Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Stock Volatility Picks Up, Dollar Weakens, and Gold Stabilizes…

Overseas markets were fairly quiet this week, if not improving, until overnight trading on Wednesday. Then, Asian stock markets witnessed a fairly sharp sell-off near 3% (6.3% in Japan) in response to the World Bank’s negative revisions to global growth (to 2.4%, from 2.2%, for 2013). The bank’s hypothesis was based on nothing new – slowing growth in China and the common refrain that central banks, both in the US and Japan – just can’t wait to taper off of monetary easing. That negative tone spilled over into European equities for a good portion of the day until markets opened here in the States. Then the sentiment turned positive.

MWM 13, 6-14 Box ScoresWhen the highly anticipated US Retail Sales figures for May were released, they didn’t disappoint, though we felt there was a 50/50 chance that they might. Sales were up 0.6%, aided and abetted by a decent rise in auto sales. Inventories for autos are at all-time highs, so we imagine there was quite a bit of discounting that helped move vehicles off the lots. At any rate, equities responded with what seemed to be a whimper at first, venturing into and out of unchanged territory for the first couple hours of trade before launching into a momentum/short covering-driven rally that carried the S&P 500 to a 1.5% (1.2% for the Dow) gain by the end of trade Thursday. Stocks in the US resumed their soft tone on Friday, finishing slightly lower, while overseas markets gave up a percent or two for the week.

Remarkably, Treasuries caught a bid Thursday on the notion that the World Bank’s forecast might actually have some merit, contrasted with stocks. At least that was the excuse provided, although Treasuries, having been battered for several weeks now, were overdue for a bounce (see box scores). Rates for Treasuries and mortgages have risen substantially (about 50 basis points) since the interim 2013 lows set in early May.

The US Dollar index continued to decline in weighty fashion through its 200-day moving average. At that point, the dollar saw a small amount of short covering early Friday, which nonetheless failed to push the dollar back above the 200-day – as many a dollar-bull would have preferred. Rapidly increasing Japanese and emerging market inflation (evidenced by collapsing currencies) is forcing a surprising number of central banks to intervene against the dollar. Recent Treasury data on foreign capital flows confirms this to a degree, showing that official holders (banks) sold $23.7 billion and private investors sold a record $30.8 billion of US securities for the month of April. This trend will most likely persist into May, at the dollar’s expense, as inflationary pressures abroad remain prodigious and uncontained.

That said, the US dollar index may flirt with the 200-day average for the next handful of days before resuming what we believe will be a strengthening bearish trend. If the economy here in the US picks up steam to the downside in coming weeks, as we believe it may, it should put to rest the ongoing talk of “tapering” QE, and subsequently pressure the dollar even further. Breaching 79.0 on the dollar index would help validate that thesis, and might even convert the record number of speculative gold shorts into speculative longs. That might be expecting too much for now, but the point is that the prospects for the metals are improving – with force, even against the few intent on bending the metals markets to their purposes.

Best regards,

David Burgess
VP Investment Management