle, a nation divided sharply along generational, educational and regional lines as can be seen from below charts.
MARKETS DOWN WORLD WIDE:
Markets were caught completely off-guard as the first results landed. In a frantic day of trading, the pound dived to a 30-year low against the USD-Dollar, setting a record intraday swing of more than 10 percent between its high and low points as can be seen from below chart.
The UK, FTSE 100 slumped 8.7 per cent on opening before trimming losses to 3.15 percent at the close of the trading day as can be seen from below chart.
Bank stocks took a hammering, with Lloyds down 22 percent, Royal Bank of Scotland down 18 percent and Deutsche Bank falling 17 percent.
The Euro Stoxx bank index fell 17 percent, back to levels last seen at the depths of the eurozone debt crisis in August 2012.
German DAX-30, and Japan Nikkei-2015, tanked respectively with 6.82 percent and 7.92 percent as can be seen from below charts.
USA stocks finished a bruising trading session with the benchmark S&P 500 sliding 3.6 percent to 2,037, as can be seen flow below chart, which was its steepest one-day decline since August of last year.
The US dollar posted one of its biggest rallies on record, and the yield on the 10-year US Treasury dropped 18bps to 1.57 per cent.
Gold prices soared to a two-year high on Friday, after Britain’s decision to leave the European Union sent investors flooding into safe-haven assets.
As can be seen from below chart Gold for August delivery settled up 4.43 percent at US$1,319.10 a troy ounce on the Comex division of the New York Mercantile Exchange, its largest one-day gain since September 2013.
The precious metal traded as high as US$1,362.60 in electronic trading following the decision, and closed at its highest level since August 2014 as can be seen from below chart.
PGM CAPITAL ANALYSIS AND COMMENTS:
Impact for the UK
In the meantime, while writing this article, credit ratings agency Moody's has downgraded the UK Government's bond rating from stable to negative in light of Britain's decision to leave the European Union.
The agency warns that Britain's economic growth will be weaker, its economic policymaking may be diminished and the government's fiscal strength reduced.
In a statement Moody's said:
"Expects a negative impact on the economy unless the UK government manages to negotiate a trade deal that largely replicates its current access to the Single Market"
The record, almost 9 percent slump in the pound on Friday has raised fears that UK inflation could spike (as imports will cost more).
We believe that a year from now, when the emotions have fade, the British economy will be weaker, inflation and unemployment will be higher, house prices will probably be lower and some prominent firms will have left London for other European capitals.
It’s possible the UK will end up better off down the road, as Brexit supporters claim, since the country will no longer be bound by arcane EU rules dreamed up by unelected bureaucrats in Brussels. But that will come, if at all, only after several years that seem likely to be painful for Brits and especially for the working-class voters who were the most ardent supporters of Brexit.
The IMF warned that leaving the EU, would hit British living standards, stoke inflation and wipe up to 5.5% off GDP, and financial insiders and analysts are already predicting a recession and a market shock that could last for years.
Its almost 48 hours, since it first became clear that David Cameron’s EU referendum had not gone as the PM had planned.
That result of the Brexit vote has triggered one of the most dramatic, volatile and downright scary trading sessions in the last decade, estimated to has wiped out over two trillion dollars of market value, worldwide.
The exit of Britain out of the EU has also increased the chances of a hard world wide global recession, for which reason, all major global markets closed Friday, June 24 deeply in the red.
Based on this we believe that politicians and central bankers will do their utmost to avoid this recession, which has the potential of becoming a depression, by lowering interest rates to near zero or even negative and by introducing more stimulus and quantitative easing programs.
These measures will put an upwards pressure on the the price of Gold and other precious metals.
The PGM Index and Brexit:
Since 2013, we have warned our readers that the Global Economy is very fragile and the so called recovery is a fake only kept alive by an artificial life line of low interest rates and money printing.
Due this we have advised our readers to seek the safety by investing in physical Gold and other precious metals.
Due to this our readers would be wondering how did the PGM Component 50 Index has performed on Black Friday, June 24, 2016.
As can be seen from above chart, the PGM Component 50 Index, which for 52 percent consists out of investments in precious metals, was up today with 0.45 percent and is YTD up 27.7 percent and has beaten al major global markets.
Until next week.
Dear PGM Capital Blog readers,
In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of June 16, 2016:
- Germany's 10-year sovereign bond yield turn negative for the first time.
- The USA FED Surrenders.
- Gold closed the week at 22-month high.
GERMANY'S 10-YEAR BOND YIELD TURNS NEGATIVE FOR THE FIRST TIME:
Germany's benchmark 10-year Bund yield, the benchmark for borrowing costs across the euro zone, fell into negative territory on Tuesday, June 14, 2016 for the first time, as nervous investors try to park their money in safe-haven investments.
Bond yields in Europe have been sliding for a year, weighed down by aggressive central-bank bond buying, negative short-term rates and skepticism about an economic recovery that seems persistently to falter.
But the catalyst for Tuesday’s drop into negative territory appeared to be a mounting concern among investors that Britain might quit the European Union.
Due to This, the 10-year German bund yield closed on Tuesday, June 14, at minus 0.008%.
Based on this, investors will now have to pay Germany, eight Euro cents a year, for a decade, for every thousand Euro lent to them.
Other countries with debt also perceived as safe - the U.S., Japan, and, interestingly, Britain - all also saw their government-bond yields fall. Falling yields mean rising prices.
THE USA FED SURRENDERS:
The USA Federal Reserve officials, at the end of the FOMC meeting of Wednesday, June 15, held interest rates steady while noting that economic data over the last six weeks had been mixed.
On the downside, Fed officials noted that job gains had diminished and business fixed investment had been "soft." The central bankers also pointed out that market measures of inflation had declined.
Federal Reserve Chairwoman Janet Yellen on Wednesday cast doubt on a significant interest-rate increase in the near future, saying turmoil in global markets and a sluggish U.S. economy will likely keep rates low.
Against this backdrop, the FED decided to maintain the target range for the federal funds rate at 0.25 to 0.5 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
The FOMC vote holding the target fed funds rate steady at 0.25%-0.5% was unanimous, which reflects the genuine risks to growth of the USA Economy.
GOLD AT 22-MONTH HIGH:
As can bee seen from below chart, Gold, the ultimate safe haven, closed on Friday June 17, at US$1,298.19 per Troy ounce, its highest closing level since August 18, 2014, following the decision by the Federal Reserve late Wednesday to keep rates unchanged, while concerns continue to grow over a possible British exit from the EU.
The bullish impact of the Fed's decision to leave rates unchanged and the tone of the statement are near-term gold bullish.
PGM CAPITAL ANALYSIS AND COMMENTS:
Negative German bond yield:
German bonds are considered a safe bet during turbulent times, because of the very low risk that Europe's biggest economy would default on its debt.
You can rely on the Germans not to go on a borrowing spree and fritter away their savings due to this German bonds are a place to wait out the storm. Below chart shows a decreasing yield of the 10-year German bond as the demand for it increased for the reasons as mentioned here above.
But the threat of a Brexit isn't the only reason behind the recent market move.
Bond yields in Germany - and many other countries - have been sinking for years thanks to low inflation, low economic growth and low interest rates.
Investors seeking a safe investment have seen their options erode, as credit agencies lower their ratings on a range of debt issued by companies and countries. That's pushed investors to clamor for the few remaining "safe" bonds with the best ratings.
The Federal Open Market Committee, which had been insisting for months that the economy is healthy enough to take rising rates, capitulated on Wednesday and signaled slow economic growth as far as their eyes can see.
Based on this the Fed has decidedly left rates unchanged. To our expectations, we had assumed the Fed would remain somewhat hawkish regarding the status of the economy. This, however, did not turn out to be the case as the Fed became even more dovish, dialing back their rate hike assumptions for 2016 and 2017.
We don't think any one expected a rate hike with the pending Brexit vote and the weak jobs number. However, the Fed's credibility has become questionable at best and here we will examine some of this disconnect.
We believe that the FED and other Central Banks in the West are ChessMate and that the markt knows it, for which reason Gold and other precious metals are set to become the biggest beneficiaries of BREXIT, negative Interest Rates and all other crisis that are looming in the coming 3-4 years.
Due to this Investors should fasten their seat bells and prepare for a very rough ride for the coming 6 - 24 months.
The PGM Component 50 Index, which heavy weighted with precious metals and other wealth preservations securities, has beaten all mayor markets year to day as can be seen from below chart.
Due to this we have proven to be your trusted partner in these turbulent times.
The last four year, via several interviews and blog articles we have been warning investors, of turbulent times ahead and that Gold and other precious metals are the only insurance against it.
Based on this the following quotes of Warren Buffet might be applicable.
“Time is the friend of the wonderful business, the enemy of the mediocre.”
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
John Maynard Keynes;
"The market can stay irrational longer than you can stay solvent".
Until next week.
Dear PGM Capital blog readers,
On Friday, June 3, 2016, the USA Bureau of Labor Statistics reported that the country's economy only added 38,000 nonfarm payrolls jobs in May, well below the 160,000 gain anticipated by analysts. The increase was the smallest registered since early 2010, when the US economy was losing jobs.
On top of this, the change in total nonfarm payroll employment for March was revised down from +208,000 to +186,000, and the change for April was also revised down from +160,000 to +123,000.
Highlights of May USA Job report:
- The number of persons employed part time for economic reasons (also referred to as involuntary part-time workers) increased by 468,000 to 6.4 million in May.
- Health care added 46,000 jobs in May, with increases occurring in ambulatory health care services (+24,000), hospitals (+17,000), and nursing care facilities (+5,000). Over the year, health care employment has increased by 487,000.
- In May, mining employment continued to decline (-10,000). Since reaching a peak in September 2014, mining has lost 207,000 jobs. Support activities for mining accounted for three-fourths of the jobs lost during this period, including 6,000 in May
- In May, the civilian labor force participation rate decreased by 0.2 percentage point to 62.6 percent as can be seen from below chart.
- Below chart shows that labor force participation rate has declined by 0.4 percentage point over the past 2 months, offsetting gains in the first quarter of this year.
As can be seen from below chart, the dollar slumped versus major rivals on Friday, with the euro rising to its highest level versus the U.S. currency in three weeks after official U.S.
More negative news for the dollar followed when the Institute for Supply Management’s services index came in at 52.9% in May, down from 55.7% in April, driving the dollar even lower.
It was the US-Dollar worst weekly performance against both the euro and the yen since April 29, with the euro gaining 1.8% against the dollar while the buck shed 2% of its value relative to the yen.
PGM CAPITAL ANALYSIS AND COMMENTS:
As can be seen from below chart, since February of this year, the job creation capability of the USA Economy is showing a decreasing trend.
On top of this when we go under the hood of the job creation myth of the USA Economy we see that since 2007 the USA Economy has created 1.6 million low-paid bartender and waiters jobs, while at the other hand it has lost 1.5 high paid manufacturing jobs as can be seen from below chart.
It is also worth mentioning that, the number of Americans not in the labor force surged to a record 94.7 million, an increase of 664,000 in May.
The weak US jobs data contaminated USA and European bourses, sending them firmly into the red by close, with the The FTSE-100 as the only exception as can be seen here below:
- DOW-30: -0,18%
- AEX-25: -0,51%
- FTSE 100: +0.39%
- DAX-30: -1.07%
- CAC-40: -1.07%
It has become increasingly clear that the rate hike in December was implemented just to save face for the Federal Reserve, and it is even more clear that the economic situation in the USA is far from bright and sunny, with the consequence that the disappointing May jobs report immediately clouded the possibility of a Fed rate hike in June or July.
The weak jobs data helped boost gold prices and gold miner stocks for a number of reasons:
- The data led to a big drop in Treasury yields which makes gold more attractive since it doesn’t offer a yield.
- Lower yields pushed down the value of the U.S. dollar relative to other currencies which helps lift the price of commodities that are priced in dollars; the lower the price of the dollar, the more dollars you need to buy the same amount of gold
- A slowdown in the U.S., which has been the bright spot in an uncertain global economy, makes a rate hike of the FED more uncertain and could make safe-haven assets, like gold, more attractive.
Based on this gold prices surged on Friday with US$ 34.00 an ounce (+2.81%) to close the week at US$ 1,243.80 an ounce as can be seen from below chart.
Based on the sharp bounce of the price of gold, gold miner stocks soared Friday, with the sector enjoying its best day in 7 1/2 years.
As can be seen from below chart, the "VanEck Vectors Gold Miners exchange-traded fund" (NYSE: GDX) shot up 11.2%, marking the best one-day percentage gain since November 21, 2008, in the midst of the Great Recession.
Until next time.
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