Monday, December 22, 2014
Sunday, December 21, 2014
Week in Review (Dec 15-19)
Week in Review (Dec 15-19)
The most notable events of the week were (1) continuing
pressure on crude oil (2) extreme volatility in the Russian Ruble and
(3) FOMC meeting.
The negative momentum in oil price continued as the OPEC (representing the producers) and the IEA
(representing the consumers) lowered their demand forecast for 2015. WTI fell steadily from ~$75 on November
26 to ~$54 by December 16. It tested the $54 level again on December 18/19 before
bouncing to $57 to close the week.
Russian Ruble came under pressure after the Central Bank
unexpectedly hiked the rate to 17% on December 16 after stopping currency
intervention on November 10. The volatility in the currency subsided
substantially despite disappointing end of the year press conference by
President Putin as the Finance Ministry gave support to the currency and the
Central Bank temporarily suspended accounting rules for companies with foreign debt.
This week's FOMC meeting, the last one for the year, was closely watched especially because the expectation was for the Fed to remove the word "considerable period” from the Statement in preparation for a hike around mid-year. Investors were surprised when that phrase stayed in the Statement but confused because they were not sure whether it had the same or a different meaning. The
vagueness of the Statement was somewhat clarified by the Fed Chair Yellen at her
post-FOMC press conference. She said unequivocally that the Fed will raise
interest rate in 2015 but not in the next 2 meetings unless the economy rolls
over unexpectedly. Stock markets, which had been under tremendous pressure
owing to the sharp fall in oil price and collapse in energy stocks rallied
after the Fed decision. By the end of the week, they were back within a striking
distance of all-time highs. Even lower guidance from FDX was not able to stop
the upward momentum. The best performing stocks for the week were mostly Energy.Volume on Friday was high because of Quadruple Witching.
Monday
- Japan, PM Abe won an easily victory in the snap election. The LDP and Komeito took 326 seats in the lower house, more than the 317 needed for a two-thirds supermajority but voter turnout was 52%, the post-war low.
- Japan’s Tankan large manufacturing index slid to 12 in the fourth quarter of 2014 slightly below market expected and prior reading of 13 in 3Q.
- China revised 2013 GDP by 1% to 3% while the PBoC said growth in 2015 could slow 7.1% from 7.4% in 2014.
Tuesday
- China HSBC flash PMI weaker: 49.5 vs. 49.8E.
- German ZEW current situation better: 10.0 vs. 5.0E.
- German preliminary composite PMI misses: 51.4 vs. 52.3E.
- Russian rubble under severe pressure amid 6.5% hike in the rate.
Wednesday
- Fed Chair Yellen was able to reassure investors at her post-FOMC press conference.
- Copper hit new cycle low (below 285).
- The Russian finance ministry announced earlier today that it will sell dollar cash in a total amount $7bn over an unspecified period, starting today.
- FedEx gave negative guidance.
Thursday
- Swiss National Bank introduces negative IR (-.25)
- German Dec expectations survey better: 101.1 vs. 100.5E
- Putin's end of year press conference
Friday
- BoJ Policy Statement: Maintains pace to increase monetary base at rate of ¥80T (as expected).
- German consumer confidence better: 9.0 vs. 8.8E.
- Equity volume was very high because it was Quad witching day.
Friday, December 19, 2014
Jeffrey Frankel - Why Are Commodity Prices Falling?
Oil prices have plummeted 40% since June – good news for oil-importing countries, but bad news for Russia, Venezuela, Nigeria, and other oil exporters. Some attribute the price drop to the US shale-energy boom. Others cite OPEC’s failure to agree on supply restrictions.
But that is not the whole story. The price of iron ore is down, too. So are gold, silver, and platinum prices. And the same is true of sugar, cotton, and soybean prices. In fact, most dollar commodity prices have fallen since the first half of the year. Though a host of sector-specific factors affect the price of each commodity, the fact that the downswing is so broad – as is often the case with big price swings – suggests that macroeconomic factors are at work.
So, what macroeconomic factors could be driving down commodity prices? Perhaps it is deflation. But, though inflation is very low, and even negative in a few countries, something more must be going on, because commodity prices are falling relative to the overall price level. In other words, real commodity prices are falling.
The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward since mid-year in most countries.
But the United States is a major exception. The American expansion seems increasingly well established, with estimated annual growth exceeding 4% over the last two quarters. And yet it is particularly in the US that commodity prices have been falling. The Economist’s euro-denominated Commodity Price Index, for example, has actually risen over the last year; it is only the Index in terms of dollars – which is what gets all of the attention – that is down.
That brings us to monetary policy, the importance of which as a determinant of commodity prices is often forgotten. Monetary tightening is widely anticipated in the US, with the Federal Reserve having ended quantitative easing in October and likely to raise short-term interest rates sometime in the coming year.
This recalls a familiar historical pattern. Falling real (inflation-adjusted) interest rates in the 1970s, 2002-2004, and 2007-2008 were accompanied by rising real commodity prices; sharp increases in US real interest rates in the 1980s sent dollar commodity prices tumbling.
There is something intuitive about the idea that when the Fed “prints money,” the money flows into commodities, among other places, and so bids their prices up – and thus that prices fall when interest rates rise. But, what, exactly, is the causal mechanism?
In fact, there are four channels through which the real interest rate affects real commodity prices (aside from whatever effect it has via the level of economic activity). First, high interest rates reduce the price of storable commodities by increasing the incentive for extraction today rather than tomorrow, thereby boosting the pace at which oil is pumped, gold is mined, or forests are logged. Second, high rates also decrease firms’ desire to carry inventories (think of oil held in tanks).
Third, portfolio managers respond to a rise in interest rates by shifting out of commodity contracts (which are now an “asset class”) and into treasury bills. Finally, high interest rates strengthen the domestic currency, thereby reducing the price of internationally traded commodities in domestic terms (even if the price has not fallen in foreign-currency terms).
US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015; the result has been to bring next year’s price increase forward to today.
The fourth of the channels, the exchange rate, has already been functioning. The prospect of US monetary tightening coincides with moves by the European Central Bank and the Bank of Japan toward enhanced monetary stimulus. The result has been an appreciation of the dollar against the euro and the yen. The euro is down 8% against the dollar since the first half of the year and the yen is down 14%. That explains how so many commodity prices can be down in terms of dollars and up in terms of other currencies.
Tuesday, December 16, 2014
Chart of the Day - Russian Ruble
Chart of
the Day - Russian Ruble or Russian Roulette
The Russian
Ruble has been amazingly volatile in the past 2 days but it has been especially
so today. The magnitude of the intra-day move is just mind-boggling. The
intra-day low was 52.2628 per US$ and high was 79.1688. That’s a massive 35.9% move
from the bottom to the top in one single session. This huge swing in Ruble occurred on the backdrop of a
6.50% increase in Bank of Russia's Key Rate to 17%, which followed 1% increase just 2 business days ago, on Friday.
In the short-run, the currency volatility might push Russia to impose capital controls. Russia has already spent ~$80 billion defending the currency before it gave up on November 10. The central bank realized that it could not keep spending so much of depleting reserves on currency intervention especially when oil revenue, which accounted for over two-thirds of exports, is falling rapidly.
In the medium, the state of Russian economy and its currency will depend on oil price. The Russian government's initial break-even price for oil was $100, but it lowered that to $80 after the OPEC meeting. If oil price stays below $60, Russia's Economic Ministry says economy will contract by 3.5%-4.0%.
Foreigners who hold Russian debt will be directly impacted by collapsing Russian economy and falling currency. According to the Russian Central Bank, $135 billion debt is due over the coming year - banks alone have $50 billion due.
Domestically, Russian oligarchs are not the only ones suffering from the plummeting Ruble. Because of currency volatility, Apple halted online sale of its products in Russia.
It will be interesting to see how all this plays out not only within Russia but also in the bigger geo-political context.
Russian Ruble
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Bank of Russia's Key Rate
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Sunday, December 14, 2014
Week in Review (Dec 8-12)
Week in Review (Dec 8-12)Last week ended on a very high note. The big news was November payroll report on Friday, which showed a whopping 321K increase plus 44K upward revisions for September and October. While the unemployment rate did not budge and stayed at 5.8%, hourly earnings surged 0.4%. The S&P500 closed at an all-time high (2,075.37), so did the DJIA (17,958.79). On intra-day basis, the DJIA came within 10 points of psychologically important 18,000 level.
Monday started with a thud as data from Japan (Q3 GDP revised down to -1.9% from -1.6%), Germany (October IP was 0.2% vs. 0.4% expectation) and China (November imports and exports missed consensus) disappointed investors.
On Tuesday, European markets
plunged following a surprise announcement of Greek Presidential election while
Chinese markets plummeted after the news that bonds rated below AAA or sold byissuers graded lower than AA can no longer be used as collateral for short-termloans obtained through repurchase agreements. US markets did fall sharply at
the opened but recouped most of the gains by the end of the session, but yield
on 10-year fell and closed at the lows of the session. The Fed releasedCapital Surcharges for SIFIs for comments, which closes at the end of February,
which was considered much stringent than expected, and that pressure JPMthe following day.
On Wednesday, the OPEC cuts its forecast for 2015demand by 70K b/d that put additional pressure on oil, which approached $60
level.
On Thursday, the ECB’s second allotment of targeted longer-termrefinancing operations took place today and delivered a disappointing result.
The ECB allotted EUR 130 bn, somewhat short of the consensus forecast of EUR
148 bn. The Russian central bank raised its “key rate” by 100 bps to anew level of 10.5%. In the US November Retail sales was up 0.7% vs. 0.4%consensus and the gains were broad-based. The yield on 10 year rose but the
increase was capped after a very strong auction for 30-year treasury.
S&P500 also rolled over with the decline in treasury yield as well as more
weakness in crude oil.
On Friday US markets fell as oil could not hold the
critical $60 level and fell sharply. Again the Energy sector was the culprit as the IEA cut its forecast for global oil demand growth next year by 230,000 barrels per day to 900,000 barrels per day on the expectation of lower fuel consumption in
Russia and other oil-exporting countries. The risk-off environment lifted
treasuries; yield on 10-year fell 8bp to 2.09%.
Best & Worst Performers in the S&P500 During the Week
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Monday, December 08, 2014
FAQ - Gold
What is the chemistry of gold?
Gold is an element with the symbol Au and atomic number 79. Its symbol is Au is dervied from the greek word "Aurum", which means glow of sunshine. The English word gold comes from the words gulb and ghel referring also to the color. The melting point of gold 1,948°F (1,064°C) and its Boiling point is 5,173°F (2,856°C). The atomic mass of gold is 196.96657 ± 0.00004 u. The density of gold is 19.30 g cm-3.
Why is gold so special?
Sanat Kumar, the Chair of Chemical Engineering at Columbia University gives succinct arguments on a NPR interview why Gold is a so special. Basically he argues that gold like other precious metals rhodium, palladium, silver and platinum is "not a gas", "does not corrode or burst into flame upon contact with air", "is not toxic" and "rare but NOT too rare". But gold stands out among them at least for ancient humans because there are flaws with others; silver tarnishes, rhodium and palladium were not discovered until the eighteenth century, and platinum has a higher melting point - 3,215°F vs. 1,948°F for gold.
What is the annual gold demand?
According to the World Gold Council, gold demand in 2013 was 4,081 tons. Of that ~60% was absorbed by jewelers, ~20% investors (bars, coins and ETFs), ~10% each by Central Bankers and by Technology - dentistry absorbed ~1% of gold demand.
With respect to countries, China had the biggest demand in 2013 (1,065 tons) followed by India (975), US (190), Turkey (175), Germany (121) and Vietnam (92).
What is the annul supply of gold?
In 2013, 2,770 tons of gold were produced. China was the largest producer (420 tons) followed by Australia (255), US (227) and Russia (220).
The privately-owned gold miners are Barrick Gold, Newmonth Mining, AngloGold, Goldcorp, Kinross, Newcrest Mining, Gold Fields, Polyus Gold, Yamana and Eldorado.
What is the stock/inventory of gold?
Central Banks are the most visible holders of gold. The US is the largest official holder of gold (8,133 tons) followed by Germany (3,387), IMF (2,814), Italy (2,451), France (2,435) and China (1,054).
In the US, Federal Reserve Bank of New York holds the most gold, 530,000 gold bars or 6,700 tons.
What s the marginal cost of producing or cash cost curve of gold?
This is not readily available because this is proprietary data for gold producers. According to zerohedge.com, in 2013 marginal cost of production (at 90th percentile) was $1,104/oz while average cost was $673/oz.
What s the marginal cost of producing or cash cost curve of gold?
This is not readily available because this is proprietary data for gold producers. According to zerohedge.com, in 2013 marginal cost of production (at 90th percentile) was $1,104/oz while average cost was $673/oz.
References
Academic Paper - Some Evidence on the Real Price of Gold, Its Costs of Production, and Commodity Prices
World Gold Council
World Gold Council
Sunday, December 07, 2014
Monday, December 01, 2014
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