REUTERS/ K. Sathya Narayanan

Gold slips 1% ahead of U.S.-China trade deal

January 13, 2020

“Gold prices fell 1% on Monday as optimism in equity markets ahead of the signing of an interim U.S.-China trade deal and lack of further escalation in Middle East tensions diminished bullion’s safe-haven appeal. The U.S.-China Phase 1 agreement is due to be signed at the White House on Wednesday. Spot gold dipped 0.7% to $1,551.25 per ounce as of 1101 GMT, having fallen 1% to $1,546.27 earlier in the session. U.S. gold futures fell 0.5% to $1,552.10.

‘We are struggling (a) little bit with the details. It’ll be quite interesting to see if there is any concrete guidance in the details of the phase-one deal,’ said Julius Baer analyst Carsten Menke. ‘Also, the news that the Chinese and the U.S. would meet on semi-annual basis to discuss trade, I imagine was something which wasn’t expected by the market, and could be weighing on gold.’ A Wall Street Journal report said on Saturday Washington and Beijing had agreed to semi-annual talks aimed at pushing for reforms in both countries and resolving disputes. The positive sentiment ahead of the planned signing boosted global equities, which were hovering just below record levels.

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USA TODAY/Jessica Menton

Stock market shakes off Iran jitters, but investors be in for a bumpy ride in 2020

January 13, 2020

Stock Market Shakes Off Jitters“The stock market has shaken off its jitters over Iran, but analysts say investors could still be in for a bumpy ride this year.  Stocks are back near records, after Iran’s missile attacks sent futures tumbling Tuesday evening. Major averages rebounded midweek after President Trump said the U.S. doesn’t seek a war with Tehran. As investing pros looked ahead at the end of last year, they saw a 2020 full of uncertainty — something investors hate — because of trade tensions with China and a presidential election in the U.S. Now hostilities with Iran have thrown another unsettling element into the mix.

‘Investors have to stay the course because it will likely be a volatile year,’ says Ephie Coumanakos, co-founder of Concord Financial Group. Investors are turning their attention to a series of events this week that could serve as the next catalysts for volatility. A ‘Phase 1’ trade accord with China is expected to be signed, but the two sides haven’t finalized a deal yet. Earnings season, meanwhile, kicks off with several large banks like JPMorgan Chase, Wells Fargo and Citigroup reporting financial results. The conflict with Iran will likely have little impact on companies’ bottom lines, but corporations will need to show profit growth to justify high stock valuations, analysts say.”

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Gold may gain up to 10 per cent this year as geopolitical risks, lower US interest rates push price to US$1,700, say analysts

January 12, 2020

Gold May Gain Up to 10“The tentative easing of tensions in the Middle East in the second half of last week caused the price of gold to pull back from a seven-year high. But analysts see further gains in store for the yellow metal this year, with US$1,700 per ounce achievable on the back of sustained geopolitical risks and lower US interest rates. On Friday spot gold was quoted at US$1,547.51 per ounce, having lost almost 2 per cent over the previous three days from a peak of US$1,574.37 per ounce on Tuesday. Fuelling gold’s spike early last week was a rush to the traditional safe haven asset after Iran fired at least a dozen missiles at military bases in Iraq that hosted American personnel, in retaliation for the US’ assassination of its top general, Qassem Soleimani, on January 3.”

“ING recently revised up its 2020 forecast for gold to US$1,500-1650 per ounce from US$1,500 per ounce, in light of the heightened geopolitical risks from the Middle East. Warren Patterson, ING’s head of commodities strategy, said the attacks will continue to weigh on investors’ minds. ‘While it appears that there has been something of an easing in tensions, we believe market participants are unlikely to forget about these risks any time soon,’ said Patterson. ING expects the Fed to cut the short-term federal funds rate in April, which will send the real yield of US treasuries lower. This will provide further support for gold … Jasper Lo, an independent market commentator, said he would not be surprised to see gold hitting US$1,700 per ounce in 2020, echoing a call made earlier last year by billionaire investor Paul Tudor Jones, founder of macro-trading hedge fund firm Tudor Investment.”

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BLOOMBERG/Andrew Atkinson and Lucy Meakin

U.K. Economy Unexpectedly Shrinks Amid BOE Rate-Cut Debate

January 13, 2020

UK Economy Shrinks“The U.K. economy unexpectedly shrank ahead of the general election, casting doubt over whether there was any growth at all in the fourth quarter. The figures will add to concerns at the Bank of England, where officials are debating whether further stimulus is needed if economic weakness persists. Three policy makers, including Governor Mark Carney, have flagged the possibility of an interest-rate cut in the past week, sending the pound lower and sparking an increase in market bets on a move as soon as this month.

Gross domestic product fell 0.3% in November, missing forecasts for unchanged output on the month. It means growth of around 0.2% was needed in December to prevent the economy contracting in the fourth quarter. The figures reflect caution in the run-up to the December election, with the dominant services industry contracting 0.3% — the biggest decline since early 2018. Overall economic growth of 0.6% from a year earlier was the weakest since mid-2012. The pound fell for a fifth day against the dollar, dropping as much as 0.8% to $1.2966. Gilts rose, led by shorter tenors, and five-year yields fell to the lowest since early December. Carney said last week that the BOE has plenty of policy room to act if necessary, and officials Silvana Tenreyro and Gertjan Vlieghe warned they could join two other colleagues calling for cheaper borrowing costs.”

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China is worried about unemployment. What it’s doing to avoid mass layoffs

January 13, 2020

China is Worried“The Chinese government wants to do whatever it can to protect the economy in 2020. It’s got an enormous task ahead of it. Beijing has made clear that the world’s second largest economy cannot spiral into a slump and risk mass layoffs as it tangles with rising debt, cooling domestic demand and an ongoing trade war with the United States. That’s particularly important this year because it marks the conclusion of the government’s 13th Five-Year Plan, during which it promised to establish a ‘moderately prosperous society’ and end poverty. Senior members of the Communist Party’s Politburo — the seven most powerful men in China — said last week that all efforts must be taken to achieve those goals in 2020.

In recent weeks, the government has bombarded the economy with a wave of stimulus measures, from tariff reductions that could help soothe the pain from rising prices, to rate cuts that could fuel more bank lending. Authorities are also amping up the language they’re using to describe the situation. China’s State Council last month called on local governments to ‘go to all lengths’ to prevent massive job losses this year — what it characterized as the country’s top policy priority.

The chief administrative office even warned that the country could face ‘massive unexpected incidents’ if unemployment balloons — a euphemism in China widely understood to refer to social unrest and riots, and one that is rare in public government documents. In recent years, the government has said it has to create 11 million new jobs annually to keep employment on track.

While China’s official unemployment data has barely budged over the last several years, hovering between 4% and 5%, Beijing’s messaging suggests that it is unusually worried about the slowing economy and the challenges that the year could bring.”

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Mountain of risky corporate debt poses ‘stability concern’

January 8, 2020
Mountain of Risky Corporate Debt“Researchers at the Federal Reserve Bank of New York said that an increase in sales of riskier corporate debt poses a ‘financial stability concern’, noting that an economic downturn could force investors to dump assets en masse. The research, published on the New York Fed’s Liberty Street Economics blog, reiterated fears aired by policymakers and investors over rising corporate borrowing. A decade of low interest rates has encouraged companies to binge on cheap debt, increasing leverage and dragging down credit ratings.

Just two companies in the US — Johnson & Johnson and Microsoft — still have a pristine, triple-A rating, the researchers noted. While sales of both the safest, triple-A rated bonds and the riskiest ‘high-yield’ bonds have been declining over the past five years, there has been a dramatic rise in the amount of triple-B rated bonds that sit on the lowest rung of the investment-grade ladder, just above high-yield. Investors and analysts worry that if economic conditions falter, downgrades of triple-B rated debt could trigger fire sales from investors whose mandates forbid them from holding high-yield bonds. ‘Bonds that are already declining in price because of a deteriorating credit outlook can face further stress from the associated selling pressure … The possibility of a large volume of corporate bond downgrades poses a financial stability concern,’ wrote the researchers.”

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