Gold has just broken out to the highest level since 2013 on the heels of the US attack against Iran.
Middle East: A Fleeting Impact On Markets?
January 6 (King World News) – Peter Boockvar: I don’t want to downplay the importance of the current geopolitical situation but most usually have a fleeting impact on the economy and markets. I understand the tinder box that the Middle East is but unless WTI breaks above $75, I think there will be little impact on economic activity. I say $75 not on some econometric modeling but just because that was the multi year high touched in early October 2018.
Crude Oil Above $75 Will Be A Problem For World Economy
In terms of the impact of rising oil prices, everyone has their opinion in an aggregate sense but I just think simplistically here in that it helps oil producers and the services surrounding E&P and it hurts all those that use it as a raw material and the consumer that consumes it.
As for the potential inflationary impact of higher oil prices, the Fed must be happy, particularly Charlie Evans who is ok with a 2.5% inflation rate due to his nonsense symmetry focus. Now of course oil doesn’t fall into the core rate but a sustained period of higher oil prices will certainly seep into core goods prices and services. I’m not sure myself how the view that a 2.5% inflation rate for a period of time in order to make up for a period of 1.5% will be good for those living paycheck to paycheck and on fixed income but it seemingly fits into some econometric model at the Fed.
Gold continues its breakout higher as it is now at the highest level since April 2013. I remain bullish but caution not to buy it on geopolitical concerns because as stated they are usually temporary. Buy it instead because the dollar continues to weaken and real yields continue to fall. See the chart below, as real yields fall, gold rises in value.
Gold Breaks Out To Highest Level Since 2013
In terms of what this means for the stock market, it all comes down to the sustainability of the oil move. It will of course help oil related companies and hurt those who consume it. Overall though, because valuations are as rich as they are, there is no room for error but that’s been the case for a while so I’m saying nothing new. I’ve stated before that the price to sales ratio on the S&P 500 is where it was in early 2000, now the EV/EBITIDA ratio is as well. Overseas markets remain much more attractive to me although I still like plenty of value names in the US.
No Room For Error – Stock Market Valuations Stretched
Shifting to the data, China’s private sector Caixin services PMI for December fell 1 pt m/o/m to 52.5 and that was below the estimate of 53.2. Domestic demand is better than overseas demand. Caixin said “the level of optimism expressed by service sector firms edged down to the 2nd lowest on record. Companies highlighted ongoing trade tensions, relatively subdued economic growth and staff shortages as factors that could dampen prospects over 2020.” Combining the services PMI with manufacturing has the composite index at 52.6 vs 53.2 in November and vs 52 in October. Let’s just say that while there is a Phase One trade deal, businesses are still taking a wait and see on what comes next as the tariffs remain almost all with us.
Elsewhere, Hong Kong’s December PMI bounced to 42.1 from 38.5 but still remaining in deep contraction for reasons we all know. Singapore’s PMI improved to 51 from 50.4 while services PMI for Australia was revised slightly higher and India’s services PMI rose too. On the other hand, manufacturing remained soft in Japan with its manufacturing PMI slipping to 48.4, below 50 for the 10th month in the past 11.
In the Eurozone, the December services PMI was revised to a better 52.8 from the initial print of 52.4 vs the estimate was for no change. That is up from 51.9 in November and clearly is offsetting the big drag from manufacturing. Markit said “All nations covered by the survey recorded growth in activity, led by Spain and Ireland.” Overall, growth is still anemic in the region as Markit expects .1% GDP growth in Q4 from Q3. Hopefully with Brexit getting some clarity and China and the US calling a timeout, confidence will improve from here. If the case, I expect a further rise in European bond yields.
One of Gerald Celente’s greatest audio interviews ever has been released and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
2020 – On The Edge Of A Precipice
ALSO RELEASED: Greyerz: 2020 – Standing On The Edge Of A Precipice CLICK HERE TO READ.