“America Works… Never Bet Against America”January 20, 2017by Frank Holmes

of U.S. Global Investors

And like that, it happened. Despite the polls, despite what anyone believed was possible, including many of his ownsupporters, billionaire developer Donald J. Trump was sworn in as the 45th President of the United States.

Whether you agree with him not, he’s now leader of the world’s largest economy and commander of history’s most powerfulmilitary force.

This is something that could only happen in the U.S.

President Trump and now-former President Barack Obama couldn’t be more different in their backgrounds, visions andleadership styles—more so than any other two men whose administrations happen to adjoin the other’s.

And yet the transition went remarkably smoothly and orderly.

I don’t believe there’s ever been such a meaningful and potentially consequential transfer of power in U.S. history, with theincoming president all but promising to undo every last policy of his predecessor, line by line. That Obama peacefully andcordially handed over the executive office to a man who led the charge in questioning his legitimacy for a number of yearsis a testament to the strength and durability of our democratic process.

It’s a process that’s key to America’s exceptionalism.

Although I don’t always agree with Trump, it saddens me to see so much negativity about him in the media and protests inthe streets. Now that he’s president, the time has come to unite behind him and root for his success. If he succeeds,America succeeds. If he fails—as many seem to hope for—America fails.

Take Warren Buffett. He backed Hillary Clinton throughout the primaries and general election. And yet just yesterday, onthe eve of Trump’s inauguration, he said he supported the new president and his cabinet “overwhelmingly,” adding that he’sconfident America “will work fine under Donald Trump.”

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I think what Buffett recognizes is that the vast majority of people who voted for Trump did so for the right reasons.Throughout his campaign, Trump’s promise to bring back American jobs and secure the nation’s borders resonated witheveryday folks who have begun to feel overlooked. Entrepreneurs, small business owners and those working in thefinancial industry found hope and encouragement in his pledge to lower corporate taxes and roll back regulations. I believemost Americans, regardless of political ideology, want these things—which is why we saw such a large number of peoplewho previously voted for Obama give Trump their vote this time.

People like Buffett and entrepreneurs have a “growth” mindset because they embrace challenge, persist in the face ofsetbacks and are willing to put in the time and hard work to achieve their goals. People with a “fixed” mindset, on the otherhand, ordinarily avoid challenge and believe their intelligence and talents can’t be developed. It’s people with a “growth”mindset that we want as our business and political leaders.

(To learn more, watch this short TEDx video, “The Power of Belief—Mindset and Success.”)

As I often say, government policy is a precursor to change, and we’re likely about to see some sweeping changes. But asinvestors, it’s as important as ever that we don’t panic or get distracted by the noise. Instead, continue to focus on thefundamentals and keep your eyes on the long-term prize.

Inflation Plays Catch-Up

Inflation, as measured by the consumer price index (CPI), got a strong jolt in December, rising 2.1 percent year-over-year,its fastest pace in at least two-and-a-half years. Higher gasoline prices—which rose more than 8 percent in December—and health care costs were the main culprits, with medical bills surging the most in nine years.

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Although they might hurt your pocketbook, pricier goods and services have historically been constructive for gold, as I’veexplained many times before. In August 2011, when gold hit its all-time high of $1,900 an ounce, inflation was running at3.8 percent and the government was paying you an average 0.23 percent on the 2-year T-Note. That means investors wereearning a negative 3.5 percent return, which helped boost gold’s “safe haven” status.

I expect CPI to continue to climb throughout this year and next, supported by additional interest rate hikes—two or three in2017 alone—and President Trump’s protectionist policies.

The metal’s investment case could be strengthened even more now that Trump has officially been sworn in. His personalshortcomings and public office inexperience might raise more than a few “unknown unknowns” for some investors,prompting them to seek an alternative to stocks and bonds. Scotiabank hinted at this in a recent note, saying it expects goldholdings “to increase as investors look to diversify their portfolios in what seems likely to be a challenging year forinvestors.”

On Inauguration Day, gold rose a little under 1 percent to close at $1,210.

Whether you support the new president’s policies or not, it’s still prudent to maintain a 10 percent weighting in gold, with 5percent in gold stocks, the other 5 percent in coins and bullion.

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Look at the chart below. It’s indexed at 100 on the day the Federal Reserve raised rates in 2015 and 2016 (December 16and 14, respectively). Although past performance doesn’t guarantee future results, gold prices so far this year appear to betracking last year’s performance pretty closely, suggesting further upside potential.

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In the first half of 2016, gold rallied more than 31 percent, from a low of $1,046 in December 2015 to a high of $1,375 inJuly. With mid-December 2016 as our starting point, a similar 31 percent move this year would add close to $360 to theprice of gold, taking it to above $1,520 an ounce.

Gold Has a 100-Year History of Outperforming All Major Currencies

In its 2017 outlook, the influential World Gold Council (WGC) listed six major trends that will likely support gold demandthroughout the year, including heightened geopolitical risks (Brexit, Trump, the global rise of populism), a potential stockmarket correction, rising inflation expectations and long-term Asian growth.

The group also calls out currency depreciation. Over the past 100 years, gold has strongly outperformed all majorcurrencies. Whereas global gold supply grows at an annual average of only 2 percent, there’s no limit to how much fiatmoney can be printed.

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Inflation and currency depreciation are among the Fear Trade’s triggers that I often write and speak about.

Spending Watchdog: U.S. Is on an “Unsustainable Fiscal Path”

This point about currency depreciation is especially relevant in light of an alarming new report from the U.S. GovernmentAccountability Office (GAO), the nation’s watchdog. According to the report, the federal government’s spending is“unsustainable,” and if no action is taken to rectify the problem, the debt-to-GDP ratio will soon exceed its historical high of106 percent, set in 1946.

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To be clear, that means our nation’s debt will be larger than its economy.

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The federal deficit increased to $587 billion in 2016, after six years of declining deficits. Spending increases were driven byentitlement programs such as Medicare and Medicaid, which surged 4.9 percent and 5.3 percent, respectively, during theyear.

Whether Trump can change any of this, we’ll just have to wait and see. He seems interested in lowering costs and bringingsome fiscal sanity to the government, as demonstrated by his criticism of Boeing over the perceived cost of Air Force One.At the same time, massive tax cuts, coupled with a $1 trillion infrastructure package, will likely drive up deficit spendingeven more.

All the more reason to have a portion of your portfolio invested in gold and gold stocks.

One Final Thought…

This weekend I’m speaking at the Vancouver Resource Investment Conference, cosponsored by Cambridge House andKatusa Research. I’ll be sure to share my thoughts and observations with you next week!

In the meantime, I wish President Trump all the best!

Index SummaryThe major market indices finished down this week. The Dow Jones Industrial Average lost 0.29 percent. The S&P 500Stock Index fell 0.15 percent, while the Nasdaq Composite fell 0.34 percent. The Russell 2000 small capitalizationindex lost 1.47 percent this week.The Hang Seng Composite gained 0.12 percent this week; while Taiwan was down 0.51 percent and the KOSPI fell0.54 percent.The 10-year Treasury bond yield fell 7 basis points to 2.47 percent.

Domestic Equity Market

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Strengths

Consumer staples was the best performing sector of the week, increasing by 1.93 percent versus an overall decreaseof 0.15 percent for the S&P 500.CSX Corp was the best performing stock for the week, increasing 14.25 percent.Netflix surprised Wall Street on Wednesday when it reported fourth-quarter earnings and subscriber growth. In theU.S., net additions totaled 1.93 million, much better than the consensus forecast among analysts of 1.38 million andNetflix's own prior estimates. Earnings per share were $0.15, two cents above the median forecast. Netflix'sperformance drove its stock higher in after-hours trading. On Thursday, it hit an all-time high of $143.45.

Weaknesses

Financials was the worst performing sector for the week, falling 1.64 percent versus an overall decrease of 0.15percent for the S&P 500.Bristol-Myers Squibb was the worst performing stock for the week, falling 12.43 percent.Tiffany & Co. said sales at U.S. stores open for at least one year fell 4 percent during November and Decembercompared with a year ago. "Management attributed the lower sales to local customer spending, with a decline in U.S.sales exacerbated by a 14 percent decline at the company's flagship store on Fifth Avenue in New York, which weattribute at least partly to post-election traffic disruptions," the company said in a statement.

Opportunities

Ford's CEO shared his vision of the future this week. "Our view is that the industry offerings, 15 years from now, isthat there are going to be more electrified offerings than there are internal combustion engines," Ford CEO MarkFields told Business Insider.GM says that it will invest $1 billion in its factories and create or keep 1,000 jobs as part of its normal process ofupgrading factories, the Associated Press reports, citing a person familiar with the matter.With real exports of food and beverage products surging in recent months and sales growth expectations bottomingout, the recent share price decline in the packaged foods industry could be an opportunity to get in before thebounce.

Threats

The FTC alleges that Qualcomm paid Apple billions of dollars in rebates to use its chips. The Federal TradeCommission said a deal between Apple and Qualcomm included "substantial incentive payments" on the conditionthat Apple would continue using Qualcomm's baseband processors "exclusively" in all iPhone and iPad models from2011 and 2012.According to a BCA analysis of relative industrials performance since the early 1990s, every time the ISMmanufacturing new orders sub-index hit 60, industrial stocks will suffer in the coming quarters, as too much optimismis already discounted.While momentum and buoyant expectations have been a powerful support for equity markets, it is critical to keep aclose eye on the cyclical valuation backdrop to avoid getting caught up in any hype. For instance, the total marketcapitalization (MC) of the U.S. stock market is more than 120 percent of (nominal) GDP, more than double the 2008trough. MC as a share of GDP has only been higher during the Internet bubble in the late-1990s. MC to GDP has

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averaged 75 percent over the last 45 years.

The Economy and Bond MarketStrengths

The Philadelphia Federal Reserve's manufacturing outlook index came in at 23.6, significantly above expectations of15.8. "Forty percent of the firms reported increases in activity this month; 17 percent reported decreases," said therelease from the Philly Fed. The activity index reading was the highest since November 2014.Housing starts jumped more than expected in December. Housing starts rose by 11.3 percent at a seasonallyadjusted annual rate of 1.226 million, according to the Commerce Department.Initial jobless claims unexpectedly tumbled to 234,000. Moreover, the four-week moving average was 246,750, adecrease of 10,250 from the previous week's revised average. This is the lowest level for the average sinceNovember 3, 1973, when it was 244,000.

Weaknesses

After a big jump post-election, the Empire Manufacturing report for January backed off of its recent highs, missingconsensus forecasts in the process. While economists were forecasting the headline reading to come in at a level of8.5, the actual reading came in at 6.5.The NAHB Housing Market Index for January came in at 67, missing consensus expectations of 69 and lower thanthe previous month’s reading of 70.Building permits for December disappointed, falling 0.2 percent vs the expected growth of 1.1 percent.

Opportunities

According to Matthew Hornbach, global head of interest-rate strategy at Morgan Stanley, the 10-year yield will end2017 at 2.50 percent, which is around the same level that it entered the year. What that means from a returnperspective is that Treasuries should be okay this year. Forward yields are higher than 2.50 percent in certain parts ofthe curve and so to the extent that he is correct and 10-year yields end around 2.50 percent, investors in governmentbonds should have a positive total return.President Donald Trump vowed to restore America’s promise. In his inaugural address, Trump pledged to transferpower from Washington, D.C., back to the American people. He called for defending the U.S.’s borders whilerebuilding its infrastructure. Every decision, whether on trade, taxes or immigration, will be made to benefit Americanworkers and families, he said. While he expects other nations to put their interests first as well, he said the UnitedStates will reinforce old alliances and build new ones.Several regional Fed surveys are being released next week. If their capex intentions components hold on to previoussharp gains, it would be a strong signal that core durable goods orders (Friday) are about to surge.

Threats

According to BCA, rising inflation expectations should push 10-year U.S. Treasury yields higher over the next 12months. With stronger growth and an already tight labor market, core inflation should continue to gradually rise towardthe Fed's target. BCA expects trailing 12-month core PCE inflation will reach the Fed's 2 percent target near the endof 2017. Consequently, the cost of inflation protection embedded in bond yields will also converge with levels that areconsistent with the Fed's target. Their forecast is that level should be in the range of 2.4 percent to 2.5 percent forlong-dated TIPS breakevens. With the 5-year/5-year forward TIPS breakeven rate at 2.13 percent and the 10-yearTIPS breakeven rate at 2 percent, long-dated Treasury yields have approximately 30-50bps of upside from theinflation component alone.

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The Congressional Budget Office (CBO) said the GOP's Obamacare repeal could leave 27 million people withouthealth insurance and cause premiums to skyrocket. The CBO projections are based on the 2015 ACA repeal bill thatwas vetoed by President Barack Obama. A new repeal bill is currently being drafted and could have somedifferences.Federal Reserve Chair Janet Yellen warned against running the economy “hot.” Speaking at the Stanford Institute forEconomic Policy Research on Thursday evening, Yellen said, "I think that allowing the economy to run markedly andpersistently 'hot' would be risky and unwise."

Gold MarketThis week spot gold closed at $1,210.57, up $12.99 per ounce, or 1.08 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, ended the week higher by 1.74 percent. Junior tiered stocks underperformed seniors for the week,as the S&P/TSX Venture Index climbed just 0.39 percent. The U.S. Trade-Weighted Dollar Index finished the week downby 0.38 percent.

Date Event SurveyActual PriorJan-17Germany ZEW Survey Expectations 18.4 16.6 13.8

Jan-17Germany ZEW Survey CurrentSituation

65.0 77.3 63.5

Jan-18Germany CPI YoY 1.7% 1.7% 1.7%Jan-18Eurozone Core CPI YoY 0.9% 0.9% 0.9%Jan-18U.S. CPI YoY 2.1% 2.1% 1.7%Jan-19ECB Main Refinancing Rate 0.000%0.000%0.000%Jan-19U.S. Housing Starts 1188k 1226k 1102kJan-19U.S. Initial Jobless Claims 252k 234k 249kJan-19China Retail Sales YoY 10.7% 10.9% 10.8%Jan-26Hong Kong Exports YoY 6.7% -- 8.1%Jan-26U.S. Initial Jobless Claims 246k -- 234kJan-26U.S. New Home Sales 585k -- 592kJan-27U.S. GDP Annualized QoQ 2.1% -- 3.5%Jan-27U.S. Durable Goods Orders 2.7% -- -4.5%

Strengths

The best performing precious metal for the week was palladium with a gain of 4.92 percent. Most of the gains cameon Friday after Sibanya Gold’s proposed acquisition of Stillwater Mining passed U.S. antitrust conditions. Not onlydoes Stillwater produce palladium, it’s also one of the largest recyclers of used automobile catalytic converters.James Steel of HSBC has noted that the supply of palladium has stagnated in recent years while auto sales havesoared.

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Gold traders and analysts surveyed by Bloomberg are bullish on the metal for a fourth straight week, citinguncertainty surrounding Donald Trump’s inauguration today. “As the inauguration of Trump draws close, I think peopleare realizing that potentially this could be a very stormy Presidency and gold may well benefit from that,” said DavidGovett earlier in the week, an analyst at Marex Spectron Group in London. The start of the year is usually positive forgold, reports Bloomberg.As you can see in the chart below, China attracted $52 million into commodity-linked ETFs over the past week. Aweakening yuan and capital outflows from the Asian nation are adding to the global forces helping to boost demandfor gold, reports Bloomberg. Investors are seeing an alternative after the yuan sustained its worst annual loss againstthe dollar in more than two decades, the article continues.

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Weaknesses

The worst-performing precious metal for the week was platinum, down 0.71 percent. BofAML Global Researchforecasted that there is little upside for platinum this week, despite increased demand, as South African producers areputting more ounces on the market at a time when discipline is needed.Following seven days of gains, gold finally snapped its best run since November as an interest rate outlook was eyedthis week, reports Bloomberg. Vyanne Lai, an economist at the National Australian Bank in Melbourne, says there isrecognition that an expected acceleration of rate hikes in 2017 by the Federal Reserve will be an important driver forthe metal.Despite the chatter of faster inflation, gold traders are pricing in a relatively calm market, according to Bloomberg.Wagers on gold volatility are near a two-year low, diverging from a gauge of inflation bets by the most sinceSeptember 2014. “The cost of hedging against SPDR Gold Shares declines in the next three months is falling backtoward its annual mean, after surging to a more than one-year high following U.S. presidential election,” the articlecontinues.

Opportunities

Gold bulls looking forward to a rally in bullion with the arrival of a new U.S. president may have history on their side,says Bloomberg. “Gold has averaged gains of almost 15 percent in years marking the inauguration of a new presidentsince the 1970s, advancing in five of those seven years,” the article continues. And because markets are seeing thefirst annual return for raw materials since 2010, many fund managers that played the last commodity slump want backin, according to Societe Generale SA and Barclays.An article in Advisor Perspectives this week highlights Jeffrey Gundlach’s response to the excessive debt, high price-to-earnings (P/E) levels and political uncertainty investors face as they enter the Trump era. He says that U.S.-centricportfolios should diversify globally and that investors should brace for moderately higher inflation. Gundlach notes thatthe U.S. is “richly valued,” so now is the time to look at other markets. However, he doesn’t recommend Europe dueto “election risks” in France and the Netherlands. Gundlach has advocated a “permanent” gold position for investor’sportfolios since 1990 and there are numerous gold miners that are based outside of the U.S.Bloomberg released an insightful piece this week on Paul Huet, CEO of Klondex Mines, calling him a “Canadianmining darling,” who finds profitable gold production in projects that no one else wants. Huet became CEO in 2012when the company had just $400,000 in cash, one asset and $7 million in invoices. Five years later, writesBloomberg, Klondex shares are outperforming its peers while remaining undervalued. The company has beenprofitable for nine of the last 10 quarters and, according to Huet, it could produce north of 250,000 ounces of goldequivalent in the “very, very near future.” Production guidance for 2017 is expected to increase by 37 percent as theHollister mine should begin production in the next six months.

Threats

The cash ban in India is making it very hard for gold lovers in the country to purchase wedding rings and jewelry,

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reports Bloomberg. A majority of consumers have a lot less cash these days, and many retailers aren’t equipped toaccept credit cards because India’s jewelry industry runs mostly on cash. According to the World Gold Council, golddemand in India probably tumbled to a seven-year low in 2016.Deutsche Bank WM is not bullish on gold in 2017, citing the outlook for a stronger U.S. dollar, and also noting U.S.inflation not going up significantly. The bank expects gold to trade around $1,200 by year-end, but still recommends itas a hedge to clients.Comments made by Fed Chair Janet Yellen on Wednesday spurred a rise in U.S. yields and the U.S. dollar, writesBBH in its CurrencyView report this week. “She spoke after headline CPI rose above 2 percent for the first time in acouple of years and reports of the largest rise in industrial output since November 2014,” the note reads. Someobservers saw in Yellen’s comments stronger confidence in the economy which could bolster the case for a rise ininterest rates.

Energy and Natural Resources MarketStrengths

Commodities are up double digits since Trump’s election last November. Crude oil, copper and iron ore have rallied17.1, 10.5, and 17.7 percent respectively. As today marks the official inauguration of President Donald Trump, theincredible performance from these key commodities suggests that the reflation trade is officially in motion, whichshould be further supported by President Trump’s pro-growth policies moving forward.

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The best performing sector for the week was the S&P Super Composite Construction and Materials Index. The indexrose 2.87 percent as the imminent inauguration of President Trump led investors to position on a sector that presentsitself as a direct beneficiary of Trump’s campaign promises of infrastructure expansion.Alcoa Corporation, one of the world’s largest producers of aluminum, was the best performing stock this weekfinishing up 7.69 percent. The stock rallied after Wilbur Ross, President Trump’s nominee for Secretary of Commerce,stated that the U.S. should focus on increasing tariffs on imported steel and aluminum.

Weaknesses

Nickel was the worst performing commodity this week falling 5.7 percent. The drop in the commodities price wasdriven by the easing of the nickel-ore exports ban in Indonesia. Indonesia is estimated to produce 12 percent ofglobal nickel output. The ban had been in place since January 2014.The worst performing sector this week was the S&P/TSX Composite Diversified Metals and Mining Sub IndustryIndex. The index fell 2.8 percent driven by a drop in hard coking coal prices, which have fallen 23 percent year-to-date. China announced its ambition to reduce its steel milling capacity by up to 12 percent, a measure that couldresult in weaker demand for coking coal prices in 2017.The worst performing stock for the week was Reliance Industries Ltd, and refining and petrochemicals companybased in India. The company fell 6.3 percent after revealing large write downs in its key oil and gas assets.

Opportunities

China GDP hit its 2016 target. Despite potential negative headwinds, the economy of China has avoided a hardlanding in 2016 as a result of robust monetary and fiscal stimulus. The economy grew at 6.7 percent for the full year

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and at a surprising 6.8 percent in the fourth quarter, comfortably within the government’s target range of 6.5 to 7percent. A positive read-through from the world’s engine of economic growth.Top oil companies are back in acquisition mode this year, targeting smaller exploration and development companiesto boost reserves, according to Reuters. Since November of last year, there have been 11 deals done by the world’slargest oil companies with a combined value of $31 billion.Gold rallied more than 1 percent this week, the largest price jump since late November. As the prospects of aweakening dollar loom to bolster U.S. trade and uncertainty surrounding the United Kingdom’s Brexit plan, investorsare beginning to acquire more of the shiny metal as sentiment is shifting towards the uncertainty camp.

Threats

Coking coal, the best performing commodity of 2016, fell 6.6 percent this week as Chinese mines raise output. Theprice of the commodity rocketed last year as the Chinese government introduced production curbs in an effort toimprove the profitability of the heavily indebted industry. As prices have gone too far too fast, putting pressure onsteel prices, the authorities in Beijing are now putting pressure to increase output adding supply to the market andcurbing the high price of the commodity.OPEC needs further output cuts to balance the oil market this year, according to the Financial Times. The cartel hasforecasted that overhang in supply will continue to threaten prices this year as forecasted demand is 32.1 millionbarrels per day versus a target output level of 32.5 according to its monthly report. Demand is not expected tooutpace supply until the third quarter of this year where demand is estimated to reach 33.3 million barrels per day andthe backlog in supplies from 2014 is cleared.Key growing areas for soybean’s in Argentina continue to experience heavy rainfall and disruption to production. Inthe first two weeks of 2017 the key growing areas have suffered the equivalent of 6 months’ worth of precipitation,ruining all seeded fields. A negative read-through for the agricultural producers in the region.

China RegionStrengths

China was the best performing country in the region this week up 33 basis points. Shares extended their rally onFriday, after reports that policymakers have offered funds to some lenders to meet cash demand before the LunarNew Year holidays. The rally also continued amid speculation that China plans to relax curbs on stock-index futurestrading that led to a 99-percent plunge in volumes.>The Malaysian ringgit was the best performing currency in the region this week up 44 basis points. The ringgit hasdepreciated about 6 percent against the U.S. dollar since Donald Trump’s surprise win in the U.S. election -- theworst hit among Asian emerging markets -- prompting Bank Negara to take steps to restrict some offshore foreign-exchange trading to curb the currency’s slide.The materials sector was the best performing sector this week up 1.76 percent.

Weaknesses

Thailand was the worst performing country in the region this week down 78 basis points.The Indonesian rupiah was the worst performing currency in the region this week down 71 basis points.Energy was the worst performing sector this week down 1.75 percent.

Opportunities

Chinese high-rollers are finally returning to Macau, two years after an anti-corruption crackdown by China’sgovernment scared many of them away from the world’s largest gambling hub. VIP gaming, measured by revenuefrom the baccarat card games favored by high-stakes gamblers from China, rose 13 percent in the last three monthsof 2016, marking a turnaround since the first quarter of 2014, data from Macau’s Gaming Inspection and CoordinationBureau show. Mass market games improved 7.3 percent, the second-straight quarter of gains.The Philippine peso, which weakened 4.6 percent over the past 12 months, is forecasted to be the most resilient toexternal risks this year, according to a Bloomberg survey of 10 foreign-exchange analysts. The Thai baht and Indianrupee together rank second, while China’s yuan is last. According to the analysts, external factors won’t impact thepeso much because the nation doesn’t largely depend on trade, especially with China or the U.S. China-dependenteconomies are likely to be hit the most by Trump policies as his eyes are more on China.As the acceleration in China’s PPI number has been suggesting, China nominal GDP accelerated to 9.9 percent year-over-year in the fourth quarter, up almost 400 basis points since its low of 6 percent in 2015. Looking at the fourthquarter, real GDP growth came in at 6.8 percent year-on-year, picking up from 6.7 percent in the third quarter and

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exceeding expectations of another 6.7 percent reading. The data also confirm the gradual shift to more services,more consumption – while less agriculture, less manufacturing and less mining. Pick-up in China economic activityprovides some respite to emerging markets, especially as the commodity and trade cycle likely bottomed in 2016.

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Threats

Asia’s nascent exporters are about to confront a potentially major setback. Economists are concerned that a recentupswing in Asian trade will struggle to survive an expected U.S. turn to protectionism under Trump’s presidency. Theincoming president’s threatened tariffs and policies on China could harm solid demand from the world’s number twoeconomy that’s been the key to the region’s export recovery.According to Evercore ISI, a dangerous confrontation looks likely post Jan 20, as incoming President Trump moves toreset U.S.-China economic relations. The U.S. will want to inflict economic pain on China, likely eliciting a Chinaresponse of unknown consequence, size and duration. This is delicate and could quickly spin out of control,threatening other parts of the 2017 U.S. economic agenda. Chances for wider global economic disruption are high,not low.Monthly data show China’s industrial output slowed to 6 percent year-on-year in December from 6.2 percent, fixedasset investment decelerated to 8.1 percent year-to-date in December from 8.3 percent in November. Retail salesgained steam, rising 10.9 percent, up from 10.8 percent. Together, this data points to a moderation in momentumheaded into the start of 2017.

Emerging EuropeStrengths

Turkey was the best performing country this week, gaining 1.9 percent. The second round of voting for theconstitutional amendment package started this week, and a referendum on the Executive Presidency is likely to takeplace in the first half of April. Next week the central bank of Turkey will meet and Fitch will review the country’s creditrating.The Polish zloty was the best performing currency this week, gaining 91 basis points against the U.S. dollar. Fitchratings agency affirmed Poland’s Long-Term Foreign and Local Currency Issue Default Ratings at “A-“, with a stableoutlook. Fitch’s decision was supported by solid fundamentals, including a healthy banking system and soundmonetary framework.The telecommunication service sector was the best performing sector among eastern European markets this week.

Weaknesses

Greece was the worst performing country this week, losing 1.9 percent. European auditors want Greece to secureadditional tightening measures of 700 million euros ($746 million) in order to meet the fiscal target for 2018. About500 million euros of these measures have been agreed to so far.The Turkish lira was the worst performing currency this week, losing 1.3 percent against the U.S. dollar. Despitemeasures that were implemented in order to support the lira, the currency is still weakening. A significant rate hike isneeded to save the currency; however, the central bank may not be able to raise rates before the referendum on theExecutive Presidency.The real estate sector was the worst performing sector among eastern European markets this week.

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Opportunities

The European Central Bank (ECB) decided to leave its main interest rate unchanged and will continue to make assetpurchases of 80 billion euros ($84.2 billion) a month until the end of March. The bank will make asset purchases of 60billion euros a month from April to December. Mr. Draghi said that inflation will likely rise more rapidly than thepolicymakers expect over the coming months, thanks to higher oil prices, but characterized the state of underlyinginflationary pressure as “weak.”

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Czech Republic’s sovereign debt will be rated by Standards & Poor after the close on Friday. The expectation is thatthere will be no change to the rating; S&P will keep Czech at Investment grade “A” with a stable outlook. Thecountry’s rating has been improving steadily, fostering a downward trend in yields on Czech government bonds. Theyields have been falling at all maturities over the past 15 years, except for the period of monetary turbulence and atthe start of the financial crisis in 2007–2008, and are currently at historic lows.Today Melania Trump became only the second First Lady not born in the United States. Melania Trump was born asMelanija Knavs in Slovenia, a small country located in southern Central Europe, bordering with Italy, Austria,Hungary, Croatia and the Adriatic Sea. Slovenia gained its independence from Yugoslavia during the 1991 collapse ofcommunism. Her success of becoming First Lady could draw attention to her birthplace.

Threats

The euphoria over Vladimir Putin having an admirer in The White House is declining. Rex Tillerson, Trump’s nomineefor secretary of state who is also a former Exxon Mobile chief and who has known Putin since 1999 (and received amedal of friendship from him in 2012), called Russia a “danger” to U.S. interests. Andrew Kortunov, director of theRussian International Affairs Council, said Tillerson’s testimony shows how deeply anti-Russian sentiment is runningin Washington.In Poland, the Development Ministry has presented a proposal to liquidate interchange fee completely and ban bankfees on issuing and using ATM cards and current accounts. The move is aimed at limiting the circulation of cash,which should reduce the shadow economy and cut the cost of administration. However, the proposal is negative forbanks as the cost for the banks could reach PLN 1.5-4 billion.Russia’s government is working on measures to limit the ruble’s volatility. One of the options the government has isto buy foreign currency, and the buying will be limited to the amount of excess revenue the government gets from

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higher-than-forecast oil prices. The Russian budget is based on the crude oil price of $40 per barrel. At an average oilprice of $50 per barrel, Russia will get an extra 1 trillion rubles ($16.7 billion) in revenue this year. Should the centralbank use the whole amount to buy foreign currency, the ruble will weaken by 2 to 3 percent against the U.S. dollar,according to Raiffeisenbank JSC and Renaissance Capital.

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