The Biggest Global Tax Break Ever Bubbles Up fromTexas Oil Industry

September 22, 2017by Frank Holmes

of U.S. Global Investors

Last Friday I had the privilege of appearing on “Countdown to the Closing Bell,” Liz Claman’s program on Fox Business.When asked if I was nervous that stocks are heading too high, I said that I’m very bullish. All around the world, exports areup, GDPs are up and the global purchasing manager’s index (PMI) is up.

Oil prices continue to remain low, however, thanks in large part to the ingenuity of Texas fracking companies. As I told Liz,this has served as a multibillion-dollar “peace dividend” that has mostly helped net importing markets, including “Chindia”—China and India combined, where 40 percent of the world’s population lives—Japan and the European Union.

I can’t emphasize enough how impressive it is that Texas shale oil producers continue to ramp up output even with crude

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remaining in the $50 per barrel range.

This underscores their efficiency and innovation in drawing on oil reserves that were largely out-of-reach as recently as 10or 12 years ago. What’s more, common law property rights here in the U.S. benefit mining companies in ways that simplycan’t be found in Latin America and other parts of the world that operate under civil law.

According to the Energy Information Administration’s (EIA) most recent report on drilling productivity, total U.S. shale oiloutput is expected to climb above 6 million barrels a day for the first time in September. The biggest contributors are Texasshale oilfields, which will exceed 4 million barrels a day. West Texas’ Permian Basin alone represents nearly 400 percentof these gains, according to research firm Macrostrategy Partnership.

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The typical Permian well remains very profitable even with $50-a-barrel oil, according to Bloomberg New Energy Finance.The research group estimates that oil would need to drop below $45 a barrel for some Permian wells to becomeunprofitable.

Christi Craddick, the Texas Railroad Commissioner, praised the Texas fracking industry in her address at the annualPanhandle Producers and Royalty Owners Association (PPROA) meeting this week. She noted how essential shale oilproducers are to the Texas economy, adding that despite the downturn in oil prices, “the Texas oil and gas industry hasshown extraordinary resilience.”

“When times were tough, the industry did what it does best—innovate,” she said. “Because of your ingenuity, we’re seeing industrygrowth today despite the price of oil.”

Again, it’s this ingenuity that’s kept oil prices relatively low, which in turn has helped strengthen GDPs in oil-importingemerging markets and squeeze the revenue of exporters such as Russia, Qatar, Saudi Arabia and others.

Texas-based oil and gas exploration company Anadarko Petroleum was one of the top performing natural resource stocksthis week, gaining more than 12 percent. The surge came on the heels of the company’s announcement that it approved a$2.5 billion stock buyback program.

Coming Together as a Community

A month after the Texas Gulf Coast was devastated by the unprecedented wind and rains of Hurricane Harvey, the cleanupand rebuilding continues. As I shared with you in an earlier post, the Texas economy is one of the strongest in the world,and its residents are committing to rebuilding Houston and other affected areas better than ever before. As a proud Texanby way of Canada, I can say that it’s in our culture to come to one another’s aid in times of need and help rebuild.

Synchronized Global Growth Is Finally Here: OECD

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I believe that my bullishness was validated this week with the release of the Organization for Economic Cooperation andDevelopment’s (OECD) quarterly economic outlook. According to the Paris-based group, synchronized global growth isfinally within sight, with no major economy in contraction mode for the first time since 2008. World GDP is expected toadvance 3.5 percent in 2017—its best year since 2011—and 3.7 percent in 2018.

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This news comes only a couple of weeks following the release of the August global manufacturing PMI, which shows thatmanufacturing activity around the world accelerated to its highest level in over six years. Not only is the index currentlyabove its three-month moving average, but it’s also now held above the key 50 threshold for a year and a half, indicatingstrong, sustained industry expansion.

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As I’ve shown before, the global PMI has been a good indicator of exports and commodity prices three to six months out,so I see this as very positive.

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Where to Invest in the Global Bull Run

World markets seem to agree. Not only are domestic averages closing at record highs on a near-daily basis, but globalstocks continue to head higher as well. The MSCI World Index, which tracks equity performance across 23 developedcountries, is up 14 percent so far this year as of September 20. And just so we’re clear that emerging countries aren’t beingleft out, the MSCI Emerging Markets Index has gained close to 30 percent over the same time period.

One of the most attractive regions to invest in right now is Asia, specifically the China region, which has outperformed boththe American and European markets year-to-date. The Hang Seng Index has advanced more than 27 percent, drivenmostly by financials and tech stocks such as Tencent and AAC Technologies.

In addition, Asian stocks look very cheap, trading at only 13.97 times earnings. The S&P 500 Index, by comparison, iscurrently trading at 21.44 times earnings.

A Rebalance of Monetary and Fiscal Policies Needed for Sustainable Growth

But back to the OECD report. The group points out that the good times could easily come to an end if world governmentsdon’t make efforts to balance monetary and fiscal policies, something I’ve been urging for years now.

Central banks are eyeing the stimulus exit door, with the Federal Reserve planning to begin unwinding its $4.5 trillionbalance sheet as early as next month, the European Central Bank (ECB) ready to reduce its monthly bond-purchasingprogram sometime in early 2018 and the Bank of England (BOE) expected to raise interest rates in November for the firsttime since 2007.

As such, governments need to strengthen business investment, global trade and wage growth. The OECD adds that “moreambitious structural reforms” in emerging economies “are needed to ensure that the global economy moves to a strongerand more sustainable growth path.”

Only then can this new period of synchronized global growth be sustained in the long term.

Invasion of the Quants in the Gold Space

For the next few days I’ll be in Colorado Springs, Colorado, attending the Denver Gold Group’s 28th annual Gold Forum.My keynote presentation, scheduled for Monday, will be about how our firm uses quantamentals in our gold investingstrategy. Quantamentals, as I’ve explained before, is a blended approach that combines old fashioned, bottom-up stockpicking with big data and machine learning. If you happen to be in the Colorado Springs area, stop by and say hi!

September 21, 2017

Markets Move Higher Despite GeopoliticalNoise

September 21, 2017

U.S. Global Investors Announces...

September 13, 2017

Oil, Gold and EconomicGrowth

Index SummaryThe major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.36 percent. The S&P500 Stock Index gained 0.08 percent, while the Nasdaq Composite fell 0.33 percent. The Russell 2000 smallcapitalization index gained 1.33 percent this week.The Hang Seng Composite gained 0.94 percent this week; while Taiwan was down 1.24 percent and the KOSPI rose0.11 percent.The 10-year Treasury bond yield rose 5 basis points to 2.25 percent.

Domestic Equity Market

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Strengths

Telecommunications was the best performing sector of the week, increasing by 3.80 percent versus an overallincrease of 0.10 percent for the S&P 500.Equifax was the best performing stock for the week, increasing 12.97 percent.We're officially in the second-largest bull market since World War II. Stocks have climbed roughly 270 percent fromtheir March 2009 low, eclipsing the bull run from June 1949 to August 1956, according to data from LPL Financial.

Weaknesses

Real estate was the worst performing sector for the week, falling 2.83 percent versus an overall increase of 0.10percent for the S&P 500.Foot Locker was the worst performing stock for the week, falling 9.02 percent.Toys R Us filed for bankruptcy. The toy retailer filed for Chapter 11 bankruptcy on Monday as a result of onlinecompetition and a huge debt load.

Opportunities

Apple's new A11 chip, which powers the iPhone X, iPhone 8 and iPhone 8 Plus, is more powerful than 2017'sMacBook Pro models. The phones are all considerably faster than any competition out there at the moment, anadvantage which could allow Apple to increase market share.U.S. defense contractor Northrop Grumman agreed to buy the missile and rocket maker Orbital ATK Inc. for about$7.8 billion in cash, with plans to establish a new business segment. Orbital has billion-dollar contracts with NASAand the U.S. Army.Tesla and AMD are reportedly teaming up. The companies are working together to make chips for self-driving cars,CNBC said, citing a source familiar with the matter.

Threats

Google is trying to avoid another massive European Union fine by offering to show rivals' shopping sites via anauction in its search results. However, EU regulators dismissed Google's proposal as inadequate, according toReuters.Bed Bath & Beyond plummeted after missing big on earnings. Shares of the company fell more than 15 percent afterannouncing earnings of $0.67 a share on revenue of $2.94 billion, both well below estimates, as restructuringcharges, Hurricane Harvey and a new accounting standard weighed, according to Investing.com.FedEx missed on its earnings report and lowered its outlook. The company missed on both the top and bottom linesand said it saw fiscal 2018 adjusted earnings in a range of $11.05 to $11.85, down from its previous estimate of$12.45 to $13.25.

The Economy and Bond MarketStrengths

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The Leading Index for August came in at 0.4 percent, ahead of the expected 0.3 percent. This reading is a positivesign for the economy.Retail investors in the U.S. are at record levels of optimism. The preliminary University of Michigan survey ofconsumer sentiment for September showed that the mean expected probability that stocks would climb over the nextyear hit a record 65 percent.September’s preliminary Markit U.S. Manufacturing PMI data came in at 53, above the previous month’s reading of52.8.

Weaknesses

China’s credit rating was downgraded at Standard & Poor’s. The credit-rating agency lowered China's rating onenotch to A+, citing the country’s rising debt load.U.S. existing home sales for August came in softer than expected. Sales of existing homes totaled 5.35 million, belowexpectations for 5.45 million.September’s Markit U.S. Services PMI came in at 55.1, below the expected reading of 55.8.

Opportunities

The likelihood of a Federal Reserve rate increase this year moved up as traders boosted the odds to about 62percent, based on Fed funds futures, on Wednesday after Janet Yellen stuck to the Fed’s forecast for another hikethis year. The probability was around 50 percent prior to the meeting and as low as 22 percent on September 8.

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The Federal Reserve raised its outlook for the U.S. economy. It now expects real GDP to grow from 2.2 percent to2.5 percent in 2017, up from June's projection of 2.1 percent to 2.2 percent.Next Friday's PCE data will be the most anticipated U.S. economic release of the week. August's income andspending may be temporarily depressed by the hurricane. But more importantly, following the 0.2 percent month-over-month increase in August's core consumer price index (CPI) data, investors will be watching for a similar rise inthe core PCE deflator. This should keep a December Fed rate hike in play.

Threats

The Federal Reserve announced Wednesday it would embark next month on its biggest post-recession policy shiftsince it first raised interest rates at the end of 2015. The central bank confirmed that it would start trimming the $4.5trillion balance sheet it built up after the Great Recession. This balance sheet unwinding carries risks for the bondmarket.Durable goods orders have been in decline for the past two months. Next Wednesday’s release will provide anupdate on this trend.S&P Global Ratings downgraded Pennsylvania’s general obligation rating to A+ from AA-. According to S&P, thedowngrade reflects the commonwealth’s chronic structural imbalance dating back nearly a decade, and a history oflate budget adoption.

Gold MarketPage 6, © 2020 Advisor Perspectives, Inc. All rights reserved.

This week spot gold closed at $1,296.95, down $23.21 per ounce, or 1.76 percent. Gold stocks, as measured by the NYSEArca Gold Miners Index, ended the week lower by 3.12 percent. Junior-tiered stocks outperformed seniors for the week, asthe S&P/TSX Venture Index came in slightly lower by 0.20 percent. The U.S. Trade-Weighted Dollar finished the weekslightly higher by 0.37 percent.

Date Event SurveyActualPriorSep-18Eurozone CPI YoY 1.2% 1.2% 1.2%

Sep-19Germany ZEW Survey CurrentSituation

86.2 87.9 86.7

Sep-19Germany ZEW Survey Expectations 12.0 17.0 10.0Sep-19Housing Starts 1147k 1180k 1190kSep-20FOMC Rate Decision (Upper Bound) 1.25% 1.25% 1.25%Sep-21Initail Jobless Claims 302k 259k 282kSep-26

Hong Kong Exports YoY 9.5% -- 7.3%

Sep-26New Home Sales 590k -- 571kSep-26Conf. Board Consumer Confidence 120.0 -- 122.9Sep-27Durable Goods Orders 1.0% -- -6.8%Sep-28Germany CPI YoY 1.8% -- 1.8%Sep-28GDP Annualized QoQ 3.1% -- 3.0%Sep-28Initial Jobless Claims 265k -- 259kSep-28Caixin China PMI Mfg 51.5 -- 51.6Sep-29Eurozone CPI Core YoY 1.2% -- 1.2%

Strengths

Typical of FOMC meeting weeks, we tend to see the precious metals take a hit. The best performing precious metalfor the week was palladium, off 0.43 percent on little market moving news. Ford announced that it will add moredowntime to five North American automobile plants due to a decrease in demand as inventories rise on dealer lots.The gold price could soon recover, says Jason Schenker, president and founder of Prestige Economics, the reasonbeing that the Federal Reserve might raise rates less rapidly because of low U.S. inflation. “The fact that the Fedmembers lowered their forecast for their own future Fed funds rate indicates that the Fed may again kind ofundershoot what they’re predicting they’re going to do for rates,” Schenker told Bloomberg. This could end up beingneutral to bearish for the dollar, which would help support the gold price.Gold has begun to climb back toward $1,300 an ounce on safe-haven demand now that tensions betweenWashington and Pyongyang are steeply escalating. Following new U.S. sanctions against North Korea, the rogueAsian country’s leader Kim Jong-un threatened to detonate a hydrogen bomb in the middle of the Pacific Ocean. Withthe back-and-forth rhetoric intensifying, investors’ interest in safe havens, gold included, has been renewed.

Weaknesses

The worst performing precious metal for the week was platinum, off 3.77 percent. Platinum prices has been out offavor for the last couple of years, recently prompting Impala Platinum, the world’s second largest producer, topropose some job cuts in South Africa that could lead to supply disruptions if labor is not on the same page. Earlierthis week, gold dropped below $1,300 an ounce as risks receded of another hurricane striking the mainland U.S. andas major stock market averages continued to hit record highs on a near-daily basis. In addition, a diplomaticresolution to the nuclear standoff with North Korea appeared likely, with Secretary of State Rex Tillerson saying theU.S. is seeking a peaceful conclusion.The gold price responded negatively to Fed officials’ announcement that the central bank would begin unwinding its$4.5 trillion balance sheet as soon as October and also signaled additional rate hikes in 2018 following a Decemberhike. Speaking with Bloomberg, RJO Futures’ Bob Haberkorn said that “the unwinding, coupled with the hawkish tonefor December and the three hikes next year, could weigh on gold for the time being.”

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The world’s 20 leading gold producers’ share of metal output is expected to fall to its lowest level in a decade in 2019,according to Bloomberg industry analyst Eily Ong. The mining group’s share of world output fell from 47 percent in2010 to 39 percent in 2016, and could fall even further by 2019. “As gold producers’ focus shifts from volume toprofitable ounces, their existing gold mines’ life expectancies have also continued to declined,” Ong writes.

Opportunities

Thursday and Friday of last week, Klondex Mines hosted a visit to its operations in Nevada to update the market onHollister, Fire Creek, and Midas. We attended the site visits. Klondex is in a unique situation, having three, high-grademines filling one centrally located mill at the Midas site. Overall, we would say investors and analysts came back witha favorable outlook. The share price outperformed the major gold equity ETF’s by over 550 basis points this week asseveral more positively toned analyst reports made the rounds. What we also think is noteworthy, was the quality ofnew people that have been attracted to Klondex, as operations have expanded, and the buy-in to the values ofKlondex’s culture of safety at its operations. Prior to the trip, Klondex Mines completed the donation of the RockCreek Lands to the Western Shoshone. For thousands of years, the Rock Creek Lands, about 20 miles northeast ofBattle Mountain, Nevada, were used by the Western Shoshone. This was a goal of management and the board ofKlondex to repair community relations with the Native Americans in the area which the previous owner of Hollisterhad ignored. Consequently, Klondex received drilling permits to now drill from the surface at Hollister to expand theexploration potential of the land package more cost effectively.Wesdome Gold Mines announced management changes driven by the CEO, Duncan Middlemiss, with full support ofthe board. The current CFO, COO and VP of Corporate Development & Exploration were all replaced immediately,which completes a realignment of staffing started by the addition of Chairman Charles Page to the board a little overa year-and-a-half ago. We see Wesdome Mines, with its Kiena Deeps exploration target, becoming more catalyst richheading into the fourth quarter.With two of the bigger gold mining conferences for the year being held this week and next, there has been a swath ofnews releases distributed. Barsele reported a drill hole that intersected 19.75 meters grading 5.07 g/t gold, indicatingcontinuity along a 100-meter gap between two lobes of the deposit. Jaguar Mining rose in excess of 25 percent ondrill results that showed down plunge continuity of the principal ore body contained within the Banded Iron Formation.Both Golden Star and Red Pine Exploration reported double-digit grades from their respective orebodies that shouldlead to resource additions. In addition, Roxgold increased its production guidance for the year from 105,000-115,000ounces, up to 115,000-125,000 ounces.

Threats

According to U.S. Trade Representative Robert Lighthizer, President Donald Trump’s chief trade negotiator, Chinaposes an “unprecedented” threat to world trade, highlighting the country’s massive subsidies to “create nationalchampions” and “distort markets.” Because current global rules are too inadequate to address the problem, Lighthizeradds, the president should unilaterally impose tariffs on China and any other country that practices “unfair” tradepolicies. Doing so, it should be noted, could lead to a U.S. trade war with China, the second-largest economy in theworld, causing dramatic price swings in commodities and other raw materials.B&N Bank, a top-five closely held lender in Russia, has asked the country’s central bank for a bailout, reportsBloomberg, making it the second nationalization in less than a month. This highlights the complicationsaccompanying the Bank of Russia’s efforts to clean up the financial sector after the dual economic shocks of a

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collapse in oil prices and international sanctions in 2014, the article continues. “The story of Otkritie, and now B&N,seriously raises questions about the actual state of private banks,” Dmitry Polevoy, chief economist for Russia at INGGroep NV in Moscow said.With the debt-cap suspension expiring on December 8, Bloomberg reports that there is a growing sense amonginvestors and analysts that the Treasury will have to “slow or hold off on the inevitable.” It is unknown how theTreasury will respond to the Federal Reserve’s tapering. “The mix of maturities it decides on has far-reachingimplications for the world’s biggest bond market, with the potential to alter the shape of the yield curve for years tocome,” the article reads.

September 18, 2017

The Blockchain Could Potentially Be as Disruptive as AmazonWas in the 1990s

September 13, 2017

Natural Disasters Have Not Caused a Single MuniDefault: Moody’s

September 11, 2017

Gold and Bitcoin Surge on NorthKorea Fears

Energy and Natural Resources MarketStrengths

Crude oil was the best performing major commodity this week rising 2.1 percent. Oil prices rallied as investorsawaited clues from a meeting of OPEC oil producers that could extend production cuts. Ministers from theOrganization of the Petroleum Exporting Countries, Russia and other producers meet in Vienna on Friday and aredue to consider extending output cuts that began in January.

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The best performing sector this week was the S&P 1500 Oil & Gas Explorers and Developers Index. The index ofmajor producers rose 4.4 percent on the back of rising crude oil prices, which broke above key technical resistancelevels.Anadarko Petroleum Corp., a major Texas-based oil producer, was the best performing stock in the broader resourcemarket this week. The stock rallied 12.1 percent after the company announced a $2.5 billion share buyback program.

Weaknesses

Iron ore was the worst performing major commodity this week dropping 11.9 percent. The steel-making raw materialdropped after a barrage of bad news, with concerns about rising global supply, questions about the outlook fordemand in China, and a warning from Australia’s central bank that China may be nearing peak steel production.The worst performing sector this week was the TSX Gold Index. The index fell 3.2 percent as gold posted a secondconsecutive weekly drop on news that the Federal Reserve still expects to raise rates one more time in 2017, and asmany as three times in 2018.The worst performing stock for the week was VALE SA. The Brazilian diversified miner dropped 6.4 percent inresponse to weaker iron ore prices.

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Opportunities

Germany’s ZEW economic sentiment index rose 7 points in September to 17. A rise in bank lending and increasinginvestment activities by both the government and private firms are likely reasons for the financial market experts’significantly more positive outlook compared to that of last month. The release suggests the strong growthmomentum in Europe may continue, and the high growth in EU oil and energy demand – which has helped rebalancethe global oil market – may continue for the remainder of the year.Global nitrogen price benchmarks have risen almost 40 percent since the second quarter as the nitrogen distributionchannel prepares for the seasonal increase in farm applications. As coal prices in China continue to climb, they willadd upward momentum to nitrogen prices, as suggested by a recent Bloomberg report.Aluminum prices hit their highest in nearly six years on a report that Aluminum Corp of China, known as Chinalco,has started cutting production in the Henan province almost two months before official winter restrictions kick in. Thesurprising reduction in supply may continue to drive aluminum prices higher for the remainder of 2017.

Threats

China’s sovereign credit rating was downgraded from AA- to A+ by S&P, the second international rating agency to doso this year after Moody’s lowered its sovereign rating in May. The agency cited concerns “that credit growth in thenext two to three years will remain at levels that will increase financial risks gradually.” The rating downgrade mayreduce the availability of capital for Chinese corporations, which could result in weaker demand for imports andcommodities.The Shanghai Metals Market’s (SMM) international division estimates that environmental policy-related closurescould reduce steel output by up to 30 million tons this year in China. As a result, SMM expects iron ore consumptionto drop by 50 million tons, a number that may create a large supply demand imbalance in the already well-suppliediron ore market.Ford Motor Co. has announced it will curtail production at five plants in North America as U.S. sales slow. Ford said itwould temporarily idle production to cope with slowing vehicle sales and rising industry inventories. The news haspotential negative implications for steel, aluminum and other raw materials used in vehicle production.

China RegionStrengths

The Philippines Stock Exchange PSEi Index returned 1.23 percent for the week, putting in a strong showing withinthe region. The peso also strengthened for the week.Also notable is Hong Kong’s Hang Seng Index, which made new 52-week highs this week and which has continuedto creep closer to its five-year highs, seen below:

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Taiwan’s year-over-year industrial production orders came in better than expected for the August period, rising 3.25percent, ahead of analysts’ anticipation of a 1.85 percent gain and up from the prior showing of 2.38 percent.

Weaknesses

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The Taiwan Stock Exchange Weighted Index fell 1.22 percent for the week, with most of the decline coming onFriday.Standard & Poor’s lowered China’s sovereign credit grade to A+ from AA- this week. The ratings agency alsodowngraded Hong Kong to AA+ from AAA this week, citing the “strong institutional and political linkages” to mainlandChina.New home prices in China rose in only 46 out of 70 cities, whereas last month they rose in some 56. On the brightside, the various (and apparently effective) measures the Chinese government have taken to cool house priceappreciation may mean that soon, given the relative success, such measures may be loosened slightly once again.

Opportunities

Several important stories came out this week related to the electric vehicle market in China. The country is said to bestudying a relaxation on the rules for foreign electric vehicle makers, according to press reports, with a possibleallowance for wholly owned foreign producers able to set up shop in free trade zones. The news comes even asChina recently announced that government officials are considering setting a deadline after which sales of internalcombustion vehicles will be prohibited. (Automaker BYD has since come out and predicted a 2030 deadline.)Tech giant Tencent announced a couple of interesting strategic agreements this week. First, Tencent announced acooperation agreement with Guangzhou Auto on “internet service for vehicles, smart-driving technology, big data andmarketing,” Bloomberg reports. Second, Tencent entered into an agreement with China International Capital Corp., orCICC, on precision marketing and big data analysis. Tencent also subscribed to an issuance of new H-shares inCICC.Reports suggest that the People’s Bank of China (PBOC) is drafting possible reforms for a broader opening of theChinese financial markets, including the possibility of foreign institutions maintaining control over local financial JVsand raising the foreign ownership threshold for Chinese banks.

Threats

North Korea remains near the forefront of investor risks, with “Rocket Man” rhetoric and threats of H-bombs spicingup the press this week.The concerns of both Moody’s (earlier this year) and now S&P on China’s debt—while not necessarily immediate oralarming—demonstrate continued concern about the situation under the hood. Clearly, the yuan has enjoyed relativestability for the last several months and outflow concerns have moderated, even as the government has pusheddeleveraging and domestic investment, but the downgrade this week from S&P ought to serve as a bit of a reminderor refresher on the overall situation.Central banking policies worldwide may continue to have outsized or unknown effects on markets.

Emerging EuropeStrengths

Russia was the best relative performing country this week, losing 10 basis points. Russian stocks started tooutperform Turkish stocks since the end of August, and investors are switching from Turkey to Russia, according toBloomberg. Turkish equities gained 33 percent year-to-date, while Russian stocks lost 8 percent.The Polish zloty was the best performing currency this week, gaining 20 basis points against the U.S. dollar.Economic data released this week in Poland points to the strength in the economy and supports the country’s localcurrency. Average gross wages continue to grow, industrial output and retail sales are improving, and theunemployment rate is at record low level.Energy was the best performing sector among eastern European markets this week.

Weaknesses

Turkey was the worst performing country this week, losing 3.3 percent. A weakening of the Turkish lira and risingpolitical risks sent Turkish stocks lower extending their decline to a third week.The Turkish lira was the worst performing currency this week, losing 1.6 percent against the U.S. dollar. A hawkishtone from the Federal Reserve and tensions around the independence referendum in Kurdistan pushed the lira lower.Real estate was the worst performing sector among eastern European markets this week.

Opportunities

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Standards and Poor’s upgraded Portuguese bonds to investment grade, a rating that the country lost during the eurocrisis in 2012. S&P said the bond upgrade reflected a growing economy, a reduced budget deficit and the recededrisk of market deterioration in external financing conditions. Portugal’s GDP expanded 2.9 percent on the year in thesecond quarter. Investor confidence has been the strongest among the biggest European economies, with a slightcorrection recently. After the credit rating agency announced the upgrade, yields fell to the lowest since late 2015,and bond prices rallied.

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The euro area economy may have grown at the fastest pace in more than two years in the third quarter after anupturn in September .The composite PMI jumped to a four-month high of 56.7 from 55.7 in August. Germany’scomposite PMI is at the highest in more than six years. France’s PMI also beat estimates.The German election takes place this Sunday, and Merkel’s Christian Democrats (CDU) party is well ahead in polls,but will most likely fall short of a majority. Six parties are polling well above the 5 percent national threshold requiredto enter the parliament. We should know the winner by Sunday, although it will be several more weeks until acoalition government is officially agreed on.

Threats

Kurdistan is planning to hold an independence referendum on September 25, which the Kurds consider a culminationof decades of struggle for a state of their own, but that Iraq calls a violation of its constitution. Washington remainsfriendly with the Kurds, who are helping to fight the Islamic State, but is concerned about the independence bidleading to the breakup of Iraq or more political tension in Turkey, Reuters reports.B&N Bank, one of the top Russian banks, asked the central bank for help. B&N is under pressure from tighterregulations that the central bank has been introducing slowly, along with a high level of bad debt. At the same time,falling rates in Russia are putting pressure on banks’ margins, a major source of profit for Russian banks. B&N Bankis the second bank asking for a bailout within a month.Only a quarter of Russians (26 percent) keep their savings in banks, according to state-owned Russian PublicOpinion Research Centre. That is slightly down from 2013 when 28 percent of Russians used banks to hold theirsavings. The fear of losing savings due to a bank crisis has fallen to 29 percent from 50 percent in 2013. Most of therespondents (73 percent) reported that they have no savings at all, up from 71 percent.

© US Global

www.usfunds.com

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