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Review & Focus®

Chuck Butler | June 1, 2016 9 MIN READ

May brought us flowers and pilgrims, and a fading of the so-called Shanghai Accord. We draw nearer to the June Fed meeting, and one day there's talk of a rate hike, and the next day the talk is squashed by an economic report, like the April Jobs report. So, I'll go through my thoughts on the prospects of a rate hike, review what the currencies and metals are doing, and offer a quick look at the old adage: "Sell in May and go away."

DOLLAR WEAKNESS FADES

Last month I talked about how at the Shanghai G20 meeting there appeared to be an agreement between the countries of the U.S., China, Japan and the Eurozone to halt the strength of the dollar, and allow the currencies from China, Japan and the Eurozone some relief, which would settle down the global markets. It was labeled the Shanghai Accord by James Rickards, but was categorically denied by the countries.

But the fact remains that after the G20 meeting in Shanghai, the dollar had its worst month in five years. And I was driven to think that I was correct in believing the strong dollar trend was over. I still believe that the end of the dollar's strong trend is at hand, but as I've said before, we could very well see periods of dollar strength return, as if trying to stage one big rally before it burns out.

As we went into May though, the dollar began to fight back, and had much better days in May than it had in April. So, is the so-called Shanghai Accord fading? It appears that way to me. In April, the Bank of Japan (BOJ) Gov. Kuroda and Prime Minister Abe were not heard from. This was strange, given that they had worked so diligently on getting the yen weaker. But once May came along, the two Japanese officials were back to jawboning the markets in an attempt to get them to back off making the yen stronger. And it worked. The yen, which had rallied from a low of 113 in March, went to 106 in April, and now back to 109 in May.

The euro, which touched 1.15 in April, has experienced a tough row to hoe since April, and is barely holding on to 1.13 as I write. And the Chinese renminbi, which saw appreciation in the fixing night after night in April, has reverted back to nightly depreciations in May.

So, it could have been a coincidence, but it sure quacks like an Agreement, walks like Agreement, and talks like an Agreement was put in place at the end of March, even though the respective countries allegedly involved deny their participation. And now that Agreement is showing it doesn't have legs to run a long distance, unlike the Plaza Accord, which was signed in 1985 to weaken the dollar and lasted nearly a decade.

UP NEXT: A FOMC MEETING

June will be busting out all over, and the Fed will be assembling their FOMC (Federal Open Market Committee), the people who vote on rate moves, for the June 14-15 meeting. Remember last December when Fed Chair, Janet Yellen, hiked rates for the first time in a decade, and told us that the Fed would be hiking rates four times in 2016? I said at the time their projection on rate hikes was malarkey, and gave you the reasons why. It was thought in December that March, June, July and December would be the months that saw rate hikes at the meetings held in those months.

So, here's the scenario: The Bond markets, and the Fed Funds Futures markets don't believe the Fed will hike rates in June. And they didn't hike in March. That will leave them just four more meetings in 2016 in which to play catchup with rate hikes. But will they really hike rates so close to an election? I don't think so. It would be viewed as "too political."

So, it's "party on Wayne, party on Garth" for the stock and the bond markets. (Gold sure likes low rates too!) Speaking of the stock market, I have a simple thought as I write in May. I borrowed this from my friend, Steve Sjuggerud, when asked about the old adage, "Sell in May and go away." Here's Steve: "According to the Stock Trader's Almanac, since 1950, the Dow has had an average return of 0.3% from May through October. Then from November through April, the average gain has been 7.5%. In fact, last year the adage held true as the S&P had a 7.4% decline from May to October."

So, there could be some give and take there this year, don't you think? And Bonds continue their 35-year bull market as long as the Fed keeps the lid on their rate hike jar. The Bond markets are telling us that the U.S. economic growth is nascent at best, and not worthy of additional rate hikes at this time. And I concur.

As evidenced by the April Jobs report, which saw 160,000 jobs created, per the BLS, when 205,000 were expected to be created. I pointed out in the world famous Daily Pfennig® newsletter (shameless plug), that 233,000 jobs were added by the BLS to the surveys as a part of their "adjustment," and that without the "adjustments" jobs creation would have been negative in April. Wait, what? Yes, that's right.

CHUCK HAS HAD IT WITH CENTRAL BANKS

Have you ever heard of the term, "helicopter parents"? These are parents that hover over their kids 24/7. Do you believe they are acting in their child's best interest? Shouldn't kids learn to make friends, socialize, and experience loss and hardships, so that they grow up well adjusted and not socially maladjusted?

A dear Pfennig reader sent me a note in May that I just had to use, for he hit the nail on the head with regards to Central Banks. I tied the helicopter parents into this, as it illustrates exactly what Central Banks (around the world, and not just here in the U.S.) are doing.

Central banks hover over their economies 24/7, and insist on pumping up the money supply and lowering interest rates at every stumble of their "child" (the economy). Eventually all these moves will fail to have the desired effect on the economy (like our ZIRP), and most likely will send their overly dependent economies into a free fall.

Here in the U.S. all the king's men and all the king's horses couldn't put the economy back together again, and I'm really giving up on Central Banks. They continue to make matters worse. I truly believe that all the economists and accountants that the Fed employs, along with the Fed members themselves, are not stupid, but if you got them alone in a room and told them no one would know what they said, they would probably admit that the Keynesian economic theory that they've followed for decades isn't working.

But will they ever change something that isn't working? No. And so we're stuck with the arbitrary decisions of the Central Bank.

For example, in Australia earlier in May, the Central Bank there, the Reserve Bank of Australia (RBA), cut rates when more than half of those that observe these things didn't think they would. There's a point—and I've said this before, so listen to me now and hear me later—where rate cuts don't work any longer. They no longer have the same effect on the economy that they did when rates were higher. And the A$ suffered, and is still suffering, two weeks later from the rate cut.

I could talk for a week about the Bank of Japan, and their mishaps that go back 20 years. For the record they include: the first to use Budget Stimulus measures, the first to cut rates to zero, the first to use Quantitative Easing. And Japan was the first country to reach a debt to GDP ratio of over 200%.

But they knew better, right? But what if Japan had just let its economy go into a recession in 1995, and work itself out? All the debt, all the suffering, all the damage that zero interest rates do to savers, and all the Japanese leaders that had to fall on a sword because they could not put Humpty Dumpty back together again, may have been avoided, that's what!

IS GOLD READY FOR ANOTHER BULL MARKET TREND?

Quick, what's the best performing asset in 2016 so far? Well, if you said gold, you are a winner, winner, chicken dinner! But that's the fact, Jack. Suddenly in 2016, the most hated asset of the last five years is rising in price again. So, what's happening to drive the price of gold to the near $1,300 per ounce that it reached late in April? Ahhh, grasshopper, that's a good question, and one that I can hopefully answer.

There are a few things in gold's favor right now, folks. We have the same old geopolitical stuff going on that has led many observers to think that the Middle East is a tinder box ready to ignite. We have interest rates around the world at record low levels, and this move by several Central Banks to move their interest rates to negative rates has really got the gold buyers storming the castle gates. I don't want to get started on negative rates again, but what mental giant thought negative rates would be a good thing? I shake my head in disgust. Getting back to gold—people, not just here in the U.S. but all around the world, are very scared to death with the state of the global economy. I call this the "fear factor" and when it's present, gold performs well.

So, looking out on the horizon, I don't see much changing these things that are favoring gold right now. Geopolitical problems will remain, negative rates have new member countries all the time (with Japan being the latest to join) and the "fear factor" isn't going away any time soon.

That's it for this month. We have quite a few things going on in June, that will certainly move the markets, so to keep up with them be sure to sign up to receive the Daily Pfennig® newsletter.


ASSET TRENDS 3/18/2016 – 4/15/2016

Source: Bloomberg World Currency Ranker Screen (WCRS). WCRS asset trends are based on BGN “Bloomberg Generic” indicative or “spot” currency exchange rates and metals prices as of 5 pm Eastern Time on the dates specified. Such rates and prices are generally only available for large volume transactions conducted by institutional investors at a specific point in time. These values are illustrative only and do not reflect interbank rates available to us or the rates or prices we make available to customers at any point in time, and the trend data provided do not include retail exchange spreads or other transaction costs.

Currency1, 2 Trend Change (%)
Australian dollar -5.18%
Brazilian real 0.28%
British pound 1.77%
Canadian dollar -0.97%
Chinese renminbi -0.77%
Columbian peso -0.92%
Czech koruna 0.46%
Danish krone 0.47%
EMU euro 0.43%
Hong Kong dollar -0.08%
Hungarian forint -0.99%
Indian rupee -0.34%
Israeli shekel -0.99%
Japanese yen -0.32%
Mexican peso -4.36%
New Zealand dollar -1.73%
Norwegian krone 0.88%
Polish zloty -1.25%
Russian ruble1 2.46%
Singapore dollar -0.88%
South African rand -7.10%
South Korean won -2.35%
Swedish krona -1.32%
Swiss francs -0.91%
Turkish lira -3.82%
Metals3 Trend Change (%)
Gold 3.10%
Silver 5.51%
Platinum 6.09%
Palladium 2.49%
EverBank CD Baskets1, 2 Trend Change (%)
Balanced Debt® -1.16%
BRICS -1.09%
Commodity BasketSM -3.75%
Euro Trax® -0.10%
European OpportunitySM -0.73%
Geographic BasketSM -2.30%
Global Power Shift® -1.25%
Investor's Opportunity® -3.04%
Mining OpportunitySM -0.84%
New World EnergySM -1.75%
Pacific Advantage® -0.95%
Pan-AsianSM -2.33%
PetrolSM -0.57%
Ultra Resource® -1.32%
Viking® 0.10%
World Energy® -0.88%

EverBank CD Basket trends are also based on WCRS indicative spot rates for the underlying currency mix, which is described at everbank.com/currencies, and thus are not reflective of interbank rates available to us or the rates we make available to customers at any point in time and do not include our spread. For more information, please see everbank.com/currencies.

Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
You can count on Chuck to tell it like it is. He has over 35 years of experience in the currency field. And he's got a wit all his own. A frequent and respected analyst for various national media outlets, Chuck is also the original author of the popular Daily Pfennig® blog.

Asset trend data are illustrative only and do not reflect retail exchange spreads or other transaction costs.

Along with the potential for market gains, foreign currency accounts carry some additional risks from currency fluctuations, economic and political factors, and accounting differences.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements, comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. Due to the rapidly changing nature of currency and commodities markets, any statement, comment, or opinion may quickly become outdated. This is not a solicitation for the purchase or sale of any securities or options on securities or for the purchase or sale of a currency or any precious metal, and it does not constitute a recommendation to you or to any specific person of any particular action. EverBank, its officers and employees do not provide investment or other types of advice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any purchases.

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