Weekly Market Review – June Week 3

The big news for the week is the now historical marker, when Germany’s key benchmark 10 year bond hit zero and went negative at -0.01%. It is a strong indication that central banks are losing control over monetary policy in Europe and worldwide. The European Central Bank has printed massive quantities of notes, negative interest rates, quantitative easing in the purchase of government and now corporate bonds. Yet, economic growth in the Euro-zone remains lethargic.

The other news for the week is that the Federal Reserve Bank (Fed) the equivalent of the central bank in the United States (U.S.), did not raise interest rates in the short term. This was the result of the preceding weeks jobs report, which saw just 38,000 jobs added to the economy in May, when 164,000 was expected. The Fed has indicated that 100,000 is what is needed just to keep pace with population growth. It is the smallest gain since September of 2010. There was also the added concern of the Brexit.

Equity markets around the globe began the week lower, on concerns over the lower level of Chinese investment, rising strength in the Japanese yen, declining oil prices, Brexit, and the worst mass shooting in the history of the United States.

Although Chinese industrial production held firm last month, investment growth is far lower in the face of declining consumer demand and industrial overcapacity. Fixed assets investment is only growing by 7.4%, in comparison to the over 10% rate recorded last year. Rapidly rising corporate debt has become a major issue as well.

The United Kingdom in relation to the wider European Union.

The Japanese yen along with the American dollar have become safe havens for investors. The yen hit a 3 year high against the both the Euro and the United Kingdom (U.K.) pound sterling. The British pound dropped another 1% to a 3 year low against the yen. There are rising concerns about the U.K. leaving the European Union (E.U.) in the referendum next week (the Brexit). The yen also reached a 6 week high against the United States Dollar (USD).

Japan is also running an increasing risk of an investment credit rating downgrade, after the country has once again delayed a planned second national sales tax hike. Higher taxes are seen as a way to combat, the rapidly rising public debt levels in Japan.

Meanwhile, the Bank of Japan keeps monetary policy unchanged and predicts inflation will remain flat or even go negative. This may result in more monetary and fiscal stimulus enacted by the Japanese government over the next year.

Although Japanese households continue to put more equity into stock and bonds, the value of their investments dropped for the first time since 2010. This was due to a stronger yen and weaker stock market. The role of negative interest rates has yet to be determined.

France is bracing for the largest strike to hit the country over government labor legislation.

Opinion polls now indicate a majority of the electorate in the United Kingdom favor a withdrawal from the European Union (Brexit). The highest vote count in favor of leaving is concentrated in England. The voters that wish to remain in the E.U. are to be found in Northern Ireland, Scotland and Wales.

Bank of England Logo

The campaign on the Brexit vote has been suspended, due to the murder of a member of the Labour Party in the Parliament. The death of the representative, could reverse popular opinion for withdrawal from the European Union.

The Bank of England ahead of the Brexit vote leaves the benchmark interest rate at 0.5%, where it has been for the last 7 years.

The Swiss National Bank continues to insist that the franc remains overvalued. This weighed heavily in the central bank decision, to leave interest rates at the record low of -0.75%.

In related news, Switzerland has withdrawn its application for admittance to the European Union.

The European Stability Mechanism (ESM) a Euro-zone emergency fund, agrees to provide new loans to Greece worth 7.5 billion Euros ($8.44 billion USD), to prevent a credit debt default later this summer.

Russia steps up campaign against Syrian rebels this week, by dropping bombs in the face of protests from the United States.

View from the Colonnade, St. Isaac’s Cathedral, Saint Petersburg, Russia

The International Economic Forum is being held in St. Petersburg, Russia this week. There will be 600 representatives from Russia and some 500 foreign companies from 60 countries in attendance. Russian President Putin would like to begin the process of normalization, between the European Union and Russia.

In South America, the news from Venezuela remains grim. Violence is spreading with casualties and mass arrests, due to food riots and looting. The government of President Maduro has announced, that there will be no referendum on his removal this year. This increases the likelihood that there will be a rebellion to topple his government. The key question remains what will the military do?

Vice-President Michel Temer with President Dilma Rousseff

For the first time since he took office in December, Mauricio Macri the new President of Argentina, releases inflation figures. For the month of May, the rise was recorded at 4.2%.

Acting President Michel Temer government in Brazil has been hit by new allegations of corruption, linked to the state oil giant Petrobas.

In corporate news, Disney has opened a new theme park in China at a cost of $5.5 billion USD. The facility over 11 times the size of the original Disneyland in California, joins the other foreign operations of the company located in France, Japan, and Hong Kong.

Gold surged above $1300 USD this week reaching a 2 year high of $1,316.80 an ounce, on the news that the U.S. central bank (Fed) would not raise interest rates now and predictions that lower rates would remain in force longer than expected. Gold prices may even go higher, if the U.K. leaves the European Union. Gold was listed for $1,291.00 USD early Friday morning.

Oil futures began the week lower. More drilling rigs are coming back on line in the United States. This is an indication that American companies can be profitable at the present price level for crude. Iran is also exploring ways to increase output further.

The IEA (International Energy Agency) is predicting that crude oil prices will balance in the second half of 2016, due to rising demand and unexpected supply disruptions. Oversupply is closer to 800,000 barrels in the first two quarters of 2016, rather than the 1.5 million that had been anticipated. However, the continuous glut in oil, will put a cap on further price increases.

On Friday morning, American West Texas Intermediate (WTI) oil increased +2.23% to $47.24 USD. Prices are $2.47 USD lower where they stood from last week. International priced Brent is up by +2.65% at $48.44 USD. This is a $2.70 USD decrease in valuation from the week before.

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