August 16, 2016
With global gold reserves nearly exhausted, can anyone spell Weimar?
From The Guardian: “With global gold reserves nearly exhausted, and prices up by 360% in the past decade, this massive supply-and-demand imbalance has fuelled organised crime syndicates looking for new sources of revenue, researchers say, with the result that Peru and Colombia – the world’s top cocaine exporters – now earn more from illegal gold exports than cocaine exports.”
A portion of today’s note from Art Cashin: That’s Not What The Pundits Suggested – Late yesterday, the Treasury released a report on foreign transactions in U.S. Treasuries. They were clearly net sellers, which is not what the current “search for yield” apostles would suggest.
Our friend, Peter Boockvar, chief market strategist over at the Lindsey Group was quick to note the incongruity in a fast email to some friends. Here’s what Peter wrote:
Just out, for the 3rd straight month in June there was large net foreign selling of US Treasury notes and bonds. In June, foreigners sold $33b worth of notes and bonds after selling $18.3b in May and $75B in April. This brings the year to date selling to $143b, the most on record in any 6 month time frame. This compares to net selling of $20b in 2015 and purchases of $165b in 2014, $41b in 2013 and over $400b in both 2011 and 2012. In notes and bonds, the 2 largest holders, China and Japan were both net sellers. If we include Hong Kong, these 3 regions sold a net $52 of notes and bonds. Japan was a big buyer of bills which more than offset their selling of longer maturities. Looking at Europe and their suffocating problem of negative interest rates, barely any money came into US notes and bonds. They bought a net $950m with an M.
Bottom line, this wall of money that so many have thought has been piling into US Treasuries in order to pick up some yield is not at all evident in this data and in fact, the exact opposite is happening. Maybe it’s the rising cost of hedging the currency and at least for Japan, the massive yen rally for those that don’t want to hedge. Either way, there is a big disconnect between the rhetoric of a massive yield pick-up in the US and the reality of this data. This all said, I look forward to seeing the July data which is post UK referendum vote to see what has changed but $143B of net selling of US notes and bonds year to date thru June is historic.
As to Peter’s comment on the cost of currency hedging, a good example is the U.S. ten year. For a U.S. citizen, they currently yield about 1.50%. After hedging, they would yield a European or Japanese just about zero. Not much attraction there.
Overnight And Overseas – Asian markets saw general profit-taking with India, Hong Kong and Shanghai all seeing mild losses. Tokyo got clocked as the yen rallied – or more correctly – the dollar weakened on dovish sounding commentary from the San Francisco Fed’s John Williams.
In Europe, the U.K. saw a bit of an inflation spike. That’s rather normal, since a plunge in the pound makes imports more expensive instantly, while exports only become more attractive after some time.
The FTSE is down only slightly as buyers in mining and materials stock offset selling in financials. On the continent, banks and financials are in the doghouse again. Autos are also weak.
As noted, the dollar dips on Williams comments. The dollar/yen struggles at that 100 market with no sign of the BOJ stepping in. The pound and the Euro also move up. Both base and precious metals move higher. Crude up again while grains help.
Consensus – The Williams comments are borderline distressing, with hints of tolerating inflation well above 2%. Can anybody spell “Weimar”?
We’ll look again at the resistance band, which by trader lore, nudges up to 2192/2195. Also watch geopolitics. Stay wary, alert and very, very nimble.