The week began with global equity markets in retreat, on fears of further recession growing across the world. It followed the poor job creation performance in the United States released last Friday. Although official unemployment is at 4.9% only 151,000 were created last month, when 190,000 was expected.
The main driver of news this week was again the price of crude and the effect it was having on world markets. On Thursday, rising oil inventories brought American WTI (West Texas Intermediate) to below $27.00 USD (United States Dollar) a barrel.
The American Dow Jones Industrial Average which had opened just below 15,900.00, plunged to nearly 15,500.00 in two hours. This was a drop of 2.38%. The exchange is down near 10% in 2016.
Later in the afternoon on Thursday, the oil minister from the United Arab Emirates hinted that there might be coordinated cuts in production made by OPEC (Organization of the Petroleum Exporting Countries).
This cartel is responsible for 40% of global production of crude. It brought about a slight rebound in oil prices, which had reached lows not seen since 2003. However, it will not last as the reality of oversupplies and lower demand continues.
As of Friday morning, WTI priced oil was down 11% for the week and international priced Brent was down 7%. The price now is at $27.85 USD and $31.52 USD respectively. Prices are down 70% since mid-2014. Overproduction in relation to demand of 1-2 million barrels a day is the main reason.
Commerzbank Tower in Frankfurt Germany
Also this week, there was a huge sell off shares in major European banks. The collapse in crude prices, slower global growth and negative interest rates are to blame. By Friday, buoyed by some positive 4th quarter reports, there was a rebound. German Commerzbank stock rose 15.5%, Italian Banco Popolare was up 10% as was Deutsche Bank.
Asian markets continued down for the week. On Friday, the Japanese Nikkei plunged an additional 4.8%. This exchange has been down for 7 of the last 8 sessions. It is now at the lowest close since October of 2014. It has lost 11% in valuation this week alone.
The market negativity will soon spread to the economy overall, as consumer and investor confidence falls. The yen has also been strengthening against USD (at a 15 month high), despite the recent decision to enact negative interest rates.
Yields on 10 year government bonds in Japan dropped into negative territory this week. At -0.01% it is the first time among the G-7 nations, that the interest rate dropped below zero.
China reported a $99.5 billion USD foreign exchange currency drop for the month of January. It brings their total reserves down to $3.23 trillion USD. This is the lowest level since 2012. The country is using the money to support the yuan, thus slowing the rate of capital flight out of China. Plunging stock valuations and lower projections of growth, have put increasing pressure on the yuan.
Hong Kong
Hong Kong stocks plunged almost an additional 4%. The main exchange is now down 16% for 2016. The valuation of stocks are now at levels, not seen since mid-2012. These events are mostly being caused by a slumping property market and a general slowdown in the larger Chinese economy. There also is a renewed concern about the amount of capital outflows leaving the territory.
Adding to the tension on the Korean peninsula, is the decision by South Korea to begin to suspend operations at the Kaesong Industrial Complex, located in North Korea. It is a response for the weekend rocket launch, made by the North Korean government. The 124 South Korean companies situated there, employed about 55 thousand people. North Korea considers the action an act of war.
Another major development was the price surge in precious metals. Concerns about market imbalance, energy commodities, currency devaluations and fears of recession, caused investors to move towards hard assets like gold and silver.
Gold spiked 5.3% to $1,263.10 USD on Thursday, to a 1 year high on the financial uncertainty. It was the largest daily increase in 7 years. Gold is up 18% in 2016, after 3 years of losses. Silver hit $15.97 USD. Both Platinum and Palladium saw similar increases in price. Gold ends the week at below $1240 USD and silver still below $16.00 USD, but well above $15.00 USD.
Precious metals received additional support from a comment made by U.S. Federal Reserve Chair Janet Yellen this week. She stated she is not willing to take negative interest rates off the table, if circumstance warranted it. The U.S. did raise interest rates in December, for the first time since 2006. Three additional increase planned for this year look increasingly unlikely, given present economic and financial conditions in the United States and globally.
As of 2013, Germany was the third largest exporter and third largest importer in the world, producing the largest trade surplus as a national economy.
In Germany, industrial production fell for a 2nd month in December. Although unexpected the decline of -1.2%, is a sign that the largest economy in Europe is weaker than earlier estimated. The pull back for November was only -0.1%. It was the result of a slowdown in exports. However the German economy overall is growing, due to lower fuel costs and higher consumer spending. Unemployment is now at a record low.
The strength of the German economy permitted the Euro-zone to eke out a growth rate of 0.3% for the final quarter of 2015. It matched the rate achieved in the 3rd quarter. Growth was weaker than expected in both France and Italy.
Swedish Central Bank
The central bank in Sweden is now lowering the key interest rate even further below zero. The new rate will be -0.50% from the previous -0.35%. Authorities there are combating deflation and are also trying to stop the krona from appreciating. Purchases of government bonds will continue as scheduled in 2016.
Russia is exploring the possibility of issuing an international bond issue. It will be the first time since sanctions were imposed by the West, following the annexation of Crimea and the war in the Ukraine. It indicates the growing need for money, as Russia continues with a second year of economic recession. A total of 25 Western investment banks have already been approached.
In the United States, the Supreme Court put on hold enforcement of new regulations that are supposed to address the issue of climate change. This order will remain in force, until all legal challenges are resolved. It will be for the next U.S. president to decide how to proceed, pending the court cases.
Also in the United States, President Obama presents a $4.1 Trillion USD federal budget for 2017. It calls for assistance in helping Puerto Rico restructure debt, but will also require future oversight of finances for the island commonwealth.
The Zika virus is spreading this week, with the first confirmed case in China. The traveler had returned from a trip to Venezuela. The virus is also spreading in a number of areas of the United States as well. The WHO predicts that at least 4 million individuals are likely to contract the contagion, with most of the victims to be in Latin America.
The Investment Newsletter had 5 target fills to report this week.
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