Stocks Slide as Trump's Trade Threat Reverberates: Markets Wrap
Treasuries jump on haven demand after threat to hike tariffs
Yen strengthens agains most major peers; Oil pares declines
Equities slumped globally and Treasuries rallied after President Donald Trump’s threat to increase tariffs on Chinese imports called into question the chances of a resolution to the trade war.
The S&P 500 index tumbled by the most since March, signaling a potentially punishing week on Wall Street after Trump tweeted a plan to hike tariffs this coming Friday. From JD.com and Skyworks to Apple and Caterpillar, tech companies with China exposure and machinery companies -- which are seen as proxies for the trade war -- were among the biggest decliners in early trading. The VIX gauge of stock volatility headed for its biggest increase this year.
“The key question for investors is whether this is simply aggressive posturing in the hopes of securing greater concessions or something that could truly scuttle any brewing trade deal,” said Alec Young, managing director of global markets research for FTSE Russell. “Stocks have largely discounted a trade agreement, and therefore a total breakdown in talks could fuel much greater equity volatility.”
Commodities were roiled. Cotton and corn futures slumped, while soybean contracts headed toward their largest drop in about nine months. West Texas Intermediate oil futures declined as much as 3.1 percent before erasing most of the drop as Saudi Arabia cut June pricing for all crude grades to the U.S., a move that appeared to be aimed at easing concern over supplies.
As some investors sought safer assets the yield on benchmark Treasuries fell the most in almost two weeks. European government bonds and the euro held steady as economic activity in the euro area showed signs of stabilization. Equities in the region slid, tracking a sell-off across much of Asia. Shanghai’s benchmark index tumbled 5.6 percent, even after Chinese state-backed funds were said to have been active in an effort to limit the damage.
Seeking to ramp up pressure on China for more concessions, Trump threatened in two tweets to more than double tariffs on $200 billion of Chinese goods and impose a fresh round of duties on top of that. Talks to resolve the year-long trade standoff appeared to be on life-support Monday, with Beijing struggling to fully respond. China’s foreign ministry said that officials were still planning to travel to the U.S. for the next round of negotiations, but it was unable to confirm when amid signs that a delay is now being considered.
“Escalation like this means we are certainly further away from the end of this negotiation process than we thought,” said Arthur Hogan, chief market strategist at National Securities Corp. “The three things that have been driving this market higher this year have been the pivot by the Fed, better than feared earnings, and the belief that we would get a trade deal done sooner rather than later.”
Adding to a complex global picture, North Korea carried out a weapons test that potentially included its first ballistic missile launch since 2017, challenging Trump’s bottom line in nuclear talks.
Elsewhere, Turkey’s lira weakened past six per U.S. dollar, touching its lowest level in almost seven months as a possible repeat of the March Istanbul mayor’s election hung over the market and added more pressure to emerging-market currencies.
Why the World's Central Banks Are Going Gaga Over Gold
The world's central banks are snapping up the metal at the fastest rate in almost half a century in a trend that looks poised to continue.
Simon Constable May 6, 2019 9:52 AM ED The Street
Central banks are going gaga over gold.
They are snapping up the metal at the fastest rate in almost half a century in a trend that looks set to continue.
Over the 12 months through March 31, they purchased a whopping 715.7 metric tons of gold bullion worth around $29.4 billion, according to a recently published report from the industry group World Gold Council.
"In all likelihood, we expect another strong year," says Alistair Hewitt, director of market intelligence at WGC in London.
He notes that the volume of gold purchased by such institutions over the most recent four quarters was higher than for any calendar year since 1971. That was when President Richard Nixon pulled the U.S. off the gold standard monetary system at a time when gold was worth $35 a troy ounce.
Gold was recently fetching around $1,278 an ounce, down from the year's high of $1,341 reached on February 19. Prices for the SPDR Gold Shares (GLD - Get Report) exchange-traded fund, which holds bars of solid bullion, have moved similarly.
The likely continued buying of the metal should also help lift gold mining stocks such as those held in the VanEck Vectors Gold Miners (GDX - Get Report) ETF, which holds a basket of gold mining shares that tend to benefit when the price of the metal rallies.
Emerging Markets Driving Demand
Central banks in emerging markets countries such as Russia are driving the push to buy more gold and diversify away from holding U.S.
dollars. They started snapping up more of the metal in earnest just after the financial crisis of 2008-2009, reversing a trend of ditching the metal.
"This is part of a trend that began as long ago as 2010," says George Milling-Stanley, head of gold strategy at Boston-based asset management company State Street Global Advisors. "That was when central banks switched over from sales to net purchases."
In 2018 central banks purchased 657 tons of bullion, up from a mere 79 tons in 2010, according to the WGC report.
Milling-Stanley says that many countries in the developing world feel that they have far too many U.S. dollars in their reserves and they want to diversify by increasing their holdings of bullion.
"This buying is going to continue according to the emerging markets central banks that I talk to," he says.
Another WGC report shows that central bank holdings in the developing world are far smaller than in much of the developed world. For instance, three-fourths of the U.S. reserves are held in gold, while Germany holds seven-tenths of its reserves in bullion, WGC data shows.
Compare that to Russia, the biggest central bank buyer of the metal in the first quarter of the year, where gold amounted to 18.5% of the country's reserves. The figures for China and India are 2.5% and 6.3%, respectively.
"They certainly want more gold across the board in emerging markets," says Milling-Stanley.
Better than just buying the metal, he says that these government banks aren't sensitive about prices. They will buy whether the price is high or low, at least once they've decided to accumulate more bullion for their country.
"They make the decision and they stick with it," he says.
If the demand for gold from central banks continues, that should be good for the gold market because it all but guarantees that a significant portion of the annual supply of the metal will get taken off the market each year.
The 657 tons purchased by national central banks and similar institutions last year accounted for 14% of 2018's total supply of gold, which comes mainly from mines and metal that gets recycled from used electronics and jewelry.
This year, central bank buying demand could be just as good if not better than it was in 2018.
"By the look of the figures they could repeat that or even surpass it this year," says Milling-Stanley. "That is a very welcome development for the gold market as a whole."
Jeffrey Gundlach Sees Better Than 50% Chance of Higher China Tariffs
By John Gittelsoh May 7, 2019, 9:41 AM PDT Updated on May 7, 2019, 10:05 AM PDT
U.S. deficits and debt are ‘out of control,’ he says
DoubleLine’s money manager says U.S. economy is ‘rudderless’
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, sees a better than 50 percent chance that there will be an increase in U.S. tariffs on China.
“We’re going to keep seeing more tension” around trade issues, Gundlach said in an interview on CNBC Tuesday.
China’s top trade negotiator Liu He will travel to the U.S. this week for high-stakes talks as prospects dimmed for maintaining a fragile truce after President Donald Trump threatened to raise tariffs on Chinese goods starting Friday.
Global markets have been roiled amid mounting U.S.-China trade tensions and comments last week by Federal Reserve Chair Jerome Powell.
Other comments by Gundlach included:
U.S. stocks are in a bear market because they haven’t returned to last year’s highs.
The U.S. debt and deficit are “out of control” because they’re growing during a strong economy, leaving little room to maneuver.
Fed’s Powell, during his last press conference, “looked scared.” The U.S. economy is “rudderless,” Gundlach said.
Gold should be about 15% higher over next year: Mark Matthews, Julius Baer
Economic Times May 7, 2019
For next three years, I would focus attention more on US markets, says Matthews
There is a case for diversification away from dollars and the central banks are doing that. One of the things they are diversifying into is gold, said Mark Matthews, MD, Julius Baer, in an interview with ETNOW.
What is going on between US and China? We are back to square one after all that optical illusion of a truce?
I do not know. We just have to wait until Friday. If on Friday there is a deal, the markets will recover and if there is not, then are going to go down. But from what I can read, it seems like China had back-paddled that is the way the Americans are putting it on several things they had already agreed to. The reason seems to be that they felt after the success of their Belt-Road Forum in Beijing two weeks ago where 40 heads of state attended and there was a really big deal that they should not bow to the US as they are a big important country and drive global growth. So, a harder position emerged out of China after that. I do not know. I do not think anybody really knows but all I can say is we will have to wait until Friday to know what is going to happen.
Global bulls seem to be enjoying a sugar rush. It could be linked to the general liquidity environment. It could be linked to a smart rally in the bond market or this purely could be market repositioning after a poor 2018. Do you think this will continue irrespective of what is going on in the world?
It depends on two things – the first is related to what you said in the beginning. The liquidity rush which is still very much in place with low interest rates and low bond yields as a result of the Federal Reserve and subsequently the ECB and BOJ and all the other central banks of the world becoming more dovish, that is point number one. That will probably remain the case as much as Jerome Powell said that inflation is transitory. I do not think inflation is going to come back up very fast in the second half of this year. I could be wrong but I do not think that Fed will be raising rates. At least, they will be keeping them stable and that is supportive for equity prices because if rates stay low, what are you going to do with your money? You get hardly anything in the bank these days.
Second, the trade war. I wish I could tell you what I think the outcome is going to be of that. It certainly is in both sides’ interest to find a solution, but from what I can read, there seem to be many things they disagree on, If they are unable to build a bridge, then we could be looking at no trade deal on Friday and that would take the market lower.
Where do you stand when it comes to metals? It is a fairly cyclical sector.
On the industrial metals we do not really like any and we think the market is in balance. There has been some supply disruption coming out of Brazil and Australia in iron ore but on the other hand, there seems to be a bit of a global slowdown going on. We think there is a balance there. Precious metals are more interesting and it is one of the few places in commodities where we do have a bullish view on gold. Gold should be about 15% higher over the next year and the basic reason is that eventually the US dollar is going to stop going up.
At the same time with all these trade wars and confrontations between major powers of the world, Russia, China, the United States, there is a case for diversification away from dollars and the central banks are doing that. One of the things they are diversifying into is gold. I would say we like gold in the commodity space.
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Humans are made of gold — silver and platinum too
PRABHJOTE GILLMAY 8, 2019, 17:09 IST Business Insider
A new discovery by two astrophysicists tells us that everyone on Earth has a little bit of gold, silver and platinum in them.
The explosion between two neutron stars 4.6 billion years ago gave Earth 0.3% of its precious metals.
If such an explosion were to take place today, the radiation would ‘outshine the night sky’.
Billions and billions of years ago, before the world even existed, a collision between two neutron stars gave the Earth its most commercially precious metals — gold, silver, platinum and uranium.
The existence of such a cosmic event also means that everyone on Earth has a little bit of these elements in them according to Szabolcs Marka from Columbia University and Imre Bartos from the University of Florida, who made the discovery.
A collision between the stars took place around 1,000 light years away from where Earth is currently located. The ensuing fire forged the 0.3% of the Earth’s heaviest metals according to two astrophysicists who reported their findings in the May 2 issue of Nature.
They assert that if such an explosion was to take place today rather than 4.6 billion years ago, the radiation would ‘outshine the entire night sky’.
Scientists knew that a collision between two neutron stars can produce heavy metals in 2017, when a collision 130 million light years away — an event labeled GW170817 — occurred.
But this is the first time that the origin of heavy metals on Earth, specifically, has come to light.
Bartos and Scazbolcs analysed radioactive isotopes from early Solar System meteorites to find an element called actinides — heavy elements that have protons, or atomic numbers, between 89 to 103.
And, since these isotopes have a half life — which means there’s only a 50% chance that an atom will have undergone nuclear decay — the astrophysicists used the actinides to reconstruct how abundant the elements were during the early Solar System.
Ending up on Earth
In order to determine when exactly the collision took place, they had to run simulations until they found one that fit — 100 million years before the Earth came into existence; 1,000 light years from the Solar System. But it was still inside the Milky Way, when the gas cloud was still shaping the Solar System as we know it.
Since the event took place such a long time ago, there isn’t much of it left to find.
Even so, Marka says, “Our results address a fundamental quest of humanity: Where did we come from and where are we going,” explaining further, “It is very difficult to describe the tremendous emotions we felt when we realised what we had found and what it means for the future as we search for an explanation of our place in the Universe.”
Where did mankind come from and where is it going, is one the most elemental questions which science has been trying to answer. Even Dan Brown’s most recent novel, Origin, has a brilliant computer scientist running simulations to determine how life came into being.
24 Hours After Talking to Einhorn and Gundlach About Gold, I’m Still Shaking
Neils Christensen Tuesday May 07, 2019 15:57 Kitco
It has been almost 24 hours since the 24th annual Sohn Investment Conference wrapped up and I am still shaking.
Not only did I get to listen to the Titans of the investment sector but for a few brief moments I also got to walk among them and even talk to two heavy weights in the gold industry. First I saw David Einhorn, the founder of Greenlight Capital. Through the throngs of people surrounding him I managed to ask him one question: “What are your thoughts on gold?”
His response: “I hold gold, and I am never going to get rid of it. I hope that I never have to use it.”
It was a simple reply, but I think makes a lot of sense in the current environment where interest in gold is waning as investors chase over-valued stocks. Einhorn’s message is one that many market analysts have been saying since last year that: as part of a diversified portfolio, investors should have some exposure to gold.
His comment also reiterates his company’s current gold position. Physical bullion is one of the firm’s largest holdings, but is something Einhorn won’t be talking much about any more.
“We continue to own roughly the same amount of gold but have decided to exclude macro positions from our list of largest disclosed long positions now and going forward to be consistent with our monthly attribution reports,” he said in his first-quarter letter to investors.
The second conversation I had at the Sohn reception was with Jeffrey Gundlach, founder of DoubleLine Capital. He also expressed a long-term affinity for the yellow metal.
Gundlach’s response to my question: “I love gold. I have owned gold since it was trading at $300.”
Lately Gundlach has been a little more aggressive on gold after he turned outright bullish in August. In an interview with Barron’s at the start of the year, the hedge fund manager said that he likes gold as he expects the U.S. dollar to weaken. He also sees an opportunity for the mining sector.
“Gold and commodities broadly should benefit this year, although I worry about the economic scenario for industrial commodities,” he said in the interview. “To be aggressive, you could buy the VanEck Vectors Gold Miners ETF [GDX]. It is a leveraged play on the price of gold. That is what I recommend.”
Although it was only a five minute-conversation, it has stuck with me for the past 24 hours.
Moving past gold, I was also personally moved by a presentation by Spencer Glendon, founder of Probable Futures who talked about the impact that rising global temperatures and melting ice in Antarctica, pushing sea levels higher, are having on the global financial systems.
“Civilization is built on climate stability,” Glendon said. “We are moving rapidly towards instability.”
Glendon recommended investors short real estate and long-term global growth, or advocate for better environmental regulations and promote the use of clean renewable energy.
On a final personal note, I just wanted to thank the Sohn Foundation for putting on another incredible conference. For anyone who hasn’t experienced this event, all I can say is that it is incredible.
In the last 24 years it has raised almost $90 million for pediatric cancer research. We have all witnessed how the foundation has touched the lives of countless families and children so for that I would like to give them my thanks.
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