Week of February 15, 2016
Markets turned down and stayed in the red last week as global growth concerns continue to weigh on market sentiment. Gold rallied while volatility spiked as investors digested the week's economic data and Central Bank policy decisions.
Despite the Dow Jones Industrial Average and the S&P 500 popping up nearly 2% on Friday, both were down for the week at 1.44% and 0.83%, respectively. The Stoxx Europe 600 Index was down 4.3%.
Last Thursday's market selloff sent the CBOE Volatility Index, or VIX, to its highest level since January 20th as fresh concerns over a slowdown cast a shadow on the market. The VIX is a measure of market fear over the next 30 days and is based on the volatility of S&P 500 options prices. Concerns over global growth appear to have driven investors away from risker equities and into the relative safety of government bonds despite low or even negative interest rates in many sovereign bonds. For example, the Bank of Japan, in an attempt to spur spending and growth, set its short-term interest rates negative the end of January. While the market briefly rallied in response to the stimulative news, the mood turned sour last week with Japan's Nikkei Stock Average Index down over 11%, marking the worst week for the benchmark since October 2008. In fact, the buying pressure in Japanese government bonds drove longer-term 10-year yields into negative territory and the Japanese yen to its highest level relative to the US dollar since 2014. This was not the desired outcome of the bank, rather, their move to negative short-term rates was meant to weaken the currency and make their exports more attractive. It wasn't until OPEC announced it was ready to start cutting oil output later in the week that domestic and European markets saw some buying support, rebounding slightly on Friday while Japanese markets continued to fall.
In what may be a sign of the market's mood, gold hit its highest level in almost nine months as it traded well over $1,200 an ounce. As one of the best performing commodities, gold is up just over 16% this year while almost $6.8 trillion in value has been wiped out from the world's equity markets over the same period. In fact, last week was the best week in four years for gold. The concerns over global growth and the equity rout have reignited the market's interest, driving more than $2.6 billion into exchange-traded funds tracking the precious metal. Investors have historically viewed gold as a hedge when they believe markets are experiencing turmoil. In addition, extremely low and, in some cases, negative interest rates have also helped boost gold through the first part of the year.
China's Foreign Currency Reserves
News released last week indicates China's foreign currency reserves are falling and falling fast. As we have discussed in our previous commentaries, China has expended billions in propping up their currency, the yuan, and it appears that those actions have taken a toll. This has investors concerned for a number of reasons. As China has less flexibility with its foreign currency reserves, their ability to boost the yuan is also limited. If the market sees a devaluation like we saw back in 2015 or the first week of 2016, capital flight could drag the currency down even further in a negative feedback loop. To combat this possibility, China has instituted a number of policies making it more difficult for those looking to exchange the yuan for other currencies. The main concern investors have is that, if the yuan falls even further and China doesn't have the reserves to prop up the currency, it could spark competitive devaluations by other emerging markets countries as they look to protect their exports relative to the Chinese.
Fun Story of the Week
Vacheron Constantin, a Swiss watch manufacturer, has created the world's most complicated timepiece. Technically a pocket watch, the behemoth is nearly four inches across and two inches thick so you're likely to carry it in a bag rather than a pocket. It took the manufacturer nearly eight years to build and includes 57 complications. A complication is anything beyond showing hours, seconds and minutes. For example, the date, a power reserve indicator or a tourbillon feature is considered a separate complication. What is astounding is that there is no battery or electronics whatsoever, only gears and springs. A lot of them. The watch is made up of over 2,800 pieces and was designed by scratch and meticulously assembled by hand. Going through each of the 57 complications would take quite a bit of time. And yes, there is a complication for measuring exactly how much time it would take. In fact, the chronograph on the watch is accurate to one-fifth of a second for those so inclined. There are even three different types of calendars, a moon phase indicator and a hand that tracks equinoxes and solstices. One look at the cluttered face and it's plain to see that this is not an exercise in time-keeping; rather, it's a showcase of technological expertise and craftsmanship. An official price hasn't been released yet and, given its one-of-a-kind status, it's hard to properly gauge. However, estimates put the price somewhere between $8 million and $20 million.
Please feel free to forward this commentary to family, friends or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
* Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. * DJIA: The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. * STOXX EUROPE 600 INDEX: The Stoxx Europe 600 Index is derived from the Stoxx Europe total Market Index and is a subset of the Stoxx Global 1800 Index. With a fixed number of 600 components, the Stoxx Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. * CBOE VOLATILITY INDEX (VIX): The CBOE Volatility Index is a measure of the market's expected volatility for the following 30-day period. It is constructed using the implied volatilities of S&P 500 Index options prices. * S&P 500 INDEX: The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. * NIKKEI 225 INDEX: The Nikkei 225 Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated. * Past performance does not guarantee future results. * Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only. * Consult your financial professional before making any investment decision. * This newsletter was prepared by CWM, LLC.
CNBC, February 2016, http://www.cnbc.com/2016/02/11/gold-eyes-best-week-in-4-years-as-market-turmoil-boosts-haven-appeal.html
CNBC, February 2016, http://www.cnbc.com/2016/02/11/us-markets.html
CNBC, February 2016, http://www.cnbc.com/2016/02/10/gold-jumps-to-8-12-month-peak-on-us-rate-hike-outlook.html
Wall Street Journal, February 2016, http://www.wsj.com/articles/hilsenrath-risks-to-u-s-economy-on-the-rise-1455121489?tesla=y
Wall Street Journal, February 2016, http://www.wsj.com/articles/japan-markets-shaken-as-investors-seek-shelter-1454997661
Bloomberg, February 2016, http://www.bloomberg.com/news/articles/2016-02-08/gold-traders-bet-comeback-has-more-to-go-as-call-options-surge
Financial Times, February 2016, https://www.ft.com/intl/cms/s/0/ce226924-ce62-11e5-831d-09f7778e7377.html#axzz3zb0tdacW
CNBC, February 2016, http://www.cnbc.com/2016/02/07/spot-gold-slips-as-dollar-holds-gains-after-us-jobs-data.html
Wall Street Journal, February 2016, http://www.wsj.com/articles/chinas-forex-reserves-plunge-to-more-than-three-year-low-1454816583
Bloomberg, February 2016, http://www.bloomberg.com/news/articles/2015-09-17/vacheron-constantin-unveils-the-most-complicated-watch-ever-made