Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Stocks Undergo Reality Check
Overseas issues kept market volatility high, and trumped any news emanating from US corporate earnings and economic data – which was dull, anyway. To start, Putin amassed additional troops at the Ukrainian border in what he asked UN members to recognize as a “humanitarian crisis” that needed to be quickly contained. By that we assume Putin is referring to Russian separatists within the Ukraine that have suffered heavy losses of late. Putin also shook markets when he applied sanctions of his own to food imports, and when he entered into an oil deal with Iran in retaliation to sanctions imposed upon Russia by the US, EU, and supporting nations. In the Middle East, a Palestinian/Israeli ceasefire was broken and ISIS seized control of one of the largest water dams in Iraq. US forces responded with an air strike in Iraq, authorized by the President. These events put pressure on stocks most of the week, while Treasuries, Gold and the US Dollar rose on a “safe haven” bid.
By Friday, however, and in remarkable disregard for the above developments, stocks had reversed all of their losses and managed a small gain. This was primarily in response to yet another cry for peace by Putin & Co. – though we doubt that Crimea will be returned as a show of good faith. In any case, that event, combined with stock prices that had touched upon critical support levels, made a bounce in the market somewhat inevitable and largely expected. It may be of interest to note that high-yield bonds and small-cap stocks continued to see fairly significant outflows during the week, and remained in technically bearish territory despite the bounce in the major indexes. This may be the market’s way of warning investors not to “buy the dip” this time around – but we’ll soon see.
Along similar lines, the world banking sector didn’t show any signs of improvement this week in regard to solvency (i.e. debt) issues. The PBoC may have engaged in a silent bailout of one of its larger development banks with a $162.0 billion loan. This was likely done to cauterize losses derived from China’s housing market, which has been suffering abnormal price declines as of late. Also, the shares of African Bank Investments Ltd. (a South African bank) collapsed, and three Greek banks were seen leading the ASE (Greek stock) index to a loss of nearly 10.0% on the week. The Greek bank share prices have fallen once again to their all-time lows. This is all in addition to the ongoing banking/debt troubles in both Portugal and Argentina mentioned in this forum previously.
Keep in mind that the natural inclination of central banks is to respond to such pressures (i.e., inflationary strain, debt defaults, and resultant conflicts) with some form of papering over the problems. China took a giant step down that road this week; others should follow, though the BoJ, the BoE, and the ECB all stood pat this week regarding their most recent policy decisions. It’s doubtful that policy will remain this way for long – even for the Fed. The consequent inflationary dynamics will be positive for the precious metals. Incidentally, COMEX gold inventories spiked higher to 9.12 million ounces this week – one of the largest increases seen so far this year.
VP Investment Management