Before moving on to specifics concerning the day’s market movements, we’d like to clear up a fashionable theory about sovereign wealth funds (SWFs) and the falling prices of equities.
The general notion is that petro-states are drawing down their SWFs to plug gaping holes in budgets. (In fact, they are borrowing to do so.) But let’s say for a moment that the SWFs were being sold off.
Petro-states account for approximately 60% of global managed SWF assets. The funds allocate 16% of their holdings to equities, or so the Sovereign Wealth Fund Institute estimates. This equates to a total stock exposure of less than 1% of global market cap.
Now, let’s suppose that the SWFs of petro states apportion their holdings roughly geographically. That means any one of the three major economic regions would account for only 0.33% of global market cap. Next we’d have to suppose that all sales were at a serious loss. Draw your own conclusions on the effects of sovereign funds.
Before crude oil surged, Asia and Europe experienced a sharp sell off that only Shanghai avoided although it, too, fell. Europe was in too foul of a mood – based on banking, pharma and telecom struggles – to snap back as crude oil rose right at session’s close.
Crude rallied furiously in time to buoy U.S. equities today. At 3:30 in New York, West Texas is up 8.50% and Brent North Sea has risen 7.50%. Natural gas did not share wholeheartedly in the rally, moving up only about ½ of a percent.
Gold continued its rally, jumping 1.25% while silver blasted off to rise 2.85%.
Gold hit three-month highs on Wednesday, carried along by slower U.S. services sector growth and a weaker U.S. dollar. Investors were looking for shelter from the volatility storm.
The services sector slowed to a near two-year low in January, suggesting that economic growth weakened further at the start of the first quarter. Indeed it did, but the sector is still expanding and note needs to be taken. The sector is still very robust, especially given the month being measured – January.
The falling dollar is intriguing for the gold trade we are in, the price of crude, and for future potential upward movement of equities pricing.
The buck was down 1.75% today against the euro, 1.85% against the yen and off 1.3% paired with the British pound.
This will be good for American exports, tangible and intangible, which have been suffering with a stronger currency since the Fed raised rates (and before when the hike was being anticipated).
The stumbling of the services sector in January, for instance, can largely be attributed to a terrible currency imbalance, especially with Europe.
The modest rise in the yield of 10-year U.S. Treasuries would suggest that not all safe havens are created equal. Gold and silver seem to be exerting a strong gravitational pull on those seeking safety.
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Wishing you, as always, good trading,