USFunds.com • August 04, 2017

Table of ContentsIndex Summary • Domestic Equity Market • Economy and Bond Market • Gold Market

Energy and Natural Resources Market • Emerging Europe • China Region • Leaders and Laggards

Storm Advisory—What You Need to Know NowBy Frank HolmesCEO and Chief Investment Officer U.S. Global Investors

In July, the Institute for Supply Management’s (ISM) Non-Manufacturing Index fell to an 11-month low of 53.9, 3.5points below its June reading of 57.4. The index measures the non-manufacturing, services industries such as foodservices, education, real estate, health care and more.

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Economists had expected a reading closer to 56.9, so it’s safe to call this a disappointment. Although the index isstill above the key 50 threshold, where it’s held for 91 straight months now, the slowdown suggests that “theeconomy may have lost some momentum going into the third quarter,” as Capital Economics’ Andrew Hunter saidin a note this week.

Following this report, it’s possible we’ll see the U.S. dollar rally before pulling back even further. Having hit a 15-month low this week, the dollar looks oversold and ready for a “retracement,” as CLSA’s Christopher Wood put it.

“It remains remarkable how weak the dollar has been so far this year given the Fed’s surprisingly hawkish rhetoricand given that its latest statement last week still suggests that the American central bank intends to commencebalance sheet contraction next quarter,” Wood wrote in the latest “GREED and fear.”

I’ll have more to add on the Fed’s balance sheet later.

July was the dollar’s fifth consecutive month oflosses, the longest such stretch since December 2010through April 2011. As I said in a Frank Talk thisweek, the major contributing factor to thegreenback’s slide is political uncertainty surroundingPresident Donald Trump and Congress. Not only didthe Obamacare repeal and replace bill fail (again),but Trump’s White House continues to look like arevolving-door workplace, with the foul-mouthedAnthony Scaramucci pushed out as communicationsdirector this week after only 10 days on the job. Thisreportedly came at the urging of brand new chief ofstaff John Kelly, who replaced Reince Priebus lastweek.

But it’s no secret that Trump favors a weakercurrency. Since he declared that the dollar was“getting too strong” back in April, it’s lost close to 8percent of its value against a basket of several othercurrencies. Add to this the disappointing ISM report,weakening automobile sales and slightly lower-than-hoped-for GDP growth in the second quarter, and itseems less and less likely we’ll see more than oneadditional rate hike in 2017.

Economic Growth Revised DownToday the Labor Department announced the U.S. economy added a robust 209,000 jobs in July, beating theconsensus, while the unemployment rate dropped even further to a 16-year low of 4.3 percent. Wage growth, however, remained pretty flat, which is a concern. Consumption is the number one driver ofeconomic growth in the U.S., and if American workers aren’t getting raises, they’re not spending more.

All of this is spurring some economists to rethink their U.S. growth estimates. In its World Economic Outlook forJuly, the International Monetary Fund (IMF) revised down its domestic economic growth forecast, from 2.3 percentto 2.1 percent in 2017, and from 2.5 percent to 2.1 percent in 2018. The Washington-based fund attributes thisrevision to “the assumption that fiscal policy will be less expansionary than previously assumed, given theuncertainty about the timing and nature of U.S. fiscal policy changes.”

IMF economists, in other words, have doubts that tax reform, deregulation or an infrastructure package will becoming anytime soon.

We’ll see if they’re right. After the August recess, Congress plans to tackle tax reform, which the U.S. sorely needs. Ihope lawmakers can come together and pass a comprehensive bill this fall that will deliver some relief to Americanworkers, families and corporations.

Fed to Take Away the PunchbowlBig changes could be coming on the monetary side this fall as well. In an address to the Economic Club of LasVegas this week, President and CEO of the Federal Reserve Bank of San Francisco John Williams said the Fed willlikely begin the process of monetary normalization as soon as next quarter. This includes unwinding the Fed’s $4.5trillion balance sheet, composed of long-term Treasuries and mortgage-backed securities (MBS). The process couldtake up to four years to complete.

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Now that “we’ve finally recovered from the recession,” Williams said, it’s time for the private and public sectors to“step up and take the lead in making the investments and enacting policies needed to improve the longer-termprospects of our economy and society.”

I agree 100 percent. For nearly 10 years now we’ve seen an imbalance in monetary and fiscal policies, with theeconomy and stock market being propped up by cheap credit.

There’s a historical risk in the Fed reducing its balance sheet, though. The central bank has embarked on thisreduction six times in the past—in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000—and all but oneepisode ended in recession.

That’s according to research firm MKM Partners, whose chief economist, Mike Darda, urged attendees of a Fidelityevent in May to hope for the best but prepare for the worst.

“My opinion is that business cycles don’t just endaccidentally,” Darda said. “They are killed by the Fed.If the Fed tightens enough to induce a recession,that’s the end of the business cycle.”

So how can investors prepare?

“Obviously, diversification is important,” Darda said,highlighting municipal bonds and emerging markets.“But my focus there would be on the commodity-importing emerging markets.”

Fidelity’s Julian Potenza seconded Darda’s emphasisof muni bonds, saying “investors should considerkeeping the portion of their fixed-income portfoliothat is currently earmarked for liquidity relatively short, in terms of duration.”

Indeed, shorter-duration, tax-free munis have a history of delivering positive returns even during economicdownturns and in environments of rising and lowering interest rates.

Explore investment opportunities in tax-free municipal bonds!

As for emerging markets, CLSA reported this week that international ETF inflows so far this year are outpacingdomestic U.S. ETF inflows, $103 billion to $86 billion. The brokerage and investment firm recommended anoverweight position in emerging markets, specifically Europe ex-U.K.

Tech Stocks a Third of Market Gains in 2017For the second quarter, close to a record 75 percent of S&P 500 Index companies are beating not just salesestimates but also earnings per share (EPS) estimates, according to FactSet data. What’s more, they’re beating theseestimates by wider margins than historical second-quarter averages.

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Granted, only around 60 percent of companies have reported as of this writing, but the news is impressivenonetheless.

How much of this is due to euphoria over Trump’s pro-growth fiscal agenda, and how much to a weakening U.S.

dollar? That’s difficult to say, but no one can argue the fact that American multinationals are benefiting from aweaker dollar, which makes their exports more competitive globally. Apple, which generated 61 percent of itsrevenue from foreign markets in the second quarter, just reported an all-time quarterly services revenue record.“Services,” which includes Apple Music, iTunes, iCloud and Apple Pay, brought in an astounding $7.3 billion, upfrom $6 billion during the same quarter last year.

Speaking of Apple, it’s one of only five U.S. stocks that, together, are responsible for a third of the market’s gains in2017, the other four being Amazon, Facebook, Microsoft and Alphabet (Google). As you can see below, informationtechnology is up close to 22 percent year-to-date, followed by health care at 15.5 percent.

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The reason I share this with you is because, while the market appears to be seeing solid growth right now, it’s beingpropelled disproportionately by only a handful of tech stocks. The S&P 500 is up 10.6 percent, but if we removeinformation technology, it’s up only around 7.5 percent. This makes the market vulnerable, should those stocks seea correction.

And that’s why I believe it’s particularly important to stay diversified, as Mike Darda said—diversified in emergingmarkets, which offer attractive valuations; muni bonds; and, as always, gold and gold stocks.

Explore investment opportunities in the gold mining industry!

Index SummaryThe major market indices finished mixed this week. The Dow Jones Industrial Average gained 1.20 percent.The S&P 500 Stock Index rose 0.19 percent, while the Nasdaq Composite fell 0.36 percent. The Russell2000 small capitalization index fell 1.19 percent this week.

The Hang Seng Composite rose 1.70 percent this week; while Taiwan was up 0.80 percent and the KOSPIfell 0.23 percent.

The 10-year Treasury bond yield fell 2 basis points to 2.26 percent.

Domestic Equity Market

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StrengthsFinancials was the best performing sector of the week, increasing by 1.76 percent versus an overall increaseof 0.13 percent for the S&P 500.

Illumina was the best performing stock for the week, increasing 11.18 percent.

Yelp's stock skyrocketed almost 20 percent on the news that it's selling Eat24 for $287.5 million toGrubhub.

WeaknessesEnergy was the worst performing sector for the week, falling 1.02 percent versus an overall increase of 0.13

percent for the S&P 500.

Range Resources was the worst performing stock for the week, falling 18.24 percent.

AmerisourceBergen got crushed after it announced disappointing fiscal third-quarter earnings and reducedits expectations for revenue for the entire fiscal 2017.

OpportunitiesAccording to Brian Reynolds of Canaccord/Genuity in a piece of research entitled "The Credit-Led EquityBull Market Is More Likely To Intensify Than Collapse,'' the stock market boom has another three to fiveyears to run due to stimulus from states and municipalities. Reynolds suggests that the credit boom willpersist because most major U.S. states, and a number of cities, have either raised or are thinking of raisingtaxes in order to shrink their pension underfunding. These states and municipalities need to earn 7.5percent annual returns just to keep up, "and they do not want the perceived risks of stocks. Thus, they investin aggressive credit and credit-related funds, which provides fuel for companies to buy back their stocks andincrease shareholder value.'' These investors aren't focused on the macro environment or temporary sell-offs, writes Reynolds, but on "meeting their bogies.'' He then proceeds to list 25 different state or localpension funds and their announced $3.5 billion in commitments gathered over the past few weeks. It's animpressive list: Texas Teachers, Colorado Public Employees, New Jersey, Connecticut, Pennsylvania, RhodeIsland, Tennessee and so on. He continues, "if history is a guide, assuming this money is put to work at 5xleverage (compared to the 10x-50x leverage of the last two credit cycles), this nearly $3.5 billion incommitments will return to the stock market in the form of more than $17 billion in buybacks.''

Amazon is seen as a threat to every retailer in the U.S. The juggernaut is armed with a war chest of cashand has been disrupting every industry in sight. However, according to RBC Capital Markets, there are stilla few bright spots. These are companies whose existing business models have created a natural insulationfrom Amazon as well as those that have been quick to adapt. The companies they highlight are CarMax,Walmart, Best Buy and Dollar General.

GoPro's stock surged after cost-cutting efforts helped the company post second-quarter results that beatanalyst estimates. The company also raised guidance for the third quarter.

ThreatsInvestors in technology companies are heavily exposed to political risk as their surging popularity – techstocks are up more than double the S&P 500 this year – have made them a proxy for market risk, accordingto Wells Fargo. So far this year traders have chased returns in the industry, which is growing earnings at abreakneck pace. What's been underappreciated is how much of a boost the sector has gotten from the macropicture, especially the slow implementation of President Donald Trump's economic agenda and a series ofdovish comments from Fed Chair Janet Yellen. Wells Fargo warns that as soon as these dynamics shift, techbulls could be in for a rude awakening. They recommend cutting exposure to the industry.

According to Business Insider, a controversial ex-Goldman Sachs banker named Anthony Noto is the personwho really runs Twitter and he's gambling the company's future on one risky bet. The bet is to turn Twitter,famous for celebrity feuds, trolls and Donald Trump, into a destination for live video — from sports tofinancial news to political debates.

When the U.S. government released its annual revisions to economic growth last week, it made sharpdownward revisions to the personal saving rate. Savings as a share of disposable income was 4.9 percent lastyear, not 5.7 percent as earlier calculated, the Bureau of Economic Analysis said. The update showed thatincomes were less than previously reported, while consumption was higher. Albert Edwards, a SocieteGenerale strategist, published an alarming interpretation of this data in a note on Thursday. For Edwards,it's a replay of what caused the financial crisis all over again. "Every day more evidence mounts that almostexactly the same debt excesses that caused The Global Financial Crisis (GFC) in 2008, are present today," hesaid.

August 3, 2017Surprise! Gold Prices Have

July 31, 2017Venezuela on the Brink—

July 24, 2017“Mother of All

Beaten the Market So Far thisCentury

An Opportunity for OilInvestors?

Bubbles” KeepsGold in Focus

The Economy and Bond Market

StrengthsThe U.S. economy added 209,000 jobs in July, more than expected, while the unemployment rate returnedto a 16-year low of 4.3 percent, the Labor Department said in a report Friday.

U.S. durable goods orders posted the biggest gain in nearly three years last month, helped by a surge indemand for civilian aircraft. The Commerce Department said that orders climbed 6.5 percent in June,reversing two straight monthly drops. The June increase was the biggest since July 2014.

The U.S. Markit Services PMI for July came in at 54.7, above the 54.2 forecast.

WeaknessesU.S. consumer spending barely rose in June as personal income failed to increase for the first time in sevenmonths. The unchanged personal income figure was the weakest reading since a 0.1 percent dip inNovember 2016 and followed a 0.3 percent increase in May.

U.S. construction spending unexpectedly fell in June as investment in public projects recorded its biggestdrop since March 2002, suggesting a downward revision to the second-quarter economic growth estimate.The Commerce Department said that construction spending tumbled 1.3 percent, the lowest level sinceSeptember 2016.

Public pension fund investments returned only 0.6 percent on average in fiscal 2016, according to a reportby the Center for Retirement Research at Boston College. This was far lower than its 7.6 percent averagetarget and adds more pressure to an already overburdened public pension system.

OpportunitiesMunicipal debt could become more attractive for banks to hold to meet liquidity coverage ratiorequirements under two bills undergoing congressional debate. A new bill would require that regulatorstreat certain types of muni debt as a high-quality liquid asset (HQLA). The House bill was passed by acommittee, 68-0, on July 25. Senate companion legislation hasn't seen action but has bipartisan cosponsors.

Chicago will contribute $1.18 billion to pensions in 2018 as the junk-rated city ramps up payments to put itsretirement funds on a path to solvency, even as the unfunded liabilities keep growing. The city will have astructural deficit of $114.2 million in 2018, the smallest since 2007, according to an annual financialanalysis released this week.

Connecticut’s legislature approved an agreement with state government worker unions that will save $1.6billion over the next two fiscal years and more than $20 billion over the next two decades, Governor DannelP. Malloy said. The $1.6 billion in savings in the current biennium is a “key piece" toward adopting abudget for the state, Malloy said. Connecticut began the July 1 fiscal year without a budget.

ThreatsThe “neutral” U.S. interest rate fell in the second quarter by the most since 2010, according to a widely-citedestimate produced by Federal Reserve economist Thomas Laubach and San Francisco Fed President JohnWilliams. The theoretical rate known by economists as “r-star,” which is adjusted for inflation and wouldneither stimulate nor restrict an economy growing at its trend pace, declined to -0.22 percent from 0.12percent in the first quarter. In comparison, the Fed’s benchmark rate, adjusted for core inflation, iscurrently -0.35 percent, which suggests the central bank is nearly at a “neutral” monetary policy setting,

according to the model. According to this, the Fed risks tightening financial conditions to a dangerous pointif they raise rates too many more times.

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Next Friday's consumer price index (CPI) will be the most important U.S. data release of the week.Following four months of weakness, core CPI needs to show a rebound for the Fed to remain comfortablewith the view that inflation will head to its 2 percent target.

U.S. corporate debt may be so high that it's a threat to global stability, and Europe's banks are hanging by athread, according to the International Monetary Fund (IMF). On a net level, Italy, Portugal and Spain haveactually added non-performing loans to their books rather than worked them off over the last year.

Gold Market

This week spot gold closed at $1,259.30, down $10.35 per ounce, or 0.82 percent. Gold stocks, as measured by theNYSE Arca Gold Miners Index, ended the week lower by 2.35 percent. Junior-tiered stocks outperformed seniorsfor the week, as the S&P/TSX Venture Index fell only 0.89 percent. The U.S. Trade-Weighted Dollar Index bouncedhigher on Friday, due to the higher-than-expected change in Nonfarm Payrolls, finishing the week up 0.23 percent.

Date Event Survey Actual Prior

Jul-31 Eurozone CPI Core YoY 1.1% 1.2% 1.1%

Jul-31 Caixin China PMI Mfg 50.4 51.1 50.4

Aug-1 ISM Manufacturing 56.5 56.3 57.8

Aug-2 ADP Employment Change 190k 178k 191k

Aug-3 Initial Jobless Claims 243k 240k 245k

Aug-3 Durable Goods Orders 6.0% 6.4% 6.5%

Aug-4 Change in Nonfarm Payrolls 180k 209k 231k

Aug-10 Initial Jobless Claims 240k -- 240k

Aug-10 PPI Final Deman YoY 2.2% -- 2.0%

Aug-11 Germany CPI YoY 1.7% -- 1.7%

Aug-11 CPI YoY 1.8% -- 1.6%

StrengthsThe best performing precious metal for the week was platinum, up 3.10 percent on money managers cuttingtheir bearish views on the metal in light of the new Russian sanctions signed into law earlier in the week. Russia is the world’s second largest producer of platinum. Gold traders and analysts surveyed by Bloombergare bullish on gold for a seventh week, reports Bloomberg, making it the longest run since early March. Inaddition, BullionVault’s Gold Investor Index, which measures client buyers against sellers, rose in July whengold prices reached an almost four-month low. The Perth Mint released gold coin and minted bar salesfigures for July, coming in at 23,675 ounces and up from June’s figure of 19,259 ounces, reports Bloomberg.

In an attempt to push for more transparency, London Bullion Market Association released data showing its$298 billion gold stash, reports Bloomberg. The data will “soon be augmented by trade reporting, which willfurther enhance the ability of market participants as well as regulators to track and asses market activity,”said Joni Teves, a strategist with UBS in London.

In July, $2.4 billion was pulled from SPDR Gold Shares, the biggest withdrawal since May 2013, reportsBloomberg. However, investors weren’t necessarily abandoning bullion-backed ETFs; they may have beenmoving their money into less expensive options. As the chart below shows, assets in the iShares Gold Trustreached an eight-month high. Perhaps this is because SPDR Gold charges a fee of 40 basis points, whileiShares Gold Trust has an expense ratio of 25 basis points.

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WeaknessesThe worst performing precious metal for the week was silver, off 2.95 percent on the pull-back in goldprices. As reduced investment in gold ETFs outweighed higher jewelry and bar purchases, global golddemand dropped to a two-year low in the second quarter, reports Bloomberg. “It was always going to behard to match last year’s demand, simply because ETF buying was so strong,” said Alistair Hewitt of theWorld Gold Council. The slowdown in ETFs contrasts with improved demand for other gold products, whichhas helped push prices up by 11 percent.

This is the second year in a row that policy changes in India may have strained gold sales, reportsBloomberg. Consumption is seen between 650 and 750 metric tons this year, compared to the annualaverage of around 850 tons in the previous half decade. The Indian government’s push to boost financialtransparency cut consumption this year as they enacted a new consumer tax system, the article continues.

Declines in U.S. car sales, combined with still-elevated inventory levels, provide signals that “profit and

leverage metrics may weaken throughout the auto food chain,” writes Bloomberg. This could proveworrisome for platinum and palladium, used in the manufacturing of vehicle emission systems.

OpportunitiesAustralian gold miners including Evolution Mining and Northern Star Resources may be required to lookoverseas for acquisitions to add operations of sufficient scale and quality, reports Global Mining ResearchLtd. North America is likely to be their targeted destination. Last year Goldcorp Inc. pointed out thatwaning global gold output is likely to spur more deals and industry consolidation. “Mine supply may fallabout a third in the 10 years to 2025,” according to Bloomberg calculations (based on forecasts from BMOCapital Markets and Randgold Resources).

Commodities have plenty of catch-up room to the dollar, reports Bloomberg. On a spot basis, ending Julyunchanged, the Bloomberg Commodity Index is set to gain, while the Bloomberg Dollar Spot Index declines9 percent. Now that reflation fears have been mostly alleviated, Bloomberg continues, renewed commodityvigor appears to be in early days.

TriStar Gold announced assay results from reverse circulation drill holes at the Castelo de Sonhos goldproject in Brazil, showing significant new gold reefs. According to the company, several individual intervalsin the new holes exceed 10 grams per ton, cutting 1m at 27.8 grams per ton. Some of the individual reefs inthe new holes are considerably thicker than the deposit average, the report continues. Another companyannouncement comes from Pure Gold Mining Inc., noting a new mineral resource estimate at its 100percent owned Madsen Gold Project. The company reports 1,648,000 indicated ounces of gold at Madsenand 178,000 inferred ounces of gold. This represents a 48 percent increase to indicated resource ounces.

ThreatsBrown Brothers Harriman discusses the U.S. Treasury’s third quarter refunding plans in a note to investorsthis week. The group notes that on Monday, the Treasury said it projected borrowing at $96 billion in thethird quarter ($2 billion less than June’s projection). “However, it signaled a surge in its borrowing needsfor the fourth quarter; a whopping $501 billion,” writes BBH. This is perhaps the largest amount the federalgovernment has tried to borrow since the fourth quarter crisis in 2008. “This is a huge amount of supplyand appears to reflect the pay back for the extraordinary measures to circumvent the debt ceiling,” comingup for negotiation in the third quarter the article continues.

Bloomberg notes three signals showing hedge funds are losing precious metals faith: 1) In the week endedJuly 11, the net-long position in gold fell to the lowest in 17 months, prior to the metal posting its firstweekly gain in six weeks. 2) Silver is also losing its luster as the position by hedge funds in the white metalswung to a net-short from a net-long, making it the most bearish since August 2015. 3) Money managerspushed their net-short position in platinum to a record before data showed European car sales slowed inJune.

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As Sibanye Gold joins AngloGold Ashanti in looking to close unprofitable shafts in order to stem losses,more than one in 10 gold mining jobs in South Africa could disappear, reports Bloomberg. South Africaproduced more gold than any other country for a century until 2007 the article continues, but depletedreserves and rising costs have meant production and jobs have tumbled since the industry’s heydays of the1970s and 1980s.

Energy and Natural Resources Market

StrengthsIron ore was the best performing commodity this week, rising 7.8 percent. The commodity benefited fromnews suggesting Chinese steel mills have been reporting major improvements on profitability, boosted bystrong end user demand. Higher profitability among mills in the largest steel producing market suggestsappetite for iron ore, a key raw material for steelmaking, is on the rise.

The best performing sector this week was the Bloomberg Global Coal Producers Index. The index rose 2.5percent driven by China-exposed producers which expect pricing for their product to strengthen on theback of positive sentiment at steel mills, which are the largest buyer of their metallurgical coal.

SolarEdge Technologies Inc., a major provider of solar power solutions, was the best performing stock thisweek finishing up 24 percent. The company rallied after quarterly revenue and outlook topped analystestimates. The company posted strong sales in its stronghold markets, with the addition of strong growththat beat expectations in its European markets.

WeaknessesNatural gas was the worst performing commodity this week, dropping 5.4 percent. The commodity slid onforecasts for a prolonged bout of unusually cool weather. According to Bloomberg, the blistering summerthat gas bulls had been counting on to propel prices higher still hasn’t materialized, stoking concern that themarket will be oversupplied heading into the low-demand fall season.

The worst performing sector this week was the S&P 1500 Oil & Gas Exploration and Production Index. Theindex fell 5.1 percent driven by a sell-off in Permian exposed names. Numerous quarterly reports byoperators on the basin suggest recent wells in the basin have been problematic, with pressure issues andhigher gas to oil ratios, resulting in lower than anticipated well economics.

The worst performing stock for the week was Pioneer Natural Resources Co. The Texan E&P dropped 16.2percent after reporting a sizeable quarterly miss and a guidance downgrade as it struggled to develop wellsthat proved problematic at its Permian basin locations.

OpportunitiesA second-half rally in commodities may be in the cards, courtesy of the weak US dollar. Year-to-date, theU.S. dollar is off to its worst start since 1985, down about 9 percent. More importantly, the chart below

suggests this type of technical break has twice spurred a decade-long bear market for the U.S. dollar, leadingto declines of at least 40 percent. Those two previous U.S. dollar bear markets have coincided with rallyingcommodity prices and bull markets in emerging markets.

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A Dallas Fed survey suggests crude oil prices could move close to $60 per barrel by the end of the year.Respondents reporting to the Dallas Fed said $59 is in line with the WTI price needed to profitably drill newwells. In addition, respondents suggested that the growth in rig counts could stall as drilling activity maytaper off until prices recover further.

China’s steelmakers are booming and driving coal and iron ore prices higher. A rapid surge in steel pricessince end of June has been backed by demand optimism and signs the government is determined to curbmarginal steel mill capacity. The biggest mills have reported soaring profit margins as rebar, a product usedin construction, is selling at the highest prices since 2013, notes Bloomberg.

ThreatsCrude prices dropped after a surprise inventory-build this week. Peak summer driving season boostsgasoline demand and generally coincides with major crude and gasoline inventory draws. So far summercrude draws have been healthy, however, it remains critical for price stability that the remainder of thesummer shows similar crude demand and draws.

OPEC is facing a growing concern of how to keep the market calm when the organization decides to removethe production cap, according to the WSJ. A Macro Strategy Partners report this week highlights commentsby the Saudi energy minister who anticipated the Kingdom is looking for ways to avoid a “shock [to] themarkets” when it unwinds the November 2016 agreement. In addition, compliance with cuts is expected tofall as discussion about a removal of caps take place.

Steelmakers in the U.S. have underperformed as economists warn U.S. GDP may be set up fordisappointment based on results by the auto industry. To substantiate this claim, economists have cited thatGeneral Motors is cutting back passenger car production to address high inventory levels, which will rippleacross its suppliers and generally lower demand for domestic steel and other industrial metals.

China Region

StrengthsHong Kong’s Hang Seng Composite Index (HSCI) soared another 1.70 percent for the week—and evenhigher intraweek—to put in more 52-week highs and edge a little closer to 2015 highs.

Although China’s official PMI survey showed that growth in the nation’s manufacturing sector cooled everso slightly in July to 51.4 from 51.7 in June, the private Caixin China Manufacturing PMI jumped to 51.1 in

July, up from 50.4 in June and—importantly—came in well ahead of expectations for a 50.4 result.

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The Indian rupee and the Philippine peso climbed for the week, rising about 90 basis points and 78 basispoints respectively. The Reserve Bank of India cut rates this week and the rupee rose.

WeaknessesThe Philippines Stock Exchange Index fell 1.72 percent for the week.

The Nexteer Automotive Group (1316 HK) was the weakest-performing stock in the HSCI for the week,falling 13.33 percent for the week, presumably on lower U.S. auto sales. The company derives some 65percent of its sales from North America.

Although U.S. tech giant Apple sales increased globally during its quarter ended June 30, revenue in theregion that includes China fell for a sixth straight period, reports Bloomberg. According to BloombergGadfly columnist Shira Ovide, iPhones in China aren’t the must-have they were when the blockbusteriPhone 6 models went on sale in late 2014. Apple, however, remains optimistic about overall demand.

OpportunitiesIndonesia is said to be seeking proposals for Chevron and ConocoPhillips to renew oil and gas operatinglicenses in the country, which has suffered a decline in energy investment. An amicable and quick decisionon the oil and gas issue could help to rehabilitate Indonesia’s reputation, which has also suffered amidcontention with Freeport McMoran over the massive Grasberg copper and gold mine. Joko Widodo’sadministration hopes to bring in as much as $200 billion in energy investment over the course of the nextdecade.

VIPs may be creeping back to Macau, according to Bloomberg News, which notes that revenue in theChinese gambling hub has continued to rise. Revenue from high-rollers—which suffered most during theinitial Xi Jinping crackdown—has shown a faster pace of recovery this year, growing 35 percent in thesecond quarter, much better than 8.1 percent for recreational gamblers.

The press reports that U.S. Secretary of State Rex Tillerson is visiting Asia this week, participating in theASEAN meetings in Manila before heading for Thailand to pay respects to the late King BhumibolAdulyadej, who died in October. Tillerson then heads to Kuala Lumpur to meet with Malaysian officials

concerning future bilateral cooperation. All the while, China and the U.S. are reported to be edging closer toa mutually-agreeable agreement on a U.N. proposal for boosting North Korean sanctions.

ThreatsOn the flipside, however, the Trump administration has pushed back its announcement on specifics overChina trade policies and possible tariffs. Press reports suggest the administration may employ Section 301of the 1974 Trade Act to position the United States as the victim of unfair trade policies from a foreigncountry, i.e. China in this case, and thereby grant the administration the ability to raise “protective” tariffs,or “level the playing field,” if you will. Intellectual property, in particular, has been named explicitly by theTrump administration as a top priority in the forthcoming announcement.

North Korea’s missile launch late last week is reported to have demonstrated a vertical capacity to reach asfar as Los Angeles, Chicago, or Denver in the continental United States. The relatively vertical trajectory ofthe missile—as opposed to an intercontinental trajectory—was the reason for its splashdown in Japanesewaters, but the range, analysts suggest, was sufficiently demonstrated to be of increasing concern. Clearly,with work toward a jointly-acceptable U.N. proposal coming amid Tillerson’s Asia trip, North Korea stillremains high on the international radar.

On Thursday, China’s Foreign Ministry said that India has been building up troops and repairing roadsalong its side of the border “amid an increasingly tense stand-off in a remote frontier region beside theHimalayan kingdom of Bhutan,” reports Reuters. The neighbors share a 3,500-km frontier, large parts ofwhich are disputed. China was warned by India that construction of the road near the common borderwould have serious security implications, the article notes.

Emerging Europe

StrengthsHungary was the best performing country this week, gaining 2.6 percent. MOL Group, an integrated oil andgas company, was the best performing stock on the Budapest exchange. The company appreciated morethan 5 percent after publishing strong quarterly results.

The Polish zloty was the best performing currency this week, gaining 50 basis points against the U.S. dollar.Despite political noise, the Warsaw stock exchange trends higher and the zloty continues its appreciationagainst the dollar, supported by a strong economy. Poland’s economy grew by 2.6 percent in 2016, and localeconomists anticipate Poland’s GDP to grow at 3 percent this year.

The energy sector was the best performing sector among eastern European markets this week.

WeaknessesPoland was the worst relative performing country this week, gaining 20 basis points. Asseco, Poland’sbiggest information technology company, was the worst performing stock on the Warsaw stock exchange.According to Bloomberg, Asseco is in takeover talks with several companies outside of Poland. This week thecompany sold 16 percent stake in Formula Systems and announced that it wants to continue paying highdividends.

The Russian ruble was the worst performing currency this week, losing 70 basis points against the U.S.dollar. The U.S. investigation into Russia’s interference in the 2016 presidential election is growing, puttingpressure on the ruble.

The real estate sector was the worst performing sector among eastern European markets this week.

OpportunitiesTurkish inflation fell sharper than expected to 9.8 percent year-over-year, from 10.9 percent year-over-yearin June. The decline in inflation was driven almost entirely by a decline in food, beverage and tobaccoinflation. As inflation continues to descent, the central bank may become more confident that it can reversethe monetary tightening undertaken at the start of the year.

The European debt crisis and economic recession were the reason for the European Central Bank’s (ECB’s)asset purchase program and negative interest rate policy. Neither of these conditions are in place now, says

BCA research. The euro area’s unemployment continues to descent, while core inflation is showing signs ofturning higher. The ECB could be announcing an exit from its emergency policies in autumn.

Inflows into emerging market funds continue. Emerging market equity funds received 0.2 percent of NAV inthe week ending Wednesday August 2, while emerging market bond funds received an impressive 0.5percent of NAV in inflows. Developed market funds received much less (equities zero and bonds 0.1 percentof NAV). The strong inflows into emerging market bond funds is another positive for countries with highyields such as Turkey or Greece, says Berenberg’s research team.

ThreatsEurozone PMI for July was reported at 56.6 versus the prior 57.4, mostly led by a down revision inGermany and France, the two biggest eurozone economies. As the chart below illustrates, the one-monthPMI reading for the eurozone crossed below the three-month average, possibly indicating a trend reversal.Central emerging Europe’s PMIs rose on average, but were driven entirely by improvement in Russia.Russian PMI increased to 52.7 from 50.3, while the Polish, Hungarian, Turkish and Czech PMIs alldeclined. Greek PMI was unchanged at 50.5, still above the 50 level that separates growth from contraction.

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The National Bank of the Czech Republic hiked its two-week repo rate from 0.5 percent to 0.25 basis pointsas expected. This was Czech’s first rate hike since 2008, and the first in Europe this year. CapitalEconomics’ research team thinks that the country’s inflation is likely to be higher than most expected,resulting in more rate hikes than are currently priced in.

President Donald Trump signed into law Wednesday morning legislation that will impose new sanctions onRussia and restrict his ability to ease sanctions against Moscow. Russian Prime Minister Dmitry Medvedevcommented that the hope for an improved relationship between Russia and the new Americanadministration is finished and marked it as a “full-scale trade war.” Russian securities have not appreciatedrecently with the rebound in the price of Brent crude oil.

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Leaders and Laggards

Weekly Performance

Index CloseWeekly

Change($)Weekly

Change(%)

Russell 2000 1,412.32 -16.94 -1.19%

S&P Basic Materials 342.01 -2.72 -0.79%

Nasdaq 6,351.56 -23.11 -0.36%

Hang Seng Composite Index 3,758.55 +62.67 +1.70%

S&P 500 2,476.83 +4.73 +0.19%

Gold Futures 1,264.80 -10.50 -0.82%

Korean KOSPI Index 2,395.45 -5.54 -0.23%

DJIA 22,092.81 +262.50 +1.20%

S&P/TSX Global Gold Index 192.53 -1.99 -1.02%

SS&P/TSX Venture Index 765.68 -6.89 -0.89%

XAU 82.04 -3.52 -4.11%

S&P Energy 483.44 -5.00 -1.02%

Oil Futures 49.52 -0.19 -0.38%

10-Yr Treasury Bond 2.26 -0.03 -1.18%

Natural Gas Futures 2.78 -0.16 -5.41%

Monthly Performance

Index CloseMonthly

Change($)Monthly

Change(%)

Korean KOSPI Index 2,395.45 +7.10 +0.30%

Hang Seng Composite Index 3,758.55 +248.73 +7.09%

Nasdaq 6,351.56 +200.71 +3.26%

XAU 82.04 +2.17 +2.72%

S&P/TSX Global Gold Index 192.53 -0.62 -0.32%

Gold Futures 1,264.80 +35.90 +2.92%

S&P 500 2,476.83 +44.29 +1.82%

S&P Basic Materials 342.01 +2.93 +0.86%

DJIA 22,092.81 +614.64 +2.86%

Russell 2000 1,412.32 -7.83 -0.55%

SS&P/TSX Venture Index 765.68 +2.88 +0.38%

Oil Futures 49.52 +4.39 +9.73%

S&P Energy 483.44 +5.77 +1.21%

Natural Gas Futures 2.78 -0.06 -2.04%

10-Yr Treasury Bond 2.26 -0.06 -2.62%

Quarterly Performance

Index CloseQuarterly

Change($)Quarterly

Change(%)

Korean KOSPI Index 2,395.45 +154.21 6.88%

Hang Seng Composite Index 3,758.55 +422.87 +12.68%

Nasdaq 6,351.56 +250.81 +4.11%

Natural Gas Futures 2.78 -0.48 -14.82%

Gold Futures 1,264.80 +27.80 +2.25%

S&P 500 2,476.83 +77.54 +3.23%

S&P Basic Materials 342.01 +6.53 +1.95%

S&P/TSX Global Gold Index 192.53 -9.29 -4.60%

XAU 82.04 +1.76 +2.19%

DJIA 22,092.81 +1,085.87 +5.17%

Russell 2000 1,412.32 +15.33 +1.10%

SS&P/TSX Venture Index 765.68 -16.04 -2.05%

S&P Energy 483.44 -12.01 -2.42%

Oil Futures 49.52 +3.30 +7.14%

10-Yr Treasury Bond 2.26 -0.09 -3.70%

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The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in theirindustry.The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S.companies.The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell3000®, a widely recognized small-cap index.The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed onStock Exchange of Hong Kong, based on average market cap for the 12 months.The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan StockExchange.The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the KoreanStock Exchanges. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leadingcompanies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights arecapped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset ofthe S&P 500.The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subsetof the S&P 500.The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the1941-43 base period.The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in theindustrial sector as a subset of the S&P 500.The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumerdiscretionary sector as a subset of the S&P 500.The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the informationtechnology sector as a subset of the S&P 500.The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in theconsumer staples sector as a subset of the S&P 500.The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset ofthe S&P 500.The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as asubset of the S&P 500.The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecomsector as a subset of the S&P 500.The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companiesinvolved primarily in the mining for gold and silver. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a marketbasket of goods and services purchased by individuals. The weights of components are based on consumer spendingpatterns.The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is basedon five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index ismarket capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove

companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, willbe greater than 0.05% of the index.

The Caixin China General Services PMI (Purchasing Managers' Index) is based on data compiled from monthly replies toquestionnaires sent to purchasing executives in over 400 private service sector companies. The index tracks variables suchas sales, employment, inventories and prices. The Caixin China Manufacturing PMI (Purchasing Managers' Index) is based ondata compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sectorcompanies. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.The ISM Nonmanufacturing index based on surveys of more than 400 non-manufacturing firms' purchasing and supplyexecutives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-ManufacturingIndex tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is createdbased on the data from these surveys that monitors economic conditions of the nation The MICEX Index is cap-weightedcomposite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developingRussian issuers presented on the Moscow Exchange. MICEX Index was launched on September 22, 1997 at base value 100.The MICEX Index is calculated in real time and denominated by Moscow Exchange in Russian rubles. The BloombergIntelligence (BI) Global Coal Producers Top Competitive Peer Group is an equal-weighted basket of peers. The S&P 1500Supercomposite Oil & Gas Exploration & Production Index is a capitalization-weighted index comprised of stocks whoseprimary function is exploring for natural gas and oil resources on land or at sea. The Philippine Stock Exchange PSEi Index iscomposed of stocks representative of the industrial, properties, services, holding firms, financial and mining & oil sectors ofthe Philippines Stock Exchange. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physicalcommodities. The index represents 20 commodities, which are weighted to account for economic significance and marketliquidity. The Bloomberg Dollar Spot Index (BBDXY) tracks the performance of a basket of 10 leading global currencies versusthe U.S. Dollar. Earnings per Share (EPS) is the portion of a company's profit allocated to each outstanding share of commonstock. Earnings per share serves as an indicator of a company's profitability. Diversification does not protect an investor frommarket risks and does not assure a profit. The Consumer Price Index (CPI) is one of the most widely recognized pricemeasures for tracking the price of a market basket of goods and services purchased by individuals. The weights ofcomponents are based on consumer spending patterns.

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