This year there are what we call ‘3 Black Swans’ or 3 major events that will cause the markets to move into risk or safety.

Market Movers

  • June 23rd – EU referendum on possible UK leaving the Eurozone
  • Mid July – Greece’s debt obligations due requiring bailout money
  • November 8th – U.S Presidential Elections

Here is our view on each of the above and how it would apply to our portfolio strategy.

 

I. If The UK Will Leave the EU [June 23, 2016]

  • As a member of the EU, the UK needs to pay billions of pounds for annual membership in exchange for the conveniences of the region.
  • Yet in recent years because the UK needs to help rescue countries in Southern Europe, its membership fees continue to rise.
  • It is difficult to predict whether the UK will exit:
    • Currently there is a 35% probability of leaving according to polls.
    • Whether an exit is good or not depends on the economic outlook of the EU economy.
    • If the EU debt problem is resolved later, the UK may miss out with major trading partners.
    • If the EU debt problem persists then it might be wise to cut losses and leave.
    • Because of the shear size of UK’s economy, when compared to Greece, her departure would mean a loss of confidence for the EU region.
    • In the long run with the Eurozone structural problems persisting and too much debt in Southern Europe, the situation is not optimistic.
  • Macro
    • It may trigger a series of consequences due to Scottish referendum further damaging the political climate.
    • London’s status of being an international finance centre will not be shaken, however international treaties will have to be renegotiated possibly leading to a reduction in investment in the region.
    • There will be a large spread in bond prices coupled with volatility.
  • On GDP
    • British Finance Minister George Osborne published a report stating the long term economic impact of the UK exiting the Eurozone. He predicts that the UK’s GDP will contract by 6% until 2030. This means every household will lose 4,300 pounds (approximately HK $ 48,000).
    • In addition, UK’s authorities have lowered their economic forecast this year from 2.2% to 2.0%; 2017 forecast will be lowered from 2.4% to 2.3%.
  • On the Sterling
    • The Brexit topic has already caused the exchange rate between the GPD to USD to depreciate by 2%;
    • If it eventuates, a sharper decline would not be without reason.
  • On Gold
    • A Brexit will trigger other Eurozone countries to head towards a referendum; if an additional main member departs, the Eurozone is at risk of collapse.
    • Then when markets are shaky for the 2nd and 4th largest currencies, the Euro and Pound, as a result the USD, Yen and Gold might benefit.
    • But if USD or Yen become too strong, the Fed and the Bank of Japan will need to take action.
    • Therefore by elimination, Gold will benefit if a Brexit occurs.

 

II. The Repayment of Greek Debt [Mid July 2016]

  • Greece has been in its debt crisis for 6 years and is dependent on bailouts from the EU and IMF.
  • It is heavily in debt and both economy and unemployment have no signs of improvement.
  • $350 billion USD due in July 2016.
  • Greece is a small European country with an economy size of $230 billion USD yet it has $350 billion USD worth of debt. Creditors are standing firm requiring debtors to ‘face their future’ which makes the situation quite difficult especially in this global economic downturn.
  • The IMF president has sent a letter to the Eurozone finance minister to discuss relieving Greece’s debt level, otherwise the IMF will not continue to support. It criticizes creditors who demand extra austerity measures and slow down the negotiation.
  • The government should have taken a proactive stance to increase fiscal spending to stimulate the economy in this period of economic downturn.
  • Because Greece is tied up by creditors it acts in accordance to their will to reduce the budget. This has resulted in an obvious negative impact to the economy.
  • With the current odds, the market has already priced in that there will not be an exit from the Eurozone.

 

III. US Presidential Elections [November 8, 2016] – Views on Trump

  • On Free Trade & Jobs
    • Trump’s view is that only by closing the doors to free trade will it allow the multinational corporations to return and create jobs internally. This strategy is clearly different to the Obama administration.
    • US business leaders are strongly against this point.
    • Bill Gates criticized Trump on advocating such protectionist politics stating any moves that impede the US international trade will be detrimental to the economy.
  • On Foreign Affairs
    • In order to make foreign policy a ‘US priority’, US foreign policy needs to treat protecting economic interest as a policy.
    • Trump’s definition on foreign policy is to demonstrate that the US and her allies should contribute equally and not be taken advantage of.
    • Many diplomatic experts have countered Trump’s foreign policy stating his position of isolationism and protectionism is a worry.
  • On Military
    • Trump criticizes the reason why the US economy is going downhill is because it focuses too much on foreign and defense budgets.
    • Trump would demand US allies such as Japan and South Korea to pay and fund the US troops stationed there.  In addition it must relax military control of Japan and South Korea.
  • On Finance
    • Need to pursue the trade balance using tariffs to increase revenue for the US government. By doing so, US and China trades alone will have tariffs bringing in substantial income.
    • Trump agrees on the policy on maintaining a low interest rate environment because a high interest rate will lead to a stronger dollar and harm US trading status with China and other countries, as well as add pressure on US to repay debts.
    • If elected, Trump will replace Fed Chairman Janet Yellen, as she is not a Republican.
  • On Stocks, Foreign Exchange Debt & Property Market
    • Most foreign investments are in the bond and currency markets with stock market being secondary. Thus the impact on the housing market will be minimal.
    • The republican government led by Trump will increase government spending by borrowing and printing money.

 

Conclusion

  • Gold has risen 20% this year already and has resumed its bull market. Where gold will head next will depend on the Fed and also the effects of these Black Swan Events.
  • The UK referendum is on June 23rd, as well Trump has already gotten the republican nomination.
  • If these two events play out the market will trigger risk aversion and the gold bull may have significant momentum to test the previous $1340 resistance level.

 

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