REUTERS/ K. Sathya Narayanan

Gold eases off 3-week peak as equities sell-off pauses

January 28, 2020

“Gold edged down on Tuesday from the previous session’s near three-week high as equities regained some ground, but concerns the coronavirus outbreak could impact the global economy cushioned safe-haven bullion’s losses.  Spot gold was down 0.2% to $1,578.13 per ounce as of 1202 GMT, having touched its highest since Jan. 8 on Monday. U.S. gold futures were steady at $1,577.40. ‘The flight to safety is not continuing today. Equity markets have stabilized, European equities are broadly flat, so the wave of risk aversion that swept across the financial markets seems to be off,’ said analyst Carsten Menke.

European markets rebounded early after the previous day’s thumping, while the U.S. dollar rose to a near two-month high. However, concerns the coronavirus outbreak could hinder the global economy persist, Menke said, adding reactions to the spreading virus had been very different across markets and the decline in oil prices suggested a slowdown of economic activity in China. Gold is seen as a safe-haven during times of economic and political uncertainties.”

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CNBC/Elliot Smith

‘Lehman-type’ moment? Analysts warn that markets are too complacent over coronavirus risks

January 28, 2020

markets and coronavirus“Markets are underestimating the potential fallout of the coronavirus outbreak, which could be a ‘Lehman-type’ moment for the global economy, according to economic research firm AdMacro. Chinese officials on confirmed that the death toll from the virus … had reached 106 with 4,515 people infected. Global equity markets sold off sharply on Monday, but began to stabilize on Tuesday, with stocks still hovering close to recent record highs. Many market analysts have pointed to the 2003 SARS outbreak as an indication of the short-term nature of any potential economic fallout.

SARS affected around 8,000 people and resulted in nearly 800 fatalities, and was estimated to have reduced growth in China in 2003 by 1 percentage point while trimming 0.5 pp off growth across East Asia. However, AdMacro Head of Research Patrick Perret-Green told CNBC Tuesday that the markets were being ‘far too casual’ given the growth of China’s economy since 2003, along with the increase in its urban population and accessibility of travel … In a statement issued Monday, Perret-Green said the coronavirus outbreak represented a ‘Lehman-type moment tipping point’ which could ‘tip the global economy into effective recession.’”

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MARKET WATCH/Jeffry Bartash

Take away the military and durable-goods orders sink 2.5% in weak year end report

January 28, 2020

year end report“Orders for long-lasting or durable goods surged 2.4% in December owing to the military, but business investment in the civilian part of the economy declined again to finish the year weakly. Economists had forecast a 0.3% decline in orders for durable goods — products made to last at least three years. If the military buildup is set aside, orders for durable goods sank 2.5%. Adding to a disappointing report, the government revised orders for November to show an even bigger 3.1% drop. Initially the decline was reported as 2.1%. The weakness in orders and business investment could be a drag on the economy in 2020 unless it turns around.

Orders declined in most parts of the manufacturing base, including autos and commercial aircraft.

Bookings for passenger planes tumbled 75%, reflecting Boeing’s ongoing struggles with its grounded 737 Max. Auto orders sagged almost 1%, the government said Tuesday. If cars and planes are stripped out, durable-goods orders slipped 0.1%. Transportation often exaggerates the ups and downs in orders because of lumpy demand from one month to the next. Still, orders also declined for primary metals, machines and electrical equipment. What’s more, a closely followed measure known as orders for core capital goods also fell nearly 1%. These orders as seen as a proxy for business investment, which has been weak for the past year … The U.S. economy has been carried by consumers for the past year, but it can’t grow any faster unless businesses pitch in.”

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BLOOMBERG/Brian Chappatta

The ‘Not QE’ Debate Looms Large Over Fed Decision

January 28, 2020

not qe“Federal Reserve officials have made clear that if all goes according to plan in 2020, it’ll be a rather quiet year. They expect to hold the fed funds rate, the central bank’s key lending benchmark, steady throughout the next 12 months. It’s true that on that front, they won’t have much to discuss when they gather this week for the two-day Federal Open Market Committee in Washington. The Fed will stick to its current range of 1.5% to 1.75%. Chair Jerome Powell will reiterate that the economy is in a ‘good place’ and that it would take a material change to the outlook to even consider moving in either direction anytime soon.

There’s still a chance for some fireworks, however, especially after Minneapolis Fed President Neel Kashkari caused a stir this month by publicly calling out ‘QE conspiracists,’ or those who argue that the central bank’s purchase of Treasury bills is no different from typical quantitative easing and responsible for the rally in U.S. stocks. The problem with that framing, of course, is Dallas Fed President Robert Kaplan said just two days earlier that balance-sheet expansion was partly why asset prices are higher, calling the current program ‘a derivative of QE.’ He added: ‘Growth in the balance sheet is not free. There is a cost to it.’ Bloomberg’s Jonathan Ferro asked the ‘QE-or-not-QE’ question to a range of high-profile executives in Davos, Switzerland, last week. Many, including Morgan Stanley Chief Executive Officer James Gorman, sided with Kaplan.”

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REUTERS/Andrea Shalal

IMF sees medium-term risks to global economy; more easing not the answer

January 28, 2020

risks to global economy“The International Monetary Fund has urged policymakers to keep a close eye on financial vulnerabilities such as rising debt levels that could pose medium-term risks to the global economy and said further monetary easing was not the answer. The global lender’s most recent economic outlook forecasts a slight rebound of global economic activity this year and next, albeit to a lower level than previously forecast, after global monetary easing helped shore up growth in 2019. The IMF said that global growth would have been 0.5 percentage point lower without last year’s actions … But further easing of global financial conditions at this point in the economic cycle and rising financial vulnerabilities could threaten growth in the medium term, said Tobias Adrian.

‘Taking a longer-term view, …the easing of global financial conditions so late in the economic cycle and the continued buildup of financial vulnerabilities — including the rise in asset valuations to stretched levels in some markets and countries, the rise in debt, and large capital flows to emerging markets — could threaten growth in the medium term.’ Default rates had already increased in the U.S. high-yield market, and in Chinese on- and offshore corporate bond markets, albeit from low levels, he said, adding that emerging-market debt was also trading at distress levels in some specific cases. While there were ‘no signs of spillovers so far,’ policymakers should be vigilant about emerging risks and take steps to ‘reduce the chance that such vulnerabilities may amplify the adverse impact of shocks to the global economy,’ they said.”

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SOUTH CHINA MORNING POST/Stephen Roach

The world economy is on the precipice, and don’t look to trade growth to cushion a fall

January 28, 2020

world economy on precipice“With the benefit of full-year data, only now are we becoming aware of the danger the global economy narrowly avoided in 2019. According to the International Monetary Fund’s latest estimates, world GDP grew by just  2.9 per cent last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8 per cent pace of post-crisis recovery over the 2010-18 period.  On the surface, 2.9 per cent global growth doesn’t appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5 per cent … Last year’s shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5 per cent.

Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole. We know from the IMF’s extensive coverage of the world economy, which consists of a broad cross-section of some 194 countries, that in a global recession about half of the world’s economies are typically contracting, while the other half are still expanding – albeit at a subdued pace. The global recession of a decade ago was a notable exception: by early 2009, fully three-quarters of the world’s economies were actually shrinking.”

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