As had been largely anticipated, yesterday’s U.S. midterm elections saw partisan control over the U.S. legislative branch shifting to the Republican Party. The most liquid markets trading overnight, currencies and commodities, reacted modestly, with the U.S. dollar climbing against its peers and a contraction in prices for both gold and oil futures. The question is what, if anything, does this political development really mean? According to many analysts, a near-term victory for U.S. equity markets bulls appears likely to subside quickly as the reality of a new sort of gridlock sets in.
Yen plunges versus U.S. dollar. The Japanese yen reached a multiyear low against the U.S. dollar and the currencies of other primary trading partners as markets mulled the press conference speech delivered by Bank of Japan governor Haruhiko Kuroda, during which he reiterated the central bank’s absolute commitment to continued quantitative easing.
China to open up its economy further. A memorandum issued yesterday by China’s National Development and Reform Commission called for public comment on lifting restrictions on foreign investment in key industrial sectors including refineries and steel mills. The move is the latest in a string of marginal shifts from the domestically controlled state-owned enterprise model, but foreign companies still face high regulatory hurdles.
More weak numbers come out of Europe. Market composite purchasing managers’ index (PMI) data for October registered weaker than forecast at 52.1 today, while the nonindustrial specific index also missed consensus expectations. Separately, September retail sales released by Eurostat for the region also disappointed, registering sharply lower than economist predictions. As the European Central Bank convenes in Frankfurt for its monthly policy meeting, bank president Mario Draghi and his colleagues find themselves with more evidence to support further accommodative action.
Quarterly earnings reporting season continues. New York–based conglomerate Leucadia National Corp. is among the companies set to release third-quarter earnings today, potentially providing Jefferies & Co., one of its subsidiaries, and Leucadia CEO Richard Handler with a more welcome reason to be in the media spotlight after recent controversy over alleged indiscretions by senior staff. Bond insurance company MBIA and insurance and financial services giant Prudential Financial will release quarterly results after U.S. equity markets close today. The accompanying conference call by senior management at MBIA will likely focus on the relative health of municipal borrowers.
Portfolio Perspective: Getting Ahead of the Curve on Tax-Loss Selling — Joseph Fazzini, Dundee Capital Markets
Tough times make precious metal equities prime targets for tax-loss selling. For some funds and all retail investors, December 31 is the end of the taxation year. Leading up to this is the season for tax-loss selling and with gold, silver and the Philadelphia Gold and Silver Index (XAU) declining 3 percent, 17 percent and 21 percent respectively on a year-to-date basis, we believe precious metal equities will be obvious targets for disposition. Admittedly, the recent sell-off in the precious metals space suggests that some may have already started selling their underperformers. Our view, however, is that more selling is likely as investors rebalance. With broader indexes such as the S&P/TSX index up 7 percent, the S&P 500 up 9 percent and the Russell 3000 up 8 percent year-to-date we expect that diversified funds and investors will have some gains to offset against losses derived from precious metal equities.
Joseph Fazzini is a research analyst covering precious metals for Dundee Capital Markets in Toronto.
