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The markets have once again proven how short term and changeable investors' memories and moods can be. Only a month after the sky seemed to be falling from the shocking Brexit referendum leave vote, most major world stock markets are back near 2016 highs. Risk on has been dramatically brought back as the modus operandi of the day, thanks to upcoming central bank meetings which promise more stimulus, sustained business sentiment readings in Germany, a new Turkish fund to support their struggling economy, and the looming prospects of continuing lower oil prices. In the wake of these latest geopolitical developments, gold prices have pulled back some in the last few weeks.
Upcoming Central Bank Meetings Strengthen Risk On Cause
The risk on trade of the moment has received a boost in the form of promised stimulus from upcoming central bank meetings this week. Both the United States and Japanese central banks will meet to decide on interest rates or additional stimulus in the upcoming days. Fed watchers and traders have been increasing their bets on the likelihood of a Federal Reserve interest rate increase before the end of the year. The consensus remains that the Fed will hold off on any rate increases this week. It is a different story altogether with Japan. The Bank of Japan has economists predicting they will use their latest stimulus attack to buy into still more exchange traded funds. No one is questioning if the BOJ will ease their monetary policy, but by what amount. Even though the bank has insisted it will not drop money from helicopters on businesses and consumers to boost their spending, the risk on investors around the globe are not convinced of their claims.
As if this were not enough to motivate the risk on traders to get their parties started again, the ECB chimed in this last week as well. They informed markets that they are more than ready, willing to help, and able to get the job done with additional stimulus measures if after reviewing the impacts of Brexit in greater depth they feel that more help is required from them. So far the monetary policy has been clear as a bell from the ECB and currency fluctuations seem to have normalized. This all feeds into the risk on frenzy that is back up to its former fevered pitch once more.
Business Sentiment in Germany Remains Stronger than Expected
Despite the blow to European political union aspirations espoused by France and Germany in the form of the Brexit results, German business confidence seems to have emerged mostly unscathed in the aftermath. Economists had expected a significant hit to the business sentiment. Instead Europe's largest economy so far remains strong and expanding. This of course fueled the ongoing stock market rally in Europe after the IFO institute revealed that the index declined by less than predicted.
Turkish Markets Rally Hard on Pledge of Premier Fund
The clear winner over the weekend in the global stock market rallies emerged as the Turkish Borsa Istanbul 100 Index. It rallied 2.8% following the announcement by the Turkish Prime Minister that there will not be early elections and more importantly that the government is working on a several billion dollar Premier Fund to support the Turkish economy by spending money on infrastructure projects. This comes after the Turkish markets dropped precipitously by 13% in the past week following the ongoing purges of those accused of treason in the failed July 15th military coup.
Oil Demand Set to Fall Off the Proverbial Cliff as Supplies Rise
Oil prices have been constrained for some time now. They may face a renewed decline despite the dropping U.S. oil production levels. OPEC has increased its production by .7% in June, reaching 32.9 million barrels per day, per Bloomberg. The future of oil production looks set to continue rising. Goldman Sachs is predicting that Russia will at last surpass the old Soviet Union records for daily crude oil production as Russia's output is predicted to rise by nearly 600,000 barrels per day during the next three years. Despite the recent decline in U.S. oil production, even its fortunes are looking brighter. U.S. drillers added 41 new rigs targeting crude in just the last four weeks, per Baker Hughes Inc. data.
As if the rising supplies were not enough of a threat for global crude prices, oil and gas demand is about to hit the proverbial wall from the American end of summer driving season. During the prior five years, American oil refineries have witnessed a typical 1.2 million barrels of oil per day decline between July and October. Underscoring this point, money managers increased their bets by the most in a year on a decline in WTI crude prices for the week that concluded July 19th, the Commodity Futures Trading Commission data showed. All of these factors help to explain the recent decline in gold prices. For the moment, the yellow metal is back on sale for your retirement account.