Download The Economy and Bond Market

USFunds.com • July 22, 2016
Table of Contents
Index Summary • Domestic Equity Market • Economy and Bond Market • Gold Market
Energy and Natural Resources Market • Emerging Europe • China Region • Leaders and Laggards
Will the Gold Bull Market Resume After the Summer
Correction?
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance
speech from last night was all gold, from the stairs to the podium, completely befitting of his showman-like style.
Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace
ourselves for what will surely be one of America’s messiest, ugliest general election seasons.
Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners
might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty.
In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing
“unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to
50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting,
diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below
zero and faith in Abenomics is flagging, gold sales are soaring.
It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).
Strong U.S. Dollar and Treasury Yields Weighing on Gold
More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-tonegative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt
currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and
rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.
click to enlarge
It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some
of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in
anticipation of Diwali and the wedding season.
click to enlarge
For the past few trading days, gold demand had also been overshadowed by a hot equities market, with many
stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs,
twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in
“Extreme Greed” mode, at more than a two-year high.
With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major
gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with
end-of-year forecasts in the $1,400 an ounce range.
Learn more about what’s driving gold.
Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated
Despite gold’s correction, the metal got a boost yesterday courtesy of Mario Draghi. The European Central Bank
(ECB) president, as expected, announced that euro area interest rates and asset purchases would remain
unchanged as economic ramifications of the Brexit referendum continue to be assessed.
Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the
U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would
dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released this week,
securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of
August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.
This week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast
for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing
faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP
Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”
click to enlarge
Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting
the pause button on the correction. Today, though, prices continued to slide, contributing to gold’s second straight
week of losses.
The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have
wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel
confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates
are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.
Index Summary

The major market indices finished up this week. The Dow Jones Industrial Average gained 0.29 percent.
The S&P 500 Stock Index rose 0.61 percent, while the Nasdaq Composite gained 1.40 percent. The
Russell 2000 small capitalization index gained 0.63 percent this week.

The Hang Seng Composite gained 1.41 percent this week; while Taiwan was up 0.71 percent and the
KOSPI fell -0.34 percent.

The 10-year Treasury bond yield rose 1 basis point to 1.56 percent.
Domestic Equity Market
click to enlarge
Strengths

Information technology was the best performing sector for the week, increasing 2.02 percent compared
to an overall increase of 0.56 percent for the S&P 500 Index.

Chesapeake Energy was the best performing stock for the week, increasing 21.95 percent. The company
received various upgrades from brokers and research firms. It was upgraded by analysts at Tudor
Pickering and Zacks Investment Research from a “hold” rating to a “buy” rating and from “underweight”
rating to a “neutral” rating by Simmons and Piper Jaffray.

Microsoft beat on the top and bottom lines. The company announced adjusted earnings of $0.69 a share,
easily beating the $0.58 that analysts were expecting. Revenue rose 1.9 percent to $22.6 billion, topping
the $22.14 billion that Wall Street was anticipating. Microsoft says it had a "run rate" of $12.1 billion for
commercial cloud products during the quarter.
Weaknesses

Energy was the worst performing sector for the week, falling negative 1.31 percent compared to an
overall increase of 0.56 percent for the S&P 500.

Netflix was the worst performing stock for the week, falling 12.70 percent after a disappointing quarter.
The video-streaming service earned $0.09 a share as revenue climbed 31 percent year-over-year to $2.1
billion. The good news stopped there, however, as the company said it added just 160,000 U.S.
subscribers, well shy of its guidance of 500,000. Netflix also gained just 1.52 million international
subscribers, missing its 2 million subscriber guidance. Third-quarter subscriber-growth guidance for
both the U.S. and international markets was well shy of Wall Street estimates. Shares of Netflix were
down more than 15 percent in after-hours trade after the earnings release.

Chipotle had a brutal quarter. The fast-casual burrito chain earned an adjusted $0.94 a share, topping
the $0.91 that analysts were hoping for. But things got a bit ugly from there. Revenue plunged 16.6
percent to $998.4 million, same-store sales crashed 23.6 percent and traffic tumbled 19.3 percent as the
company continues to struggle after its E. coli crisis.
Opportunities

GameStop shares jumped more than 8 percent after CEO Paul Raines told CNBC that sales at stores that
were Pokémon Go gyms in the app were up 100 percent. Gyms are real-world places where players can
take their Pokémon for battles, and 462 of them were at GameStop stores this past weekend. The popular
location-based smartphone app is also helping GameStop sell merchandise, Raines said. In the first
quarter, GameStop reported a 29 percent plunge in new video game hardware sales year-on-year, and a 7
percent drop in digital sales.

IBM beat on the top and bottom lines. "Big Blue" earned $2.95 a share, outpacing the $2.89 that Wall
Street analysts were expecting. Revenue fell 3 percent year-over-year to $20.24 billion, but that was
ahead of the anticipated $20.03 billion. Revenue has now fallen in 17 straight quarters. Cloud revenue
remained a bright spot, however, surging 30 percent to $3.4 billion.

Halliburton believes the North American oil market has turned. "We expect to see a modest uptick in rig
count during the second half of the year," CEO Dave Lesar said in the company's second-quarter
earnings statement. Around mid-May, the plunge in the U.S. oil rig count stabilized as rising oil prices
encouraged some producers to increase activity. Halliburton posted an adjusted loss per share from
continuing operations of $0.14, better than analysts' median estimate for a loss of $0.19, according to
Bloomberg. Revenue totaled $3.84 billion (versus $3.76 billion expected), a 35 percent year-over-year
decline.
Threats

Fiat Chrysler is being investigated by the U.S. government on whether it violated securities laws,
according to Bloomberg. The report recounted a January lawsuit in which "dealerships in Illinois and
Florida that alleged the sales were padded through a scheme by which dealers—sometimes unbeknownst
to their owners—were paid to create false New Vehicle Delivery Reports." The investigation is focused on
sales of vehicles to customers, not dealerships.

The U.S. government is planning to file lawsuits to block the massive mergers of four health care giants,
according to Bloomberg. The Department of Justice will try to block both the $54 billion deal between
Anthem and Cigna, which would create the largest health insurance company based on the number of
people covered, and a $37 billion takeover of Humana by Aetna. Both deals are being blocked on
anticompetitive grounds, Bloomberg said, citing sources within the Justice Department. Lawsuits could
come by the end of the week, the report said. The deals had already faced regulatory pushback from
Democratic U.S. senators.

Volkswagen is being sued by a handful of states. Attorney generals from Maryland, Massachusetts and
New York have filed a lawsuit against Volkswagen, Porsche and Audi, alleging a "cover up" that was
"orchestrated and approved at the highest levels of the company." The lawsuit accuses Volkswagen of
skirting emissions standards by installing "defeat devices" since the mid-2000s. Additionally, the suit
says that the group "made a knowing decision to violate the law" and that Volkswagen "allegedly
destroyed incriminating documents" upon hearing about the investigation.
July 20, 2016
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Hillary Would Tax this Important
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Make You Scream “Oh Yes!”
The Economy and Bond Market
Strengths

U.S. housing starts rose more than expected in June. Starts jumped 4.8 percent at a seasonally adjusted
annual rate of 1.189 million, rebounding from a downward-revised 1.7 percent drop in the
May. Economists had forecast that starts rose 0.2 percent month-on-month in June at a seasonally
adjusted annual rate of 1.164 million. Building-permit activity also topped estimates, rising by 1.5 percent
at a rate of 1.153 million. Starts data are usually volatile month-to-month, but June's increase "shows a
sturdy demand for new homes as we move into the second half of the year," said Quicken Loans Vice
President Bill Banfield.

According to Chris Williamson, Markit's chief economist, American manufacturing is showing an
"encouraging sign of revival." The firm's flash purchasing managers' index for July rose to 52.9, its
highest level since November. Output growth jumped to the best level in eight months, and
manufacturing payrolls had the biggest gain in a year.

The Citi Economic Surprise index has been on the rise lately, reflecting the strong economic data in the
U.S. It coincides with the latest Conference Board U.S. Leading Index month-over-month (MoM), which
posted an increase of 0.3 percent for June, ahead of the forecasted 0.2 percent.
click to enlarge
Weaknesses

U.S. homebuilder sentiment unexpectedly fell in July. The National Association of Homebuilders'
housing market index dropped to 59 from a five-month high of 60 — the level that economists had
forecast it would remain at. All three index components that the NAHB surveyed its members on —
current sales, future sales expectations, and buyer traffic — fell in July. NAHB Chairman Ed Brady said
in the release that members in some markets complained about regulatory constraints, inadequate lots,
and labor shortages.

In an update to its World Economic Outlook, the International Monetary Fund trimmed 0.1 percent from
its March forecasts for global gross domestic product growth. The IMF now expects the global economy
to grow 3.1 percent this year and 3.4 percent next year, blaming uncertainty surrounding Brexit for the
slower growth. On a separate note, France’s highest court ruled on Friday that IMF managing director
Christine Lagarde must stand trial for negligence in a case stemming back to her time as the French
finance minister.

German confidence was hit hard by Brexit. The ZEW Indicator of Economic Sentiment for Germany
plunged 26 points in July to -6.8. "Uncertainty about the [Brexit] vote’s consequences for the German
economy is largely responsible for the substantial decline in economic sentiment," professor Achim
Wambach, the ZEW president, said. "In particular, concerns about the export prospects and the stability
of the European banking and financial system are likely to be a burden on the economic outlook."
Opportunities

U.S. data next week include the services PMI (following today's manufacturing PMI), consumer
confidence, home sales and prices, durable goods orders and second-quarter GDP. If the data confirm
the FOMC's expectation that U.S. growth is solid, the chance of a rate hike in September and/or
December will rise sharply.

The U.S. oil-rig count rose for a fourth-straight week, according to Baker Hughes. The tally increased by
14 to 371, the gas-rig count fell by one to 88, and miscellaneous rigs rose by two to three, taking the total
up 15 to 462. Amid steep cost reductions and rising oil prices in the past few weeks, producers are betting
that a rebound is underway.

Congress formed a Puerto Rico Economic Growth Panel. The eight-member panel was formed to conduct
a review of federal laws and programs to help boost Puerto Rico’s economy, part of legislation enacted to
address the island’s $70 billion debt crisis.
Threats

Policymakers at the Fed and the Bank of Japan hold their respective policy meetings next week
(Wednesday for the Fed and Thursday for the BoJ). Any surprises could jolt the relative ease that
markets have seen in the past weeks.

Eurozone data releases next week include PMIs and confidence for July. These data points will reveal
whether or not the Brexit vote has had a large negative effect on the eurozone economy.

The municipal bond market has outperformed Treasuries as prices slipped during the past two weeks,
making munis the most expensive relative to Treasuries in three weeks.
Gold Market
This week spot gold closed at $1,322.01, down $15.49 per ounce, or -1.16 percent. Gold stocks, as measured by the
NYSE Arca Gold Miners Index, slipped 3.50 percent. Junior miners outperformed seniors for the week as the
S&P/TSX Venture Index traded up 0.47 percent. The U.S. Trade-Weighted Dollar Index moved higher with a 0.82
percent gain.
Date
Event
Survey
Actual
Prior
Jul-19
Germany ZEW Survey Current Situation
51.5
49.8
54.5
Jul-19
Germany ZEW Survey Expectations
9.0
-6.8
19.2
Jul-19
U.S. Housing Starts
1165k
1189k
1135k
Jul-21
ECB Main Refinancing Rate
0.000%
0.000%
0.000%
Jul-21
U.S. Initial Jobless Claims
265k
253k
254k
Jul-26
Hong Kong Exports YoY
-1.1%
--
-0.1%
Jul-26
U.S. Consumer Confidence Index
95.5
--
98.0
Jul-26
U.S. New Home Sales
558k
--
551k
Jul-27
U.S. Durable Goods Orders
-1.3%
--
-2.3%
Jul-27
FOMC Rate Decision
0.50%
--
0.50%
Jul-28
Germany CPI YoY
0.3%
--
0.3%
Jul-28
U.S. Initial Jobless Claims
264k
--
253k
Jul-29
Eurozone CPI Core YoY
0.8%
--
0.9%
Jul-29
U.S. GDP Annualized QoQ
2.6%
--
1.1%
Strengths

The best performing precious metal for the week was palladium, up 5.49 percent. Citigroup forecast that
platinum could see a deficit of 172,000 ounces in 2016, but palladium’s deficit could be short by 847,000
ounces, thus the group is more bullish on the later.

Esturo Honda, who according to Bloomberg News has emerged as a matchmaker for Prime Minister
Shinzo Abe in finding foreign economic experts to offer policy guidance, is opening his ears to Ben
Bernanke. In April, Bernanke noted that helicopter money, in which “the government issues nonmarketable perpetual bonds with no maturity date and the Bank of Japan directly buys them,” could
work as the strongest tool to overcome deflation, says Honda.

Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, says there is political
risk building into the gold market, including the Italian referendum and U.S., French and German
elections. Blanch adds that in the past, gold used to be driven more by the U.S. dollar and commodity
market movements, but “in this day and age, it’s a new world.” He also mentions that one-third of
government bonds are yielding negative. The chart below shows that $9.2 trillion of sovereign bonds are
trading with negative yields.
click to enlarge
Weaknesses

The worst performing precious metal for the week was silver, down -2.97 percent. With silver generally
more volatile than gold, a strong rally in stocks, up 10 of the last 11 days and with new record highs, had
investors chasing returns in the broader market.

Gold traders and analysts are bearish for the first time in four weeks, reports Bloomberg. The precious
metal headed for its first back-to-back weekly decline since May, with gains in equity markets and the
dollar hurting prices. David Meger, director of metals trading at High Ridge Futures in Chicago, says that
the dollar’s strength continues to pressure most commodities, gold in particular. “Safe-haven demand
has been diminishing, obviously with equity markets moving to new record highs,” Meger said.

A group of armed men stormed one of Agnico Eagle’s mines in northern Mexico early Tuesday morning,
reports the Canadian mining company, injuring a security guard and making off with a haul of gold and
silver. Last April a similar situation occurred when armed men entered McEwen Mining’s El Gallo 1 mine
in northern Mexico, reports Reuters, even though thefts within mines are “relatively rare in Mexico.”
Opportunities

The World Gold Council and the Accounting and Auditing Organization for Islamic Financial Institutions
are drafting new standards for investing in gold to comply with Sharia law, reports an Energy and Capital
article. If the proposals for the changes (expected in the fourth quarter) are accepted, a flood of new
investors could help send gold prices soaring, the article continues. A similar situation took gold prices to
$1,900 in 2011 when surging demand came from China following the government’s urge for its citizens to
own the yellow metal.

With the U.S. presidential election seen as the next big catalyst, Bill Beament of Northern Star Resources
believes that gold’s rally is set to endure, reports Bloomberg. He says the overall trend is up and that “the
U.S. vote will have more of an impact on bullion than the U.K. referendum.” The IMF also scrapped its
forecast for a pickup in global growth, the article continues, yet another positive for gold.

Commerzbank raised its year-end gold estimate by $100, reports Bloomberg, to $1,450 an ounce.
Similarly, DBS Group Holdings says that gold is in a major bull market and could surge past $1,500 an
ounce as “low interest rates buoy demand and the U.S. presidential election looms.” The long-term gold
price has been adjusted higher at Numis Securities as well, up to $1,400 an ounce from $1,350 an
ounce. While it good to see the street starting to take their price forecast higher for gold, investors
should remain disciplined as the late summer can be a seasonally weak period for prices and many of the
expected price targets being raised are capitulation moves to higher price levels.
Threats

According to data compiled by Bloomberg, investors pulled $793 million out of SPDR Gold Shares last
week, the most since November. As Citigroup’s U.S. Economic Surprise Index rose to its highest since
January 2015 (a sign of an improving economic outlook), demand for ETFs backed by gold has
diminished some. Holdings in gold-backed ETFs around the world fell 3.9 metric tons last week, reports
Bloomberg.

Sovereign gold bonds issued in India were trading at a 27-percent premium over the fixed price when the
bonds were first issued in November, reports LiveMint. Prices of physical gold have risen 23 percent
during the same period. According to the article, “Investors get a fixed interest rate of 2.75 percent per
annum on these bonds over and above the capital gains that may accrue if the price of gold rises in the
spot market.” The gold bonds are part of the government’s gold monetization efforts aimed to “wean the
public off physical gold.”

Will gold miners maintain their capital discipline? Bloomberg reports that as the price of gold rises to its
best first half of the year in nearly four decades, earnings reports could indicate that miners are
preparing to ease in terms of spending. “Historically there’s been a very high correlation, almost a oneto-one correlation, between costs and the gold price, implying that with higher gold prices you will likely
see costs rise at the same time,” Josh Wolfson of Dundee Capital Markets said. Wolfson added that a
majority of miners structured spending based on the assumption that gold will trade between $1,100 and
$1,150 an ounce. Let’s hope the miners learned something over the prior three painful years of falling
gold prices.
Energy and Natural Resources Market
Strengths

Gold miners results are coming in and they are good. With major gold indices more than doubling in
2016, expectations were high, and quarterly results have not disappointed. Newmont Mining, the largest
U.S. producer of the yellow metal, posted its best quarterly performance since the first quarter of 2013,
handsomely beating analysts’ expectations and even suggesting a dividend increase may materialize later
this year. Similarly, AngloGold Ashanti, Africa’s top bullion producer, returned to a profit as higher
prices and years of cost-cutting boosted its margins.

The best performing sector for the week was the Nasdaq Clean Edge U.S. Index. The index of renewable
energy companies rose 1.3 percent for the week as the White House announced an initiative to accelerate
the deployment of electric vehicle charging infrastructure and encourage the use of electric vehicles.

Lucara Diamond Corp, a Canadian diamond mining company was the best performing stock in the
broader natural resource space, rallying 6.4 percent for the week. The stock outperformed after the
company announced the payment of a special dividend, raising the annual distribution yield to 13.6
percent.
Weaknesses

Oil prices dropped to a three-month low as inventories hit an all-time high. A ninth-straight decline in
U.S. oil inventories could not prevent OECD crude stockpiles from rising to a new all-time high of 3,074
million barrels. The EIA reported a 13.5 million barrel build in overall OECD inventories for the month
of June, suggesting there may be more short-term pain before the market reaches a supply demand
balance in 2017.

The worst performing sector for the week was the FTSE 350 Mining Index. The index of major
diversified mining companies dropped 4.3 percent for the week as BHP Billiton and Anglo American
reported disappointing production numbers for the second quarter.

The worst performing stock for the week in the S&P Global Natural Resources Index was CF Industries
Holdings Inc. The major producer of fertilizers dropped 8.3 percent for the week as a number of analysts
cautioned that weaker nitrogen pricing forecasts may lead to downside revisions to estimates.
Opportunities

Natural gas prices should continue their run as abnormally warm weather hits much of the East Coast. In
fact, gas deliveries to electricity generators have jumped to an all-time high as people blast air
conditioners to keep cool, according to a Bloomberg report. The boost from warmer weather coincides
with an underlying fundamental switch in the U.S. electricity market, which has seen natural gas take
over as the major source of electricity generation in the country as coal-powered plants continue to be
phased off.
click to enlarge

Activity in the oil sector is set to rebound as major service companies call a bottom. Schlumberger and
Halliburton, the two largest providers of drilling and fracking services, have declared that the worst is
over as the cycle has bottomed. The companies are forecasting modest upticks in activity for the
remainder of the year.

Platinum group metals should continue to outperform as auto sales beat expectations. Macquarie reports
that global car sales rose 5.6 percent in June, led by China and the EU. The strong beat suggests full-year
growth expectations may see upward revisions. The news is especially supportive for PGMs, which derive
most of their demand from auto catalysts fitted to new vehicles.
Threats

Gasoline demand is posting disappointing growth rates. Americans drove 9 billion miles in May 2016,
representing a 2-percent growth compared to last year. This growth rate compared unfavorably to those
of March and April 2016, at 4.9 and 2.5 percent respectively. On a year-to-date basis, the growth rate
slowed to 2.7 percent, leading analysts at Tudor Pickering Holt to remain cautious on gasoline
fundamentals.

Gasoline prices may continue to drop as China boosts exports to record. Chinese refiners more than
doubled gasoline exports as a last ditch effort to alleviate swelling stockpiles at home. Exports rose 120
percent from last year to a new record of 312,000 barrels per day, exacerbating a glut of fuel across Asia,
as Japan and South Korea also grow their exports.

Steel prices continue to weaken as Chinese property prices cool down. June property prices continue to
taper off as more cities impose curbs designed to avoid speculation in the real estate market. Steel prices
retreated 6 percent for the week.
China Region
Strengths

Hong Kong’s benchmark Hang Seng Index has now erased 2016 losses and this week entered a so-called
technical bull market, rising to a closing high yesterday of more than 20 percent from the index’s
February lows.

Indonesia’s Jakarta Composite Index continued its gains this week, climbing to new 52-week highs as
investors focused upon a possible tax amnesty plan for the island nation, largely shrugging off the fact
that Bank Indonesia left reference rates unchanged despite chatter and some expectations of a cut.
click to enlarge

Thailand’s SET Index also climbed to new 52 week highs this week. The index is now up roughly 23
percent from its February lows and about 17 percent year-to-date.
Weaknesses

Housing gains in China slowed down for the June period as even some second-tier cities have now
imposed curbs to cool rising prices. Prices dropped in 10 cities, according to Bloomberg News, compared
to only four in May.

The publishers of the China Minxin Manufacturing PMI Index suspended indefinitely the unofficial
purchasing managers’ index. The index, a joint product of the China Minxin Banking Corp. and the
China Academy of New Supply-side Economics, follows the October discontinuation of the former flash
PMI index that had been compiled by Markit Economics and Caixin Media.

The Malaysian ringgit and the FTSE Bursa Malaysia KLCI Index are both among the worst relative
performers in the region for the last week and the trailing three months as the broad regional rally has
generally left Malaysia’s currency and benchmark equity index in the dust.
Opportunities

China’s top economic planner issued the nation’s latest railway plan this week, reports China Daily, with
the target to operate a 175,000 kilometer rail network by 2025. According to the National Development
and Reform Commission, by 2020 China will have 150,000 kilometers of railway, of which about 30,000
kilometers will be high-speed, covering 80 percent of the major cities nationwide.

China’s working-age population has been shrinking since 2012, reports Bloomberg, a clear fact that the
world’s most populous country, ironically, needs people. According to the article, China is preparing to
open its first-ever immigration office to attract highly skilled foreigners to help the nation become a
“global center for innovation.”

According to a report from the National Development and Reform Commission, a record number of
students who studied overseas are making their way back home to start their own businesses, reports
China Daily. Around 523,700 Chinese students went overseas to study in 2015 and 409,100 returned last
year, up 12 percent from 2014, reports the Ministry of Education.
Threats

“China is still a developing country—we can’t shoulder the heaviest burden of the world’s economy,”
Premier Li Keqiang said on Friday during a discussion on economic growth, reports Bloomberg. Li
continued by explaining that the Asian nation still has room for proactive fiscal policies and tax cuts,
while sticking to prudent monetary policy, and that China still faces long-term, downward pressure.

The Three Gorges Dam’s role in flood control is being questioned among those living along the Yantgze
River, reports South China Morning Post, as the area battles its worst flooding since 1998. According to
the article, floods have left 237 people dead and another 93 missing, on top of the 69 killed when
Typhoon Nepartak hit Fujian province on July 9.

Goldman Sachs estimates that June cash outflows in China were closer to $50 billion, up from May’s
roughly $25 billion. Given that the renminbi weakened this week as far as 6.7 versus the dollar for the
first time in five years, Goldman suspects that the subsequent stabilization of the currency indicates
policymakers’ response to the situation.
Emerging Europe
Strengths

The Czech Republic was the best performing country this week, gaining 3.2 percent. S&P Global Ratings
affirmed its AA-/A-1+ long- and short-term foreign currency and its AA/A-1+ long- and short-term local
currency sovereign credit ratings on the Czech Republic. The ratings reflect the country’s diversified and
productive economy, stable institutions, and moderate levels of public debt that the government is able
to refinance on the domestic market. The outlook is stable.

The Polish zloty was the best performing currency this week, gaining 100 basis points against the U.S.
dollar. Economic data releases show improvement in the economy including stronger retails sales, higher
gross wages, and a pickup in sold industrial output.

The health care sector was the best performing sector among Eastern European markets this week.
Weaknesses

Turkey was the worst performing market this week, losing 13.4 percent. After last week’s failed coup
attempt, Turkey imposed a state of emergency for the next three months. The President of Turkey held
an exiled cleric, Fethullah Gulen, responsible for the uprising and demanded that President Obama
deport him from his home in Pennsylvania. Secretary of State John Kerry said that the U.S. would
consider extradition, but required evidence of wrongdoing.

The Russian ruble was the worst performing currency this week, losing 1.84 percent against the U.S.
dollar. Year-to-date the ruble is the second strongest world currency, appreciating 15.9 percent against
the U.S. dollar. President of Russia, Vladimir Putin, instructed the country’s government to pay attention
to a strengthening ruble as strong currency means that Russia gets less revenue per barrel of crude sold
abroad.

The industrial sector was the worst performing sector among Eastern European markets this week.
Opportunities

Since the U.K. voted to leave the eurozone, emerging market equities have outperformed equites from
developed markets. The chart below shows the performance of an Eastern European ETF versus a
Western European ETF since June 23.
click to enlarge

Greece’s second review may start in September and could be completed by the end of this year. Its main
targets will focus on labor reforms and the legal framework for the trade unions. Once complete, Greece
will receive another financial aid and will push forward with its reforms to strengthen its economy.

Wells Fargo, the world’s biggest bank by capitalization, has given a huge vote of conidence in London’s
future as a financial center, even after the British exit from the European Union. The bank bought an 11story building for its new headquarters in the U.K. capital. The office sale was one of the largest property
deals since the U.K. voted to leave the EU on June 23. This purchase takes place even as some were
concerned with Britan’s property market and London’s status as a finiancial hub.
Threats

The eurozone’s ZEW sentiment survey plunged after the Brexit vote. The investor confidence index,
calculated by the ZEW economic institute, fell by 34.9 points to minus 14.7 points in July from 20.2 in
June, its lowest level in four years.
click to enlarge

Marc Chandler from Brown Brothers Harriman writes that Italian banks face three challenges:
capitalization, bad loans and profitability. The government appears to be moving toward recapitalization
and a way to get bad loans off of the bank books. However, the European Banking Authority and the
European Central Bank’s stress test on July 29 are expected to show some Italian banks are undercapitalized.

The S&P rating agency cut Turkey’s credit rating from BB+ to BB. Similarly, Moody’s rating agency
placed Turkey’s Baa3 rating on review for downgrade. The rating agency said that it would consider the
current rating if Turkey withstands the pressure from rising political risk. A potential downgrade would
probably be limited to one notch, but it will cut the rating from investment grade to junk. An
announcement will be made August 5.
Leaders and Laggards
Weekly Performance
Close
Weekly
Change($)
Weekly
Change(%)
18,570.85
+54.30
+0.29%
2,175.03
+13.29
+0.61%
S&P Energy
512.82
-6.80
-1.31%
S&P Basic Materials
304.93
-0.84
-0.27%
Nasdaq
5,100.16
+70.57
+1.40%
Russell 2000
1,212.89
+7.58
+0.63%
Hang Seng Composite Index
2,954.40
+31.44
+1.08%
Korean KOSPI Index
2,010.34
-6.92
-0.34%
S&P/TSX Global Gold Index
261.46
-5.22
-1.96%
XAU
103.74
-3.99
-3.70%
1,330.80
-4.10
-0.31%
Index
DJIA
S&P 500
Gold Futures
Oil Futures
44.20
-1.75
-3.81%
Natural Gas Futures
2.78
+0.02
+0.91%
10-Yr Treasury Bond
1.57
+0.01
+0.84%
Close
Monthly
Change($)
Monthly
Change(%)
18,570.85
+790.02
+4.44%
2,175.03
+89.58
+4.30%
S&P Energy
512.82
+5.41
+1.07%
S&P Basic Materials
304.93
+7.18
+2.41%
Nasdaq
5,100.16
+266.84
+5.52%
Russell 2000
1,212.89
+63.92
+5.56%
Hang Seng Composite Index
2,954.40
+135.18
+4.79%
Korean KOSPI Index
2,010.34
+17.76
+0.89%
S&P/TSX Global Gold Index
261.46
+30.77
+13.34%
XAU
103.74
+12.85
+14.14%
1,330.80
+54.50
+4.27%
44.20
-4.93
-10.03%
Natural Gas Futures
2.78
+0.10
+3.88%
10-Yr Treasury Bond
1.57
-0.12
-7.18%
Close
Quarterly
Change($)
Quarterly
Change(%)
18,570.85
+567.10
+3.15%
2,175.03
+83.45
+3.99%
S&P Energy
512.82
+12.86
+2.57%
S&P Basic Materials
304.93
+8.31
+2.80%
Nasdaq
5,100.16
+193.93
+3.95%
Russell 2000
1,212.89
+66.20
+5.77%
Hang Seng Composite Index
2,954.40
+29.40
+1.01%
Korean KOSPI Index
2,010.34
-5.15
-0.26%
S&P/TSX Global Gold Index
261.46
+58.78
+29.00%
XAU
103.74
+22.88
+28.30%
1,330.80
+95.80
+7.76%
44.20
+0.47
+1.07%
Natural Gas Futures
2.78
+0.64
+29.95%
10-Yr Treasury Bond
1.57
-0.32
-17.15%
Close
Monthly
Change($)
Monthly
Change(%)
18,516.55
+876.38
+4.97%
2,161.74
+90.24
+4.36%
S&P Energy
519.62
+21.91
+4.40%
S&P Basic Materials
305.77
+11.51
+3.91%
Monthly Performance
Index
DJIA
S&P 500
Gold Futures
Oil Futures
Quarterly Performance
Index
DJIA
S&P 500
Gold Futures
Oil Futures
Monthly Performance
Index
DJIA
S&P 500
Nasdaq
5,029.59
+194.66
+4.03%
Russell 2000
1,205.31
+56.01
+4.87%
Hang Seng Composite Index
2,922.96
+152.44
+5.50%
Korean KOSPI Index
2,017.26
+48.43
+2.46%
S&P/TSX Global Gold Index
266.68
+28.69
+12.06%
XAU
107.73
+15.31
+16.57%
1,337.70
+49.40
+3.83%
Gold Futures
Oil Futures
46.28
-1.73
-3.60%
Natural Gas Futures
2.76
+0.16
+6.20%
10-Yr Treasury Bond
1.55
-0.02
-1.34%
Close
Quarterly
Change($)
Quarterly
Change(%)
18,516.55
+619.09
+3.46%
2,161.74
+81.01
+3.89%
519.62
+44.37
+9.34%
Quarterly Performance
Index
DJIA
S&P 500
S&P Energy
S&P Basic Materials
305.77
+16.41
+5.67%
Nasdaq
5,029.59
+91.37
+1.85%
Russell 2000
1,205.31
+74.39
+6.58%
Hang Seng Composite Index
2,922.96
+0.85
+0.03%
Korean KOSPI Index
2,017.26
+2.55
+0.13%
S&P/TSX Global Gold Index
266.68
+65.47
+32.54%
XAU
107.73
+29.81
+38.26%
1,337.70
+101.50
+8.21%
Gold Futures
Oil Futures
46.28
+5.92
+14.67%
Natural Gas Futures
2.76
+0.85
+44.90%
10-Yr Treasury Bond
1.55
-0.20
-11.47%
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