Physical gold demand is skyrocketing, plus China ending lockdowns?

China Fully Reopening?
November 1 (King World News) – 
Peter Boockvar:  Considering the extraordinary amount of economic pain and human suffering to China’s Covid policy, it’s not surprising to see a robust response to the possibility that China is exploring steps to fully reopen and that a committee was being formed, according to rumors on social media. China’s foreign ministry spokesman however said “I’m not aware of the situation you mentioned.” Maybe not yet but at some point he hopefully will and the global economy would also be a huge beneficiary. On the other hand, the demand for commodities would remain firm and the inflation story would continue to be. In response to the chatter, the Shanghai comp was up 2.6%, the H share index in Hong Kong spiked by 5.5% and the Hang Seng rallied by 5.2%. Travel and leisure stocks led the way with up by 12% and Sands Macao by 11.5% to name a few. The yuan is higher too as is copper by 2.6%, iron ore by 1.7% and brent crude by 1.7%. 

With respect to energy specifically, we know that the Biden windfall profits tax proposal is just political noise that has zero chance of passing but just the talk of it and reality of it in Europe is more reason to be bullish on energy stocks as these companies will be even less incentivized to drill more and provide us with more needed supply. 

The Reserve Bank of Australia hiked rates by another 25 bps to 2.85% as expected. This is the 2nd time at this new lower pace and “The Board expects to increase interest rates further over the period ahead” and “The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labor market” said Governor Philip Lowe. Lowe is trying to balance the need for higher rates but also in the face of a high percentage of Australian home mortgages that are floating rate and also the Australian people have a high level of debt relative to income. That ratio stood at 188% as of Q2, a record high. 

Australia Debt To Income Ratio Hits A Staggering 188%

Helped by the rally in Chinese stocks, the ASX was up by 1.7% and the Aussie$ is higher as is everything against the dollar today.

Gold Demand Is Skyrocketing
With respect to gold, the World Gold Council released its Q3 2022 report today and while the price languishes, they said:

“Healthy Q3, driven by stronger consumer and central bank buying, helped year to date demand recover to pre-covid norms. Gold demand (excluding over the counter) in Q3 was 28% higher y/o/y at 1,181 tons. Year to date demand increased 18% vs the same period in 2021, returning to pre-pandemic levels.”

Central bank buying reached a record high in the quarter at “nearly 400 tons.” Jewlery demand also was up, increasing by 10% y/o/y but investment demand was weaker by 47% y/o/y “reflecting weak sentiment among some investor segments.” The investment demand for physical gold was pretty strong, rising 36% for bars and coins but was offset by outflows from ETFs. Bottom line, the demand for physical gold, whether via central bank demand, jewelry and coins/bars, is solid but paper demand, via ETF’s and futures remains weak. As for the supply of gold, it rose just 1% y/o/y. Get the physical while you can because at some point it will cost more and I remain a wounded bull. 

Auto Sales
Ahead of vehicle sales data today for October, last week JD Power said “new vehicle prices remain at record levels, with the average transaction price expected to reach $45,599 – a record for October and a 2.7% increase from a year ago.” The record high was just above at $46,173 seen in July. They also said, “Even with a modest increase in inventory, strong demand continues to allow manufacturers to maintain a low level of discounting. The average incentive spend per vehicle is tracking toward $882, a decrease of 44.7% from a year ago. This will mark the 6th consecutive month under $1,000. Incentive spending per vehicle expressed as a percentage of the average vehicle MSRP is trending at 1.9%, down 1.6% percentage points from October 2021.” 

In all the earnings calls I’ve heard in the industrial/manufacturing world, the auto sector is the one that continues to hang in there but I wonder for how much longer as used car prices continue to fall and stress is growing in subprime auto credit. 

With regards to the global PMI’s out today, they were pretty weak across the board with m/o/m declines seen in Taiwan (down to just 41.5, the lowest since 2009), Thailand, Malaysia, Vietnam and Indonesia. While China’s Caixin index and the PMI in South Korea both rose from September, they were still below 50…

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Meanwhile In The East
On China’s private sector PMI, not surprisingly it was below 50 at 49.2 “As Covid containment measures weighed on both output and demand” but “business confidence edged slightly higher during October.” On Taiwan, “Weak domestic and international demand conditions were the main drag…production levels were cut for the 7th month in a row, while firms grew increasingly pessimistic over their outlook for output, which was the 2nd weakest in the series history.” The South Korean PMI release explained its weakness, “as global economic conditions and ongoing cost pressures, often linked to exchange rate weakness, reportedly dampened demand conditions.” 

Also out of South Korea was the 5.7% y/o/y drop in exports in October led by a drop of almost 16% to China and a 13.1% fall to Japan. Exports to the US and EU rose. Product wise, semi shipments declined by 17.4% y/o/y. 

The UK October manufacturing PMI was revised to a slightly better 46.2 vs the initial print of 45.8 but still down from 48.4 in September. The softness was driven by “weak demand, high inflation, supply chain constraints and heightened political and economic uncertainties,” not surprisingly at this point. 

Bank of England Set To Hike Rates
The Bank of England will hike rates either 50-75 bps on Thursday and today they will start selling gilts as previously announced. They will auction off 750mm pounds of short term gilts and we’ll hear the results at 10am est time. Gilts are trading well ahead of it with the 2 yr yield lower by 11 bps and the 10 yr down by 7 bps. 

Finally, here is an updated chart of S&P 500 (EPS) earnings per share estimates and I expect this downward trend to continue.

S&P Earnings Per Share Estimates Continue To Plunge

Have You Ever Heard Of Hammurabi?
Art Cashin, Head of Floor Operations at UBS:
  On (about) this day (maybe +1 or 2) in (about) 1772 B.C., one of the great administrative minds in human history issued a new code of law. His name of course was Hammurabi the Great, of Babylonia. Throughout human history lots of rulers have adopted “the Great” in their titles but on a merit basis this guy clearly deserved to be on the short list. 

More than a millennium before the appearance of the likes of Socrates, Caesar, and Christianity and nearly 500 years before Moses – – he issued a code of conduct that was all encompassing, yet amazingly fair and flexible. Most schoolboys (er make that school-persons) learn that the code of Hammurabi was “an eye for an eye”. It was far more complex. It tried to cover all human interactions and attempted to marry two concepts – – “the strong shall not injure the weak” and all shall have a right to prosper in line with their effort. 

It covered crime, property rights, divorce, military service, inheritance, loans and bankruptcy. (Remember, 4000 years ago there was an active futures market in most commodities and there was even an early form of program trading.) 

Hammurabi’s code was so broad it included some items that might get him invited as a guest on Meet the Press; et. al. (it covered medical malpractice claims and limits on bankrupting the family of those chronically ill). 

Anyway, it brought great peace and prosperity to the people for centuries (until some government types began to play politics). 

To celebrate, stop by the Constitution Lounge and have a couple of Amendments on the rocks. 

These days, if they could resurrect the wise Hammurabi, with all due respect to Jay Powell, we suspect he would be appointed head of the Federal Reserve. Once again the market wavered and wobbled, concerned about yields on bonds, which ticked up modestly, influenced to some degree by rising inflation in Europe and general concerns about the hint of inflation here with early economic data plus we have the payroll data coming out at the end of the week and CPI next week. So, it was pretty much on every one’s mind. 

Rumors Of China Ending Lockdowns Fuels Asian Stock Surge
Overnight, global markets are almost celebratory. The biggest deal is in Asia where unconfirmed rumors of a possible change in the zero Covid policy swirl about. Although they are unconfirmed, the marketplace seems to be buying in to it hook, line and sinker. Hong Kong is up the equivalent of about 1600 points in the Dow as the feeling is if they adjust the zero Covid policy, lots of things will happen. China production of goods will soar back to normal and that will supply backlogs, etc. and may be beneficial to the inflationary picture worldwide. That has spilled over into almost all of bond markets on the globe. 

In Europe, the yields are down smartly, and the equity markets are all rising with a broad sense, even though the Bank of England has said it is going to go back to quantitative tightening and start selling some bonds aggressively. Nonetheless, bonds in England are down too, but hope from the Fed and hope about the new Covid policy has even impacted our bond market and the yields on the ten-year are down a whopping 14 bp back below 4% and that is inspiring some technicians to feel a lot more strongly that there is resistance in the ten-year above 4%, particularly around the 4.25% level. So, that will work out over the next several days. 

U.S. futures are better as dawn hits Central Park. The Dow is trading up the equivalent of about 200 points. The calendar is reasonably heavy. The FOMC meeting begins with the press conference and announcements not until 2:00 p.m. tomorrow. In midmorning, we are going to get Manufacturing PMI coming out and ISM data and also Construction Spending and, most importantly, the JOLTS data, which some feel, if it is good enough, it could influence the Fed and maybe go to 50 bp instead of 75 tomorrow. Powell does not like to surprise the markets so, if anything like that is going to happen, they are going to have to get a leak out quickly sometime today to let the markets adjust. 

For this morning, the bulls are in charge. Discussions of quantitative tightening here are apparently nowhere on the drawing board, although the Fed said it is going to go ahead with it. So, your key stories is yields down smartly, putting a bid under equities and watch for the late morning data coming out. Let’s see if resistance in the S&P between 3900 and 3950 is for real or only imaginary. 

You know the drill. Stay close to the newsticker. Keep your seatbelt fastened. Stay nimble and alert and try to stay safe. The Ye Olde Traders Handbook says All Saints Day has a mild upward bias. Let’s see if they can pull it off today and watch for that S&P resistance between 3900 and 3950 and it becomes much stronger if it gets closer to 4000. The bulls are in charge. Let’s see how far they move the ball. 

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