The Precious Metals Week in Review – October 21st, 2022

1. U.S. stocks soared Monday as investors assembled for a big week of corporate earnings. The S&P 500 was up 2.7% into the afternoon, while the Dow Jones Industrial Average gained close to 600 points, or 1.9%. The technology-heavy Nasdaq Composite surged 3.4%. The moves come after a roller-coaster week on Wall Street that saw the S&P 500 log its fifth-largest intraday reversal from a low in history Thursday. Still, the benchmark index ended the week lower. Wall Street will focus on how Corporate America is holding up against the backdrop of persistently soaring prices and the Federal Reserve’s efforts to stabilize them as companies deploy third-quarter financial services.

2. With their wild swings and reversals heightened by a Federal Reserve bent on curbing inflation, US equities have been anything but simple to call this year. This has created a challenge symbolized this week by two of Wall Street’s most prominent strategists. Morgan Stanley’s Mike Wilson tells US stocks are ripe for a short-term rally given the absence of an earnings capitulation. It is an unusual positive call from a long-time bear who correctly foresaw this year’s slump. In contrast, JPMorgan Chase & Co.’s Marko Kolanovic, among Wall Street’s most vocal bulls, has presented more caution for the coming months. He cites increasing risks from central bank policies and geopolitics. The shifting and diverging views between Wall Street firms highlight the uncertainty facing equities for the rest of the year.

3. The Federal Reserve’s interest-rate hikes to bring inflation under control are starting to work, an administration economic adviser said. “What we can see in the economic data is the Fed is focused on bringing down inflation,” Cecilia Rouse, chair of Biden’s council of economic advisers, said on Sunday. However, inflation is spreading deeper into the overall US economy, slamming the door on hopes that the Fed will potentially dial back rate increases soon. The Fed has boosted its benchmark target by 3 percentage points this year to a range of 3% to 3.25%. Core inflation, excluding food and energy, jumped to a 40-year high of 6.6% in September from a year ago. This has outpaced forecasts and triggered a slide in US bond markets, as investors anticipate that the Fed will potentially go for two more 75 basis-point increases this year. That spells trouble for a US economy that is already been slowing down, as soaring prices eat into paychecks while higher borrowing costs crush the housing market. Many Americans are asking themselves will inflation go back to normal anytime soon? Bank of America does not believe so. “Historically, it takes an average of 10 years for a developed economy to return to 2% inflation once the 5% threshold is breached,” the bank says in a recent note.

4. During the White house press briefing on Tuesday FOX business correspondent Edward Lawrence asked White House press secretary Jean-Pierre if she had a “timeline for when Americans can start feeling some economic pain relief.” “In regard to the Inflation Reduction Act, early next year they will see some of the pieces of that when you think about energy costs, when you think about the Medicare kind of benefits from that. So, we’ll see some movement on that early next year” before claiming gas prices have gone down. The reporter countered by noting that it has been 18 months since gas prices began rising and inflation became clear in other economic sectors. “Well, 18 months ago the president signed the American Rescue Plan more- back in April of 2021,” she said. The rapid response director for the RNC Tommy Pigott further tweeted, “sounds like cause and effect.”

5. The Biden administration is moving toward a release of at least another 10 million to 15 million barrels of oil from the nation’s emergency stockpile in a bid to balance markets and keep gasoline prices from climbing further. The move would effectively be the tail end of a program announced in the spring to release a total of 180 million barrels of crude from the Strategic Petroleum Reserve. About 165 million barrels have been delivered or put under contract since the program was put into effect. The reserve, which has the capacity to hold about 714 million barrels, holds 405.1 million barrels, as of Oct. 14. President Joe Biden will speak about gasoline prices on Wednesday, and that announcement will be part of Biden’s response to the ongoing effects of Russian President Vladimir Putin’s invasion of Ukraine. The administration also looks to address anxiety about stubbornly high gasoline prices ahead of midterm elections next month and historically constrained supplies. Heading into winter, the US has the lowest seasonal inventories of diesel, according to data first compiled in 1982.

6. Central bank drama continued across the Atlantic to start the week. The Bank of England on Monday morning said it would restart bond sales next week, after an emergency rescue intervention that involved a pause on selling to stabilize financial markets. U.K. Finance Minister Jeremy Hunt also reversed most of the fiscal package that prompted the sell-off in U.K. assets. This could include plans to cut taxes. Sterling jumped by as much as 1.4% following the turnaround on the economic agenda. Top British politicians said the cause of the market chaos that followed the September fiscal statement forced the Bank of England to intervene, according to the central bank’s deputy governor. “The source of that mini-budget, and you could say of that period, was ministerial decisions on fiscal policy,” Jon Cunliffe told the Treasury Committee on Wednesday. Economists, asset managers and now the BOE have blamed the crisis on the £45 billion package of unfunded tax cuts with no accompanying independent forecast. The loss of fiscal credibility sparked the sell-off, Cunliffe said. On Thursday it was announced that PM Liz Truss has dramatically resigned, admitting defeat following crisis talks with Tory chiefs in Downing Street and with MPs in open insurrection. After just 44 disastrous days in No10, the PM took to a lectern outside the famous black door to confirm her departure, sealing her fate as the shortest-serving premier in modern political history.

7. BMW is betting on hydrogen. “After the electric car, which has been going on for about 10 years and scaling up rapidly, the next trend will be hydrogen,” says Oliver Zipse, the chairman of BMW AG on Oct. 17 in England. “When it’s more scalable, hydrogen will be the hippest thing to drive.” BMW has dabbled with the idea of using hydrogen as a power source for years, even though it is obscure compared to the current enthusiasm surrounding electric vehicles. In August, the company started producing fuel-cell systems for a production version of its hydrogen-powered sport utility vehicle. Hydrogen’s big advantage over electric power, which requires an extensive and so-far nonexistent charging network, is that it can supply fuel cells stored in carbon-fiber-reinforced plastic tanks. “There could soon be markets where you must drive emission-free, but you do not have access to public charging infrastructure,” Zipse says. The same could be said for hydrogen infrastructure, but this is quite simple to do. Zipse explains it would be “a tank like an old gas tank, and you recharge it every six months or 12 months.”

8. On Tuesday it was reported that banks face bigger deposit insurance payments under new FDIC Rules. The Federal Deposit Insurance Corp. is requiring lenders to increase how much they contribute to a fund that protects consumers from bank failures, despite fierce industry objections. American banks will have to start paying bigger deposit insurance assessment rates starting in the first quarter of 2023 under the rule change approved on Tuesday. The FDIC said the first increase will be two basis points in a series of gradual rises meant to boost the industry’s overall ratio of protection to insured deposits. “Overall, the banking industry continues to report strong earnings and is well position to absorb this modest increase in assessment rates,” FDIC Acting Chairman Martin Greenberg said during a meeting. The change “should not impact lending or credit availability in any meaningful way,” he added. The FDIC says it is required to boost the ratio of protection to insured deposits reserve ratio, to 1.35%. The regulator has said the metric stood at 1.23% in March. The FDIC has said the increases will cease if reserve ratios rise to 2%.On Thursday, the The Department of Labor released the numbers for the week ending October 15. The advance figure for seasonally adjusted first claims was 214,000, a decrease of 12,000 from the previous week’s revised level. The previous week’s level was revised down by 2,000 from 228,000 to 226,000. The 4-week moving average was 212,250, an increase of 1,250 from the previous week’s revised average.

9. Oil prices for the week swung between gains and losses, following broader equity markets, as concerns over a global economic slowdown continue to hang over the market. West Texas Intermediate futures traded around $85, trading in a volatile $2 range on Friday. Investors are juggling slowdown fears against signs of oil market tightness, while fluctuating risk sentiment in broader markets whipsaws crude prices.

10. The EUR/USD rose 0.2% to 0.9787 after German producer prices rose by 2.3% on the month and by an eye-watering 45.8% on the year, as companies again passed on sharp increases in their energy costs to buyers. The numbers show sustained inflationary pressure in the economic pipeline and add to the pressure on the European Central Bank to keep raising interest rates despite the obvious slowdown in the Eurozone economy.

11. The yen’s slump past the symbolic mark of 150 per dollar is keeping traders guessing when Japanese authorities will intervene to halt a further decline. The Japanese currency has weakened by more than 5 yen per dollar since Japan stepped into the market in September, despite a barrage of warnings to dissuade traders from testing its resolve and speculation authorities were quietly intervening on a small scale. The yen slipped another 0.8% on Friday to 151.38, a 32-year low.

Many Wall Street economists are still betting that US inflation will slow substantially over the next year even as they’ve been forced to keep raising their predictions in the near-term. With most having shared the Fed’s failure to predict the stubbornness of last year’s price pressures, these experts continue to be surprised by how much inflation is spreading. Sometimes giving up is a good thing. The sentiment on stocks and global growth among fund managers surveyed by Bank of America “screams” what Wall Street tends to call full capitulation. By definition, capitulation means to surrender or give up. In financial circles, this term is used to indicate the point in time when investors have decided to give up on trying to recapture lost gains as a result of falling stock prices. As disquieting as the phrase may sound, it means the way will be open for a potential equities rally come 2023. The bank’s monthly global fund manager survey “screams macro capitulation, investor capitulation, start of policy capitulation,” strategists wrote in a note on Tuesday. They expect stocks to bottom in the first half of 2023 after the Federal Reserve finally pivots away from raising interest rates. The problem with capitulation is that it is difficult to forecast and identify. There is no magical price at which capitulation takes place. Often, investors will only agree in hindsight as to when the market actually capitulated.

Ukrainian President Volodymyr Zelenskiy said almost one third of the country’s power stations have been destroyed in Russian strikes since Oct. 10, triggering blackouts, while a report showed the nation’s power grid has managed to hold steady. Russian missile and drone strikes targeting Ukrainian power infrastructure over the past week have failed to knock electricity supply off the grid for any prolonged period, according to International Energy Agency data. Kyiv’s mayor, Vitali Klitschko, said power and water supplies were partially restored. Earlier, he urged residents in the capital to conserve use as more critical infrastructure was damaged by Kremlin forces. In America, Republicans led by House GOP leader Kevin McCarthy say they plan to cut aid to Ukraine should they regain control of the chamber in the coming elections.

Vladimir Putin spent years racing against Russia’s looming demographic clock, only to order an invasion of Ukraine that portends another historic decline for his country. Besides Russian casualties mounting to potentially tens of thousands, a draft of several hundred thousand more and an even bigger flight of men seeking to avoid fighting have all derailed Putin’s goal of stabilizing Russia’s population. Crippling disruptions from the war are converging with a 30-year-old demographic crisis for “a perfect storm.” Should military operations continue in the coming months, as expected, Russia may see less than 1.2 million births next year, the lowest in modern history. Total deaths in Russia average close to 2 million annually, though the number increased during the pandemic and approached 2.5 million last year.

About two dozen police patrolled a busy Beijing intersection on Thursday after photos and videos circulated of a rare protest attacking Chinese President Xi Jinping. Slogans attacking President Xi Jinping featured on banners draped over a bridge last week have spread to other Chinese cities. Phrases from the handwritten signs criticized the strict lockdowns and restrictions that have defined Xi’s “Covid zero” policy, while also calling for his removal in favor of democracy. “We want food, not PCR tests. We want freedom, not lockdowns and controls. We want respect, not lies” one of the banners read. The protest, held in broad daylight and in full view of surveillance cameras, represents an embarrassing public outburst against Xi just days before he outlines his vision for China at the Communist Party congress. Chinese officials go to great lengths to portray unity and restrict any signs of dissent ahead of the event.

Stocks snapped back, with some of the world’s largest technology companies rallying despite a tumble in Tesla. The pound held gains after Liz Truss resigned as UK prime minister. Giants Microsoft, Apple and Amazon all contributed the most to the advance in the S&P 500. So far in 2022, the percentage of trading sessions when the S&P 500 posted a positive daily return is just 43.5% — the lowest since 1974. IBM soared after affirming its cash-flow forecast in a sign that demand for software, mainframe computers and hybrid cloud services stays steady. “Company earnings seem to be going fairly well,” said Chris Gaffney, president of world markets at TIAA Bank. “And we’re seeing some warnings of what may come, but right now the earnings are holding up. If companies can make money, maybe the higher interest rates don’t affect the markets as much as they could.” Traders also kept an eye on the latest economic data, with a gauge of existing-home sales in the US extending its decline to the longest since 2007 and jobless claims dropping to a three-week low.

Geopolitical, economic, and environmental uncertainty can be expected to continue in the near-term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. Remember that one of the keys to profitability through the ownership of physical precious metals is to acquire the physical product and hold on to it for the long term without overextending your ability to maintain its ownership.

Trading Department – Precious Metals International, Ltd.

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