Investment Markets Overview – w/e 19 August 2011

40 years ago this week, on the 15th August 1971, US President Nixon ordered the removal of the final legal link to gold, in response to a request by France to be repaid its loans to America in the shiny metal rather than coloured paper, known as the Dollar. After that date US Treasuries became nothing more than IOUs created out of thin air and, as the $US remained the world’s reserve currency, all currencies are backed by nothing but sovereign debt.

US economic data announced this week included July inflation data, as per the PPI and CPI official figures, which came in at 0.2% and 0.5% respectively and both above consensus forecasts. Manufacturing contracted in August, as did July housing starts and existing home sales. The Dow fell by 4%, whilst the S&P 500 and the Nasdaq were lower by 4.7% and 6.6% respectively.

Euro-zone Q211 advance GDP was lower than expected at 0.2%, with the “locomotive,” Germany, falling to 2.8% year on year against the 3.2% forecast and the Q1 growth rate of 5%. Core CPI for July fell to 1.2% annualised versus June’s 1.6%.For the UK, July CPI was flat, whilst retail sales for the same month disappointed, at 0.2% against the 0.4% forecast and the revised June number of 1%. 3 month unemployment to June rose to 7.9% against the 7.7% expected but at least the UK’s public finances were in slightly better shape than forecast in July. The FTSE 100 gave up 5.3%, whilst the French CAC and the German DAX fell by 6.1% and 8.6% respectively.

Out East, Japan’s department store sales contracted by 0.1% year on year in July, whilst provisional Q211 GDP contracted by 1.4% annualised. Elsewhere, Q211 GDP in Hong Kong fell by 0.5% as exports collapsed by 11% against the 14.4% annualised rise in Q111. HK exports more than any other country in Asia and hence serves as an alarm bell for the region. The Nikkei ended lower by 2.7%, whilst the Hang Seng fell by 1.1%.

The $US index slipped by 0.8% to 74, with other losers including the $Kiwi, lower by 1.7%. Gainers included the British pound and the Swedish Krone, up by 1.2% and 1.9% respectively. Sovereign debt yields, with the exception of Portugal and Greece, fell, as “investors” continued their flock to “safety.” UK gilt yields fell by 15bps to 2.39%, Japan’s JGB yield eased by 6bps at 0.98% and the German 10 year fell by 23bps to 2.1%. The Portuguese 10 year yield rose by 22bps to 10.32, whilst Irish yields declined by 36bps to 9.26%. Spanish and Italian yields ended lower by 3bps and 8bps, at 4.94% and 4.92% respectively, as the ECB spent a record amount on their debt, whilst the Greek 10 year yield jumped by 96bps to 16.16%.and the 2 year soared by 344bps, ending the week at 36.5%pa The US Treasury 5 and 10 year yield fell by a further 4.7% and 7.4%, ending the week at 0.9% and 2.07%.

Within the commodities complex, the $crude oil price fell by 2.8%, ending the week at $82.9 a barrel, whilst in the precious metals space, the price of $Gold surged once again, by 6% or $110, to $1855oz whilst the $Silver price jumped by 9.4% to $42.8oz.

Next week sees more on Q211 GDP for the US and the UK and consumer confidence updates for the UK and for the Euro-Zone. The US also provides July durable goods orders and new home sales data, whilst the Euro-Zone announces July M3 money supply numbers plus the latest PMI manufacturing and services information. Japan is to release August CPI figures whilst Hong Kong update on CPI and retail sales.

Returning to August 1971, 10 year US treasuries were yielding 6.6%pa, the Dollar index was at 118 and an ounce of $Gold cost $35. They are currently at 2%, 74 and $1855 respectively with the former at an all time low, the latter at an all time high and the $US index marginally above its April 2008 low of 71.3. The consensus amongst economists and city folk alike are for higher yields and a higher $gold price, with continued dollar weakness in the face of inflationary trends. We remain suspicious of consensus thinking.

 “Greenspan, who knew so much more than most, knew far less than most supposed”   FT September 2007

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