China Removes Calm And Instills Fear!

* A flight to safety is on the board today.
* China takes huge chunk out of renminbi’s value!
* Gold marks 3-day rally!
* China warns foreign banks to participate, or else!

And now. Today’s A Pfennig For Your Thoughts.

Good day. And a Wonderful Wednesday to you! Emerson, Lake, and Palmer (ELP) greet me this morning with their great song: Lucky Man. When I go to a new doctor’s office, like I will today, the nurses always go through my medical history, when finished, I always tell them, “And. they call me Lucky!” That always breaks the ice, and we have a good laugh together! I used to play this song: Lucky Man on my guitar, back in the day. But you didn’t open up the letter today to read about my days as a long-haired, hippie freak, traveling around the country in a VW Micro-bus, with my guitar!

I don’t think you opened up the letter today to read about what I’m to, unfortunately, tell you! The Peoples Bank of China (PBOC) fixed the renminbi this morning at a much weaker level that was outside of their normal operations, thus indicating that even though they injected 130 Billion renminbi into their money markets yesterday, they are serious players in the Currency Wars! The 6.5314 reference rate for renminbi this morning represents a 5-year low. Renminbi hasn’t seen that level since April 2011. And back in April 2011, the daily fixings were usually ones of appreciation. So. April, 2011, eh? That wasn’t such a bad year, as in April of 2011, my beloved Cardinals were starting out on what would end up to be their 11-World Championship year!

So, you know that “calm” I talked about yesterday, that China had brought to the markets with their injection of 130 Billion renminbi into their money markets? And how clairvoyant was I with the title yesterday, when I said, “China Calms the Markets. For Now.” Well, the calm has been thrown to the roadside, and there’s nothing but fear in the markets this morning. And when there’s fear, you can bet your sweet bippie that the dollar, Treasuries, and Gold will perform nicely. OK, I take that back, you can’t always depend on Gold to participate, given Gold’s outside influences, but for the most part, fear is why you own, and buy Gold! Geopolitical fear, country fear, inflation fear, deflation fear, markets fear, they all generate some interest in Gold.

Speaking of Gold, it’s up $8 this morning, marking 3-consecutive days of rallying for the shiny metal to start the year. I read yesterday something very interesting, and that is that Gold actually was up in 7 of the top 10 countries (economy size-wise) with Australia being basically flat. So, Gold mining in these 7 countries is in better condition than here in the U.S. where Gold was down 11% VS the dollar. Wanna know something else that’s interesting? The Dollar Index was up about 10% last year, so, you could say that Gold’s problem last year, was dollar strength. Almost lock-step moves, eh?

Getting back to the currencies. Well, China puts the fear in the currencies, and the dollar goes to the top of the hill, and the currencies get rocked. Right now, the euro is flat VS the dollar, as is the Japanese yen, Czech Koruna, and Swiss franc, but other than those currencies lucky enough to keep their heads above dollar’s rising waters, the rest of the lot are down with the Petrol Currencies adding to their losses this morning, as the price of Oil slips again.

Yes, the Russian ruble, Brazilian real, Canadian dollar, Norwegian krone, Mexican peso, and British pound sterling are all getting sold at a quicker pace. I was writing some updates to the currency insights that reside on the website in the currencies section, yesterday, and with each Petrol Currency that I began writing about, I believe I was sounding like a broken record. “This currency will struggle for gains as long as the price of Oil remains low, but should Oil prices rebound in 2016, we would look for this currency to rebound too!”

Alrighty then, I’ve got to get this off my chest this morning. (that should wake up the reviewers! HA!) Well, first. What has the Fed members led by Fed Chair, Janet Yellen, been telling us for over a year now? That they expect inflation to rise in “X” time. And that’s why they hiked rates in December, and are talking about 4 more rate hikes in 2016. But then along came this report yesterday that I found on MarketWatch. Well, according to the report on MarketWatch “An update of an economic model used by the Federal Reserve suggests the staff of the U.S. Central Bank has sharply lowered their forecast for inflation over the next six months.”

So, have we heard any of these Fed members that were spouting out loud about how they had no doubts that inflation would rise in 2016 to their target level of 2%, that they’ve got new information and that inflation won’t rise like they thought it would? No, and we won’t either! Oh well, now you and I know, and anyone else that read the report on MarketWatch yesterday. Like I said when the Fed hiked the rates. “How can they expect inflation to rise, in a slow economic environment like the U.S. while they are hiking rates?”

The Chinese fear that was injected into the markets this morning has really gotten to the Antipodean currencies. The Aussie dollar (A$) is down 3/4’s of a cent and kiwi is down 1/2-cent. it’s all about China here folks. And as I pointed out yesterday, things like this are really beginning to occur with regularity, as the different countries and markets look to China for direction, not the U.S.

I actually saw a report on Bloomberg this morning that mentioned “risk off”, and had to laugh. I thought we had left that phrase in 2014. But there it was right before my eye! Oh well, I drag old sayings out all the time!

Speaking of dragging old sayings out. Yesterday morning, my good friend, and retirement guru, Dennis Miller, sent me a link to website that had a quiz about 70’s slang, I got 10 of 12 right, so that was good. But then something else caught my eye on the site, and it was a quiz about How Well Do you Know the first line lyrics to iconic 60’s songs? I just had to take that one! And I nailed it! 12 of 12! And then the site came back with this: You’re a regular genius in regard to music from the 1960’s! Some of these lines were rather vague, and you were still able to name them with no problem. Do you do a lot of karaoke? Or is your mind just an impenetrable steel trap?

I laughed out loud, because I don’t ever remember doing karaoke, so I must have an impenetrable steel trap for a mind! Yes, and it’s full of cocktail trivia about sports and music, nothing that would have made me a cool $Million back in the day!

Well, the U.S. Data Cupboard yesterday didn’t have a lot, but what it had was interesting. U.S. Vehicle Sales for December printed weaker than expected, and for the first month in a while, the total Vehicle Sales didn’t reach 18 Million in a month. So, that’s a two-day report card on the U.S. economy that had a 6-year low in the Manufacturing Index and weaker Vehicle Sales. Hmmm. Seems to be falling right in place for the recession I say is coming in 2016.

Today’s U.S. Data Cupboard is chock-full-o-data-prints for us! Good stuff too! Like, Factory Orders for Nov., Durable Goods Orders for Nov., Capex for Nov, The November Trade Deficit, and the ADP Employment Change for December. The ADP report is expecting nearly 200,000 jobs created in December with the actual expectation at 198,000. This report is supposed to be an indicator of what to expect from the BLS surveys that will print on Friday. I’ve said this over and over again, that this dance is gonna be a drag, no wait! What I have said over and over again is that I would rather we used the ADP report than the BLS hedonic adjusted surveys. But then that’s just me, being me!

We’ve been patiently waiting for the Chinese to finally come out with their renminbi denominated benchmark price for Gold, and when I had a thought about what was going on with this, I knew where to go to find an answer. Ed Steer! And there it was an article that was Reuters that he posted that talked about this new benchmark will be launched in April, and that China had warned foreign banks that it could curb their operations in the world’s biggest bullion market if they refuse to participate! WOW! Well, it’s getting closer all the time, but we must remain patient, folks. We certainly don’t want to rush April here, for April is Tax Month! UGH!

To recap. After injecting 130 Billion renminbi into their money markets yesterday, and calming the markets, China went for a huge chuck of renminbi in their daily fixing, weakening the currency by a larger than normal amount, thus setting a “fear factor” back into the markets, and when that happens, dollars, treasuries and Gold are the beneficiaries. A handful of currencies are flat VS the dollar this morning, while the rest of the currencies are down, with the Antipodean currencies, and the Petrol Currencies taking on even more water. The U.S. Data Cupboard is chock-full-o-data-prints today. Yesterday U.S. vehicle sales disappointed, following up on Monday’s 6-year low in the Manufacturing Index. And China warns foreign banks that they had better participate in their renminbi denominated Gold Benchmark, that will launch in April, or else!

Before I head to the Big Finish today, I wanted to mention two things that are bothering me today regarding data. First, the Baltic Dry-Index has fallen to a new record low at 468. And second, it was reported yesterday that China’s total volume of goods transported by the national railway was down 10.5% in 2015, VS 2014. And still the Fed thinks it’s going to hike rates further in 2016?

Currencies today 1/6/16. American Style: A$ .7080, kiwi .6645, C$ .7105, euro 1.0755, sterling 1.4645, Swiss $.9915, . European Style: rand 16.8145, krone 8.9675, SEK 8.5985, forint 292.50, zloty 4.0315, koruna 25.1280, RUB 74.41, yen 118.35, sing 1.4340, HKD 7.7522, INR 66.82, China 6.5314, pesos 17.46, BRL 4.0300, Dollar Index 99.32, Oil $35.08, 10-year 2.18%, Silver $14.04, Platinum $889.10, Palladium $532.05, and Gold. $1,088.08

That’s it for today. getting my bearings worked out here, and yesterday was a very windy day, not fit to be outside unless you liked being blown all around! But it was warm, and that’s all I ask for. Well, that, and a little sun, a little food money, a little beer money, and every now and then, a little hug from someone I love! A few of you sent off responses to me yesterday telling me you liked the January poem. I thought it was pretty cool. and well done! I’m still not used to everything on TV being on so late here on the East Coast! For instance Monday Night’s National Championship College Football Game won’t start here until 8:30 pm, which means I’ll be lucky to see the first half! Maybe I need to stop getting up so early every morning! HA! Well, “Mr. Lucky” needs to get going here, so I’ll get out of your hair for today, and send you on your way to having a Wonderful Wednesday!

Chuck Butler
Managing Director
EverBank Global Markets
Editor of A Pfennig For Your Thoughts