Was There a Global Holiday I Didn't Know About.
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In This Issue.

* Chicago Fed

* China and Switzerland agree


* Basis points

And Now. Today's A Pfennig For Your Thoughts.

Was There a Global Holiday I Didn't Know About.

Good Day! And welcome to Tuesday morning. Talk about uneventful. Monday mornings are usually pretty hectic but that just wasn't the case yesterday. It felt more like a holiday than a regular business day, but we at least had a couple things to talk about. Its supposed to be a hot one here in St. Louis today so we'll see in the market heats up today, but headlines were few and far between.

The lone data report from yesterday was a non-event. Not only is the Chicago Fed national activity index second tier, which means nobody really pays attention to it, but we didn't see any big surprises. This report uses zero as the baseline in which zero indicates economic activity is growing at its long run potential. A reading above zero indicates the economy is running above average while a negative number suggests its below average. The index came in lower than both the expectations as well as the prior month, but it did remain positive at 0.12.

I don't want to spend too much time on this, but the lower than expected number was primarily due to slower production growth. If we take a glance at the individual components, we saw factories, mines, and utilities moderate a bit as industrial production rose 0.2% in June after rising 0.50% in May. The employment indicator as well as the consumption and housing gauges increased a bit, but again, nothing significant. In the end, this report has put together a string of four consecutive months in positive territory.

We'll have a little more to talk about after we see this morning's data but the experts aren't calling for any surprises. Consumer inflation, or CPI, for June isn't expected to change from May's larger than anticipated move upward. We'll also get the existing home sales from June, which is coming off the best month in almost three years, according to the stats from May. We also get the Richmond area manufacturing index as well as another home price index. Since we'll have much more data to sift, I expect a bit more movement in the current market today.

As I mentioned several times already, it was a toss-up between watching the currency market and paint dry as to the winner on the excitement scale yesterday. We did, however, see China take yet another step forward in expanding distribution of the renminbi. It seems as though nations are starting to fall over themselves to not only enter into bilateral currency swap agreements with China but to also position themselves as a hub for trading the Chinese currency. It was just a couple months ago when London expressed the desire to become Europe's go to place for trading this currency.

Anyway, the Swiss National Bank (SNB) and the People's Bank of China agreed to directly trade as much as 150 billion renminbi over the next three years. At the beginning of the month, we saw the first free trade agreement between China and a country in continental Europe, which was Switzerland, become effective. This is still way off on the horizon, but Credit Suisse expects China to replace Germany as Switzerland's top destination for exports by 2035. The SNB said in a statement that it's a big step for both countries and welcomed the diversification opportunity.

As it currently stands, the SNB has roughly $500 billion worth of foreign exchange reserves that is a byproduct of their decision to cap the franc's move against the euro. Of that total, roughly 75% is denominated in euros and US dollars so policy makers are excited for this opportunity. As you can see, the logistics of unnecessary trade through US dollars are the main selling point for the rise of these agreements but central bank asset diversification is just another factor. I wonder who will be next.

I found a story from last week that states the BRICS nations have not discussed coordinated forex intervention, but indicates its an idea worth thinking about. If you recall, they recently agreed to create a $100 billion reserve fund and development bank, but I haven't seen any additional details as to a concrete plan on its operation. In taking a look at the "I" in BRICS, the Indian rupee held steady yesterday. The currency has been hovering in the 60 handle and there isn't much of anything pushing it one way or the other right now. Citizens of India and the investment world alike have become very excited about the prospects of the Indian economy as bullish economic sentiment has hit a five year high.

The newest addition to BRICS, that being the South African rand, was the best performer on the day as it was still trading on the merits of last week's rate hike amid an uneventful market. We'll see the results of June's CPI in South Africa tomorrow, so a higher reading should continue offering support. While I'm at it, let's also talk about Brazil. It finished the day marginally higher but not because of the latest news. A central bank survey revealed that economists, on average, feel that the Brazilian economy will grow less than 1% this year. I've seen some economists calling for a recession assuming second quarter GDP comes in negative and the first quarter gets revised downward.

Every other currency finished within 15 basis points of breakeven yesterday, so there is absolutely nothing to discuss currency wise. Precious metals also finished the day with moves expressed more appropriately with basis points. If we look at the euro again, there isn't much of a difference between the high of 1.3549 and the low of 1.3514. If we take a glance at the Aussie, the high and low of the day were .94 and .9372 respectively. There really wasn't much data globally to talk about so it was a double whammy in that regard.

If we focus on the Eurozone at this point, we have conflicting headlines about the German economy. The IMF raised its forecast for German economic growth this year to 1.9%, which was higher than its previous estimate of 1.7%. At the same time, Bundesbank said they expect the German economy to run into a wall in the second quarter but hinted they don't expect growth to be held up for long.

Concern still lingers about the conflict in Gaza and Ukraine, so that continues to keep a lid on currencies but that again should act as jet fuel for gold prices. While it was up a few dollars in the morning, it ended the day right where it began. It did remain above $1,300 all day as there were some reports of Ukrainian forces moving toward the Malaysian Air wreckage. When I was flipping through some news stories, I came across a prediction from the folks at Capital Economics calling for gold prices to end the year at $1,450. If things do escalate in the very least, I think we could see that much sooner but who knows. The markets haven't been making much sense lately.

As I came in this morning, we're still stuck in that low volatility and tight ranged trading pattern. The dollar is marginally higher once again and actually rose to a five month high of 1.3481 against the euro. The market is banking on the fact inflation will point toward the notion that interest rates will need to increase a little sooner than expected. The title of a new summary that I receive pretty much says it all with "Quiet, lazy summer day in Asia". I think you can substitute any continent into that sentence and it will remain accurate.

For what its worth. Chuck has mentioned this on several occasions, but an article from Bloomberg paints the same picture. Bank of England Governor Mark Carney's hesitance to divulge specifics on interest-rate increases might harken back to his experience at the Canadian central bank, observers say. "The historical experience there suggests the market consistently priced in too much," said Sam Hill, a Royal Bank of Canada senior economist.

To recap.Monday may have been one of the slowest non-holiday trading day that I have seen. The only data report was the Chicago Fed index and showed some slight deceleration but remained positive. We'll have more data to evaluate so we'll at least have that to talk about. Switzerland is the latest country to sign up for an agreement with China to directly trade currency and is just another feather in the cap for the renminbi. Who's next? Other than that, no real currency news. The best performing currency was the rand but all of the other currencies were within a several basis point bank.

Currencies today 7/22/14. American Style: A$ .9390, kiwi .8668, C$ .9309, euro 1.3485, sterling 1.7068, Swiss $1.1104 . European Style: rand 10.6190, krone 6.1858, SEK 6.8531, forint 229.42, zloty 3.0721, koruna 20.362, RUB 34.90, yen 101.52, sing 1.2402, HKD 7.7512, INR 60.2650, China 6.1544, pesos 12.9650, BRL 2.2208, Dollar Index 80.74, Oil $105.06, 10-year 2.49%, Silver $20.81, Platinum $1,481.60, Palladium $865.90, and Gold. $1,306.50

That's it for today.It was tough going for me this morning. I think I could have hit the snooze button for an hour straight this morning but I only kept it to two times. The Cardinals started the second half of the season on the right foot by taking two of three from the Dodgers. NFL training camps being this week so that means the football season is right around the corner. I can't wait. I'm running a little behind this morning, so that does it for me. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 07-22-2014 2:32 PM by Chuck Butler
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