Is India the New China?

Author: Frank Holmes
Date Posted: June 3, 2016 Read time: 49 min

A "slow-growth trap." That's how the Organization for Economic Cooperation and Development (OECD) described the global economy yesterday in its latest Global Economic Outlook. The group sees world GDP advancing only 3 percent in 2016, the same as last year, with a slight bump up to 3.3 percent in 2017.

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Global slowdown worries high Indias booming economy

A “slow-growth trap.” That’s how the Organization for Economic Cooperation and Development (OECD) described the global economy yesterday in its latest Global Economic Outlook. The group sees world GDP advancing only 3 percent in 2016, the same as last year, with a slight bump up to 3.3 percent in 2017.

Catherine Mann, the OECD’s chief economist, urged policymakers around the world to prioritize structural reforms that “enhance market competition, innovation and dynamism,” as monetary policy has been used alone as the main tool for far too long. The longer the global economy remains in this “slow-growth trap,” Mann said, the harder it will become to revive market forces.

This is precisely in-line with what I, and many of my colleagues, have stressed for months now. To push the economy on a high-growth path, we need structural fiscal reforms, both here and abroad. One need only look at the global purchasing managers’ index (PMI) to see that manufacturing conditions have been slowing for the past several years since the financial crisis. The PMI in May registered a 50.0, which Markit Economics describes as “lethargic” and “low gear.”

Global Manufacturing Sector Stagnates May
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U.S. manufacturing also saw further weakness in May, with its PMI reading falling to 50.7, more than a six-year low. The eurozone’s PMI fell to 51.5, a three-month low. Meanwhile, the Caixin China General Manufacturing PMI came in at 49.2, still below the neutral 50 threshold.

It’s clear that policymakers need to address slow growth with smarter fiscal policies, lower taxes and streamlined regulations. Zero and negative interest rate policies are taking their final gasp as far as what they can accomplish.

Indian Prime Minister Narendra Modi

One of the bright spots continues to be India, whose own manufacturing sector expanded for the fifth straight month in May. The country’s GDP advanced an impressive 7.9 percent in the first quarter, following 7.3 percent year-over-year growth in 2015. This helps it retain its position as the world’s fastest growing major economy. Credit Suisse ranked India first in April’s Emerging Consumer Survey 2016, noting that “Indian consumers stand out among their emerging market peers with higher confidence about their current and future finances and relatively lower inflation expectations.”

Many analysts are referring to this as the “Modi effect,” in honor of Prime Minister Narendra Modi, elected two years ago on promises to reinvigorate business growth by cutting red tape and increasing infrastructure spending. Modi, who is scheduled to visit Washington next week, has had limited success at this point. But to be fair, India’s challenges run deep, and it will take quite a bit longer to make substantial changes to the country’s notorious regulations and corruption.

India’s Oil Demand Ready for Takeoff

Make no mistake, China’s oil demand is still massive, second only to the U.S. But it has begun to contract in recent months, and there to offset the difference is India, who is expected to have the fastest growing demand for crude between now and 2040, according to the International Energy Agency (IEA). India’s consumption stood at 4.5 million barrels a day in March, which is up considerably from an average of 4 million barrels a day in 2015. The Asian country represented a whopping 30 percent of total global consumption growth in the first quarter. This makes it the world’s “star performer” growth market, a role occupied until recently by China. India is now poised to overtake Japan as the second largest oil consumer in Asia, if this hasn’t already happened.

Indias oil consumption poised to overtake Japan
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Contributing to India’s oil binge are policy changes that make its economy resemble China’s in the late 1990s, soon before its industrial boom. Compared to other major economies, India’s per capita consumption of oil is relatively low, as ownership of automobiles and motorcycles—many Indians’ preferred mode of personal transportation—is still developing, with penetration at merely 144 per 1,000 people. If we look just at passenger cars, the rate is closer to 17 per 1,000 people. (In the U.S., the figure is 850 per 1,000 people.)

Vehicle ownership in india has been steadily rising
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This is the exciting part, of course. A couple of months ago I shared with you a factoid from my friend Gianni Kovacevic’s book “My Electrician Drives a Porsche?”, that in 1979 there were only 60 privately-owned automobiles in China. Today, it’s the world’s largest auto market.

India’s rise appears to be similarly dramatic. In the chart above, courtesy of a March report from the Oxford Institute for Energy Studies, you can see that the number of vehicles driving on Indian roads doubled between 2007 and 2014, thanks not only to an exploding population but also the rise of India’s “spending class,” as Gianni calls it. More than 600 million Indians are under the age of 25, based on 2014 data, and many in this cohort aspire to have social mobility and the American Dream. The country is now on track to become the third largest auto market by 2020, behind China and the U.S., and obviously this has huge implications for oil consumption.

Did you know India has 600 million people under 25

Oil at $60 by the End of Summer?

Despite OPEC’s failure to agree on a production cap, global oil markets are rebalancing faster than expected. U.S. producers, reacting to low prices, continue to trim exploration and production spending, leading to fewer active rigs and, consequently, less output over the past 12 months.

U.S. oil production down as number of active rigs continues to drop
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Meanwhile, demand remains strong, not only in India but around the world. The IEA, in fact, expects global demand to outpace supply in mid to late 2017. What’s more, analysts with Bank of America Merrill Lynch believe that oil demand will peak sometime after 2050, “as long as we remain in a relatively low oil price environment of $55-75 per barrel in real terms.”

Global oil demand expected to outpace supply in 2017

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Many prominent analysts, including British financials firm Standard Chartered’s chief economist, now see oil climbing above $60 by the end of the summer. Goldman Sachs also appears to have turned bullish, noting that global storage levels are heading into a deficit “much earlier than we expected.” 

Helping to turn sentiment around is the arrival of the busy summer travel season, as I told CNBC’s Pauline Chiou yesterday. This year in particular is expected to be one for the history books—not just on roads but also by air. With fares down throughout 2015 and the first half of 2016, industry trade group Airlines for America estimates 231.1 million passengers will fly on U.S. airlines during the months of June, July and August. This would mark a record high, up from the 222.3 million that flew over the same period last year.

All Eyes on Gold

You might not know it, but today was National Donut Day. This tradition was created by the Salvation Army in 1938 as a fundraiser for those who served in World War I (or the Great War, as it was then known). Many donut chains delighted customers today with free treats, including Krispy Kreme and Tim Hortons, founded by the great hockey star.

Frank Holmes CNBC Fear Trade sees gold as store of value

I’d like to thank Verizon union members for the strong pop in gold prices today. As you might already know, thousands of Verizon workers were on strike during the month of May and consequently were counted as unemployed. This contributed to the weakest jobs report since 2010—only 38,000 new jobs were created in May, a dramatic drive from March’s 180,000—adding to speculation that an interest rate hike this month will once again be delayed. This bodes well for gold, which had its strongest daily gain since March today, soaring up more than $33 an ounce.

More than that, though, gold is up on Fear Trade worries, with negative interest rates draining yield around the world.

With this in mind, I want to remind everyone to register for our next webcast, “All Eyes on Gold: What’s Attracting Investors to the Yellow Metal,” scheduled for next Wednesday at 4:15 P.M. Eastern time. I’m thrilled to be joined by World Gold Council CEO Aram Shishmanian, and you won’t want to miss his deep insights into the yellow metal.

Register now by clicking below!

All Eyes on Gold: What's Attracting Investors to the Yellow Metal - webcast

Index Summary

  • The major market indices finished mixed this week.  The Dow Jones Industrial Average lost -0.37 percent. The S&P 500 Stock Index finished flat, while the Nasdaq Composite climbed 0.18 percent. The Russell 2000 small capitalization index gained 1.19 percent this week.
  • The Hang Seng Composite gained 1.80 percent this week; while Taiwan was up 1.46 percent and the KOSPI rose 0.85 percent.
  • The 10-year Treasury bond yield fell 15 basis points to 1.70 percent.

Domestic Equity Market

S&P 500 Economic Sectors
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  • Utilities was the best performing sector for the week, increasing by 2.56 percent versus an overall increase of 0.04 percent for the S&P 500.
  • Michael Kors was the best performing stock for the week, increasing 15.94 percent. The company reported earnings stronger then the streets’ estimates.
  • CST Brands rose the most in more than three years after Reuters reported that Canada’s Alimentation Couche-Tard Inc. and Japan’s Seven & I Holdings Co. have submitted bids for the U.S. convenience-store chain.


  • Financials was the worst performing sector for the week, decreasing 1.24 percent versus an overall increase of 0.04 percent for the S&P 500.
  • Signet Jewelers was the worst performing stock for the second week in a row, falling -11.44 percent. Last week the company reported lackluster first quarter revenue numbers and from the looks of it, investors are still running for the exit on this one.
  • Abbott Laboratories tried to end its $5.8 billion agreement to buy Alere Inc. after finding out that the medical-testing company was swept up in a U.S. probe of bribery overseas. However, violations of the U.S. Foreign Corrupt Practices Act aren’t necessarily a deal-breaker, and with Alere refusing to go away, Abbott may have no easy way out.


  • Consumers are in much better financial shape than the business sector, and banks remain willing to extend consumer credit, especially relative to corporate sector loans, underscoring that revolving credit growth should remain robust. This bodes well for consumer finance companies.
  • While the financial sector relief bounce is likely to peter out as the Fed threatens to tighten monetary conditions during a profit recession, the more defensive REIT sub-component should continue to outperform. Roughly $9 trillion of global bonds trade at a negative yield, a massive increase from only two years ago, which should sustain the secular advance in REITs. Moreover, REITs are slated to become a new GICS1 sector on August 31, a new classification that has the potential to augment investor interest.
  • Gold is correcting short-term, overbought conditions on the back of a more hawkish Fed and rise in the U.S. dollar, but any correction is unlikely to constitute a trend change. The majority of the world is increasingly shifting toward even more policy unorthodoxy and if central banks ultimately get their way, gold’s appeal as an inflation hedge will eventually increase. In the meantime, real interest rates, the opportunity cost of holding a zero yielding asset like gold, have slipped back into negative territory, and may need to fall further to reverse chronically subpar economic performance. Furthermore, gold sentiment is still not overly bullish, despite this year’s rally.


  • Despite the broad market’s rebound toward the top end of the 18-month long trading range, defensive sectors have held up against cyclical sectors. Given that financial conditions are tighter than warranted by underlying economic activity, an economic reacceleration is high risk. This would pose a threat to cyclical sectors.
  • According to BCA, equity mutual fund inflows have dried up, with little prospect for a recovery given souring sentiment. If the corporate sector, one of the largest sources of equity demand since 2009, can’t keep retiring stock because balance sheets are already stretched, then the pool of potential stock buyers has shrunk considerably. A plunge in buyback announcements, on the heels of corporate credit quality strains and shrinking free cash flow, bears close attention.
  • The ratcheting up in Fed interest rate expectations has triggered a rally in financials stocks, a replay of price action witnessed during previous bouts of intensifying Fed hawkishness. Higher rates are seen as removing a drag in sector profits. However, this may be another case of false hope, as financials have gone on to make subsequent new relative performance lows after prior spurts of Fed-induced strength. If the Fed were lifting rates amid broad-based economic strength, it would be easier to buy into financials sector strength, but that is not the case.

2016 GROW third Quarter Results Announcement

The Economy and Bond Market



  • The April report on personal income and spending showed incomes rose 0.4 percent in April — in-line with expectations — while spending rose 1 percent, the biggest one-month jump in six years and more than the 0.7 percent increase that was expected.
  • The March reading on home prices from S&P/Case-Shiller showed home prices in the U.S. rose 0.85 percent month-over-month and 5.43 percent over the prior year. The economy is supporting the price increases with improving labor markets, falling unemployment rates and extremely low mortgage rates.
  • Markit’s final manufacturing PMI for May came in at 50.7, better than the 50.5 that was expected and up from the flash reading of 50.5 earlier reported last month. The ISM manufacturing composite index also beat expectations, rising to 51.3 from April’s reading of 50.8. Expectations were for this number to come in at 50.3. Overall, both measures showed the U.S. manufacturing sector continues to expand, yet modestly, lending some credence to the idea that manufacturing has bottomed and could support gains in GDP growth into the second half of this year.


  • The May report on auto sales was a broad disappointment with figures from GM, Toyota, Ford, and Honda all dropping more than expected.
  • The Conference Board’s consumer confidence index for May fell to 92.6 from 94.7 last month, widely missing expectations for a reading of 92.6. Consumers remain cautious about the outlook for business and labor market conditions.
  • The April report on construction spending showed spending was down 1.8 percent against the prior month, more than the 0.6 percent expansion that was expected.


  • Federal Reserve Chair Janet Yellen will deliver her semiannual testimony before Congress on June 21, about a month earlier than usual. This means we’ll hear from Yellen on June 6, June 15, and June 21. There will be plenty of Fed commentary from the most important member of the Federal Open Market Committee (FOMC) ahead of a July 27 policy announcement that could include the Fed’s next rate hike. The June 15 announcement has mostly been eliminated as a likely time for the Fed to move.
  • The new orders component of the manufacturing ISM held steady at a fairly strong 55.7, which bodes well for future production.
  • The Fed Labor Market Conditions Index for May will be released next Monday. With the 1 month above the 3 month reading, the odds favor a positive reading. This would reinforce continued progress in the labor market.


  • According to BCA, the recent stability of global bond yields seems odd. Despite a strong rally in global risk assets, some upside growth surprises in China and Europe and a doubling of oil prices year-to-date, the long ends of developed market yield curves have remained remarkably stable. The lack of yield volatility in core Europe and Japan is easier to explain, given the ongoing massive bond buying programs of the European Central Bank and the Bank of Japan that have crushed bond risk premiums. Yet even in the U.S., where the Fed is no longer buying bonds and is looking to raise interest rates, the benchmark 10-year Treasury yield remains mired below 2 percent. The disconnect between growth/inflation/risk and yields leaves bonds in a potentially precarious state in the near-term.
  • Commentary from Business Insider’s Josh Barro argued that Trump, for those who think about things in financial market equivalencies, is the ultimate tail risk candidate. Trump calls for a huge risk premium because the low-probability disasters he might cause would be immensely costly.
  • The Goldman Sachs Financial Conditions index is off its peak from earlier this year, but remains high relative to history and is beginning to flare out again. Meanwhile, inflation expectations are sinking again on the back of recent U.S. dollar strength, hardly a sign of economic reacceleration. This could lead to profit and growth disappointment, ultimately dragging the market down.

Threat of Tightening Financial Conditions Poses Market Risk
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Gold Market

This week spot gold closed at $1,244.70, up $31.75 per ounce, or 2.62 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, surged 11.90 percent. Junior miners underperformed seniors for the week as the S&P/TSX Venture Index traded up just 3.77 percent. The U.S. Trade-Weighted Dollar Index got shellacked with a 1.64 percent drop for the week.

Date Event Survey Actual Prior


Germany CPI  YoY





Eurozone CPI Core YoY





U.S. Consumer Confidence Index





Caixin China PMI Mfg





U.S. ISM Manufacturing





ECB Main Refinancing Rate





U.S. ADP Employment Changes





U.S. Initial Jobless Claims





U.S. Change in Nonfarm Payrolls





U.S. Durable Goods Orders




U.S. Initial Jobless Claims




Germany CPI YoY




China Retail Sales YoY





  • The best performing precious metal for the week was palladium, with a gain of 2.97 percent.  Palladium moved up with gold on Friday, but in the prior week had been depressed by news that Russia had no plans to buy palladium for its state minerals depository.
  • While investors awaited the U.S. jobs report earlier in the week, one Bloomberg headline read “Gold Is ‘Without Friends.’” To the market’s surprise, however, payroll data came in much weaker than expected on Friday – the U.S. economy added 38,000 jobs, the fewest in almost six years – sending gold up for its biggest advance in 11 weeks.

Gold Nears Oversold Level
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  • Gold traders are paying the most in at least half a decade to maintain their bullish gold bets, reports Bloomberg. According to Comex data, those holding June futures would have paid an extra $3.40 an ounce on May 23 to swap that position for the most-active August contract. “The bullish sentiment is coming at a cost for gold longs,” Brad Yates, head of trading at Elemetal LLC, said. “There’s massive speculative position starting to roll, so they’re selling June and buying August.”



  • The worst performing precious metal for the week was platinum, only gaining 0.78 percent for the week.  Headlines out of South Africa today stated that the National Union of Mineworkers (NUM) is demanding at least a 10-percent wage hike at the platinum mines.
  • The Perth Mint reported gold coin and minted bar sales for the month of May lower than the previous month’s sales. According to mint data, gold sales in April came in at 47,542 ounces, but May sales were only 21,035 ounces.
  • Earlier in the week, bullion dipped below $1,200 an ounce, losing around $100 in less than a month on continued talk of a U.S. interest rate hike by the Federal Reserve, along with a stronger dollar. Despite gold hitting its lowest level since February 17 on Monday, Friday’s jobs report has since sent gold higher. Data out of China also startled markets earlier in the week – Chinese stock-index futures plunged by the daily limit before snapping back in under a minute, reports Bloomberg. The China Financial Futures Exchange is investigating the tumble.


  • “Gold may be embarking on a new bull run and has the scope to rise to $1,400 per ounce over the coming year,” Allocated Bullion Solutions (ABS) stated in a report on Wednesday. The group expects market weakness to persist in the short term, along with a reappraisal from the market on the path of U.S. monetary policy.
  • In a press release from Orex Minerals this week, the company highlights a 350 meter step-out hole where it hit silver, west of the Main Zone on its Sandra Escobar project. This particular hole yielded 46 meters core length starting at surface, grading 156 grams per ton of silver.  Orex’s share price gained nearly 30 percent on the news of the implied size growth in the company’s new discovery.  The Sandra Escobar project is shaping up to be one of the most significant silver discoveries this year and is attracting a lot of attention.
  • Rye Patch Gold recently announced a C$40 million private placement of subscription receipts to fund its acquisition of the Florida Canyon gold mine located in Nevada. We previously noted when Klondex Mines bought the Midas property about a year-and-a-half ago, calling that a “transformation transaction for Klondex.” Well, the same is true here for Rye Patch Gold.  The company is buying the Florida Canyon gold mine from a private Japanese owner who has gotten into a bit of a bind, thus Rye Patch is getting a completely de-risked operating mine at less than one-third the valuation of other comparable assets.


  • In this week’s newsletter from Secular Investor, the group attempts to explain gold’s pullback from its recent jump toward $1,300 an ounce. “While gold ETFs were racking in tons of fresh gold, Venezuela started dumping huge amounts of their gold holdings in recent weeks,” the article explains. Admittedly, that is a lot of gold (up to 80 tons and more in the market), but the group says this is no real problem, calling it a “temporary hangover” until Venezuela is sold out of its gold.
  • Gold companies in South Africa will appeal against a court ruling that could see as many as half a million mineworkers suffering from lung disease suing current and former employers, reports Bloomberg. The lung disease is said to be caused by inhaling dust from the mines, continues the article, creating scar tissue in the organs and “increasing vulnerability to tuberculosis.”
  • Primero Mining has launched a NAFTA challenge against Mexico, reports the Financial Post, claiming that authorities are trying to revoke its legal rights to collect more tax. The Daily IKN email digest shared its thoughts on the matter, which can be simply summed up as follows: What are they thinking? “You do not take a sovereign nation to dispute, let alone the country where you have your main operating mine unless you have exhausted all venues to negotiate,” IKN reasons in its email.

Can you guess which movies feature gold?

Energy and Natural Resources Market



  • Gold rallied $31 per ounce this week as weak economic data in the U.S. and abroad suggests the Federal Reserve may defer its next interest rate hikes past June. With the May jobs report showing payrolls rose by just 38,000 in May, investors all but eliminated the possibility of an interest rate rise in June, thus boosting the appeal of gold bullion.
  • The best performing sector for the week was the NYSE Arca Gold Miners Index. The index of gold producers rose 11.9 percent for the week following a 2.5 percent rally in gold prices, its first weekly advance in 5 weeks.
  • Endeavour Mining, a Canadian listed gold producer was the best performing stock in the broader natural resource space after rallying 17.7 percent for the week. The stock benefited from a strong rally in gold prices, leading it to post a fresh 52-week high.


  • Crude prices dropped this week after speculation for a fresh output ceiling agreement during the OPEC meeting failed to materialize. In addition, the U.S. oil rig count increased by the most this year, suggesting U.S.-based producers may be planning to boost production to profit from prices approaching $50 per barrel.
  • The worst performing sector for the week was the S&P 500 Construction Materials Index. The index dropped 2.3 percent for the week despite positive news, suggesting the underperformance is a consolidation move following the previous four-week, 11 percent rally.
  • The worst performing stock for the week in the S&P Global Natural Resources Index was Novolipetsk Steel. The Russian steel producer dropped 6.9 percent for the week after EU officials imposed provisional anti-dumping duties on the company’s products entering the EU.


  • Low prices boost gasoline demand. Over the past four weeks gasoline demand rose 3.95 percent compared to the same period last year, with Americans consuming 9.66 million barrels per day, a fresh record high for May, and almost equal with the all-time high of 9.68 million barrels per day in July 2007. With U.S. gasoline prices sitting at their lowest since 2009, the summer driving season which kicks off over Memorial Day Weekend is likely to top all previous gasoline demand records.

U.S. Gasoline Demand Strengthens As Prices REmain Low Heading Into Summer
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  • Refiners could boost buybacks and dividends as crack spreads improve and shares lag the broader energy sector. Comments from management teams at the largest independent refiners indicate they are confident crack spreads will improve over the summer, which could result in significantly higher levels of profitability. With mergers and acquisitions not a priority, management indicated they may increase dividends and/or stock buybacks.
  • American steelmakers relish as the government imposes duties on steel imports from China, Brazil, India and Japan. U.S. steel prices have rallied more than 60 percent this year after having fallen 33 percent last year. 


  • May PMIs released this week suggest the global economy continues to slow. China’s Caixin Manufacturing PMI ticked down to 49.2, its 15th consecutive contractionary reading. The glimmer of hope came from the U.S. ISM Manufacturing PMI which rose to 51.3, suggesting domestic activity is picking up. Can the U.S. pull up overseas manufacturing activity? According to Cornerstone Macro (CSM), it didn’t do so two years ago. And today, CSM does not think U.S. growth is strong enough either.
  • A “Brexit” would set off a global slowdown according to the Organization for Economic Cooperation and Development (OECD). The organization says the global economy remains fragile and even the smallest negative shock could “tip the world back into another deep downturn.” The resulting turmoil would send stocks down and borrowing costs up, similar to the shock seen at the height of the eurozone crisis in 2011.
  • Copper short bets reach all-time highs as investors seek insurance for global risk. As VTB Capital reports, total Comex fund shorts have increased 80 percent in the past three weeks, while LME shorts have also increased sharply. Sentiment has rapidly shifted to extreme negative lows again, with copper the main target for the sudden global risk-off trade.

China Region


  • China was the best performing country in Asia this week, gaining 4.17 percent on optimism that the nation’s equities will be included in MSCI Inc.’s global indices. The odds of Chinese stocks winning MSCI inclusion have increased to 70 percent (from 50 percent a month earlier), as the authorities published rules curbing trading halts and issued a clarification about beneficial ownership rules. On June 14 MSCI will decide whether or not to add some of China’s largest-listed companies to its name.
  • The best performing currency for the week was the Philippine peso, gaining 37 basis points.
  • All sectors in the HSCI Index were up this week, with property and construction as the best performing sector.                


  • Malaysia was the worst performing country this week, losing 41 basis points. Foreign funds are making a dash for the exit as international probes related to 1Malaysia Development Berhad widen into one of the worst global financial scandals. Overseas investors are pulling money from Malaysian stocks for a fifth straight week. This is a reversal from the first quarter of the year when money managers piled in at the fastest pace, propelling the Malaysian stock market to an eight-month high.              
  • The worst performing currency this week was the Malaysian ringgit, losing 1.57 percent.
  • The weakest sector in the HSCI Index this week was information technology.


  • Chinese authorities are stepping up efforts to boost infrastructure construction with several major announcements last month. This, together with accelerating housing investment, will likely boost business activity further. Growth may surprise significantly on the upside given how low investors’ expectations have become.
  • China manufacturing is still weak, but consumption is robust and extreme pessimism is fading from news coverage. The latest numbers from Unionpay Advisors, who collect data on all transactions across China’s dominant payment network, show that consumer spending is rebounding. Transactions at both restaurants and luxury hotels are growing again, coming out of contraction at the end of 2015 and the beginning of 2016.
  • The Philippine real estate market is expected to sustain its robust growth this year, driven largely by a strong economy and the continued entry and expansion of outsourcing companies, growing developments outside central business districts. Philippine-approved foreign investment also rose 19.2 percent year-over-year in the first quarter.


  • China’s Caixin May manufacturing PMI dropped to 49.2 versus 49.4 in April, showing that manufacturing activity remained subdued. The reading has been in contractionary territory for 15 consecutive months, which suggests that the flurry of rate cuts and monetary easing has been unable to bolster the overall economic sentiment. The Caixin Services PMI was slightly lower as well at 51.2 in May versus 51.8 in April.

Chinese Services Purchasing Managers'Index (PMI) Expands While Manufacturing PMI Contracts
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  • Retail sales in Hong Kong fell in April for the fourteenth consecutive month, sliding to 7.5 percent from a year earlier to HK$35.2 billion in value terms. “The near-term outlook for retail sales will continue to depend on the performance of inbound tourism,” the government said in a statement this week.         
  • On Wednesday, the Chinese yuan fell against the U.S. dollar, nearing a five-year low. The losses come amid signs the nation’s authorities are more comfortable letting the yuan weaken. Analysts are cutting their forecasts for China’s yuan at the fastest pace since January with the currency’s losses accelerating as the economy slows and the U.S. moves closer to raising interest rates. The exchange rate will weaken 1.8 percent the rest of this year to 6.70 a dollar, according to the median estimate in a Bloomberg survey of analysts. That translates to a forecast cut of 0.6 percent, the most since Jan. 25.
  • Macau’s May gaming revenue fell 9.6 percent despite last month’s Labor Day public holiday. Macau has been struggling for two years as China’s economy slows and President Xi Jinping’s corruption crackdown causes high-stake gamblers to avoid the world’s largest gambling hub. The steeper decline in May was partly due to the tightening policies on the industry, especially the recent ban on phone betting. 
  • China buys around one-fourth of South Korea’s exports, and data on Wednesday revealed South Korea’s total May exports contracted 6 percent on-year, marking nearly one year of straight declines and a major miss on the 0.4 percent decline a Bloomberg survey had anticipated. Exports to China fell 9.1 percent. This indicates Chinese import demand is weakening on the back of tepid appetite from mainland consumers and enterprises.

Emerging Europe



  • Ukraine was the best performing country this week, gaining 2.72 percent. The U.S. agreed to hand Ukraine its third $1 billion loan guarantee, signaling continued international support for the nation’s new government to overhaul the ex-Soviet economy. The guarantee “provides direct support for Ukraine’s continued progress in implementing critical economic and governance reforms,” U.S. Treasury Secretary Jack Lew said in a statement.
  • The Hungarian forint was the best performing currency this week, gaining 2.76 percent against the U.S. dollar. Jobbik, the Hungarian radical nationalist political party, is no longer advocating to quit the European Union as it sees a chance for the bloc to improve. May Manufacturing PMI was reported at 52.3 versus prior reading of 52.2.
  • Health care was the best performing sector among Eastern European markets this week.


  • Poland was the worst performing market this week, losing 2.38 percent. Deputy Labor Minister Marcin Zieleniecki said that the country’s pension fund industry will be reviewed in the second half of the year. The nation’s 12 privately managed funds, which have been active since 1999, were striped of 51 percent of their holdings in bonds in 2014, when the previous government sought to reduce the country’s debt. Poland may consider merging all of the pension funds into one, which would be managed by the state-controlled entity. Pension funds control one-fifth of local stocks traded in Warsaw, holding $35 billion in assets.
  • The Russian ruble was the worst performing currency this week, losing 1.8 percent against the U.S. dollar.  The Russian currency weakened and bonds retreated with stocks after OPEC’s failure to agree on a new output ceiling sent oil prices lower.
  • The materials sector was the worst performing sector among Eastern European markets this week.


  • During the European Central Bank (ECB) meeting this week, the bank slightly upgraded its forecasts for both inflation and growth in the euro area in 2016, but left its predictions for 2017 and 2018 unchanged. Inflation will average 0.2 percent in 2016 and then accelerate to 1.3 percent in 2017 and 1.6 percent in 2018. Growth in the eurozone would average 1.6 percent this year and 1.7 percent in 2017 and 2018.
  • Hungary’s OTP Bank, one of emerging Europe’s largest lenders, expect as sharp improvement in the quality of its loans over the next two years. In the Hungarian market, 11.7 percent of loans are at least 90 days overdue and the figure could drop below 10 percent by the end of 2017 according to Laszko Bencsik, the bank’s Deputy Chief Executive Officer.
  • Wood & Company remains positive on the outlook for the banking sector in Romania and believes that it still offers one of the best growth/risk profiles in the region. Loan growth is supported by strong macro-economic conditions. GDP growth in Romania was 3.8 percent last year, and Wood expects 4.5 percent growth this year and 5.5 percent next year.


  • Eurozone Manufacturing PMI was marginally lower at 51.5 in May, down from 51.7 in April. Given the sluggish growth in manufacturing, the outlook for the eurozone remains disappointing.

Eurozone Manufacturing PMI Hits Three-Month Low
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  • A Guardian/ICM telephone and online poll released May 31 showed a jump in support to take Great Britain out of the European Union. Previous polls showed online voters to be more in favor of Britain leaving the EU. But in the latest ICM research, carried out for the Guardian, both methodologies yielded the same result – a majority in favor of leaving. The referendum is scheduled for June 23.

Pound Drops As Brexit Poll Shows "Leave" Camp Leading
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  • The European Union has issued a statement this week saying that Poland’s government is not following the rule of law as required by the bloc’s membership and has taken a step toward sanctions. If the EU decides to impose sanctions on Poland after its government have parlayed the country’s Constitutional Tribunal, this will be the first-ever sanctions against any EU member under the rule of law procedure.  The EU has had similar issues with Hungary, but these subsided after Hungary made amendments, and no sanctions were issued on Budapest.


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Leaders and Laggards


Weekly Performance
Index Close Weekly
DJIA 17,807.06 -66.16 -0.37%
S&P 500 2,099.13 +0.07 +0.00%
S&P Energy 494.31 -5.07 -1.02%
S&P Basic Materials 298.56 +2.98 +1.01%
Nasdaq 4,942.52 +9.01 +0.18%
Russell 2000 1,164.13 +13.68 +1.19%
Hang Seng Composite Index 2,840.59 +51.34 +1.84%
Korean KOSPI Index 1,985.84 +16.67 +0.85%
S&P/TSX Canadian Gold Index 229.94 +25.57 +12.51%
XAU 89.06 +9.65 +12.15%
Gold Futures 1,246.70 +30.00 +2.47%
Oil Futures 48.81 -0.52 -1.05%
Natural Gas Futures 2.40 +0.23 +10.56%
10-Yr Treasury Bond 1.70 -0.15 -8.15%


Monthly Performance
Index Close Monthly
DJIA 17,807.06 +155.80 +0.88%
S&P 500 2,099.13 +48.01 +2.34%
S&P Energy 494.31 +9.37 +1.93%
S&P Basic Materials 298.56 +9.82 +3.40%
Nasdaq 4,942.52 +216.88 +4.59%
Russell 2000 1,164.13 +51.00 +4.58%
Hang Seng Composite Index 2,840.59 +33.90 +1.21%
Korean KOSPI Index 1,985.84 +9.13 +0.46%
S&P/TSX Canadian Gold Index 229.94 +16.87 +7.92%
XAU 89.06 +5.79 +6.95%
Gold Futures 1,246.70 -30.00 -2.35%
Oil Futures 48.81 +5.03 +11.49%
Natural Gas Futures 2.40 +0.26 +12.00%
10-Yr Treasury Bond 1.70 -0.08 -4.22%


Quarterly Performance
Index Close Quarterly
DJIA 17,807.06 +800.29 +4.71%
S&P 500 2,099.13 +99.14 +4.96%
S&P Energy 494.31 +41.00 +9.04%
S&P Basic Materials 298.56 +25.92 +9.51%
Nasdaq 4,942.52 +225.50 +4.78%
Russell 2000 1,164.13 +82.20 +7.60%
Hang Seng Composite Index 2,840.59 +90.19 +3.28%
Korean KOSPI Index 1,985.84 +30.21 +1.54%
S&P/TSX Canadian Gold Index 229.94 +48.36 +26.63%
XAU 89.06 +22.31 +33.42%
Gold Futures 1,246.70 -25.90 -2.04%
Oil Futures 48.81 +12.89 +35.89%
Natural Gas Futures 2.40 +0.73 +43.94%
10-Yr Treasury Bond 1.70 -0.17 -9.28%


Monthly Performance
Index Close Monthly
DJIA 17,873.22 -168.33 -0.93%
S&P 500 2,099.01 +3.86 +0.18%
S&P Energy 499.38 -10.41 -2.04%
S&P Basic Materials 295.58 -4.63 -1.54%
Nasdaq 4,933.51 +70.36 +1.45%
Russell 2000 1,150.44 -3.71 -0.32%
Hang Seng Composite Index 2,789.25 -111.12 -3.83%
Korean KOSPI Index 1,969.17 -46.23 -2.29%
S&P/TSX Canadian Gold Index 204.17 -1.74 -0.85%
XAU 79.41 -4.02 -4.82%
Gold Futures 1,212.60 -39.70 -3.17%
Oil Futures 49.49 +4.16 +9.18%
Natural Gas Futures 2.17 +0.17 +8.52%
10-Yr Treasury Bond 1.85 0 0%


Quarterly Performance
Index Close Quarterly
DJIA 17,873.22 +1,233.25 +7.41%
S&P 500 2,099.01 +150.96 +7.75%
S&P Energy 499.38 +70.89 +16.54%
S&P Basic Materials 295.58 +31.49 +11.92%
Nasdaq 4,933.51 +343.03 +7.47%
Russell 2000 1,150.44 +113.26 +10.92%
Hang Seng Composite Index 2,789.25 +159.23 +6.05%
Korean KOSPI Index 1,969.17 +49.01 +2.55%
S&P/TSX Canadian Gold Index 204.17 +27.22 +15.38%
XAU 79.41 +17.51 +28.29%
Gold Futures 1,212.60 -9.00 -0.74%
Oil Futures 49.49 +16.71 +50.98%
Natural Gas Futures 2.17 +0.37 +20.88%
10-Yr Treasury Bond 1.85 +0.09 +5.05%


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This commentary should not be considered a solicitation or offering of any investment product.

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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 03/31/2016:
Ford Motor Co.
OTP Bank Plc.
Orex Minerals Inc.
Rye Patch Gold Corp.
Endeavour Mining Corp.
Klondex Mines Ltd.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks.
The Russell 2000 Index® is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.
The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months.
The Taiwan Stock Exchange Index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange.
The Korea Stock Price Index is a capitalization-weighted index of all common shares and preferred shares on the Korean Stock Exchanges.
The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.
The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks.
The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.
The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The S&P 500 Financials Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period.
The S&P 500 Industrials Index is a Materials Index is a capitalization-weighted index that tracks the companies in the industrial sector as a subset of the S&P 500.
The S&P 500 Consumer Discretionary Index is a capitalization-weighted index that tracks the companies in the consumer discretionary sector as a subset of the S&P 500.
The S&P 500 Information Technology Index is a capitalization-weighted index that tracks the companies in the information technology sector as a subset of the S&P 500.
The S&P 500 Consumer Staples Index is a Materials Index is a capitalization-weighted index that tracks the companies in the consumer staples sector as a subset of the S&P 500.
The S&P 500 Utilities Index is a capitalization-weighted index that tracks the companies in the utilities sector as a subset of the S&P 500.
The S&P 500 Healthcare Index is a capitalization-weighted index that tracks the companies in the healthcare sector as a subset of the S&P 500.
The S&P 500 Telecom Index is a Materials Index is a capitalization-weighted index that tracks the companies in the telecom sector as a subset of the S&P 500.
The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

The Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.
The Goldman Sachs Financial Conditions Index (GSFCI) is a weighted sum of a short-term bond yield, a long-term corporate yield, the exchange rate, and a stock market variable.
The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.
The Conference Board index of leading economic indicators is an index published monthly by the Conference Board used to predict the direction of the economy’s movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy.
The Labor Market Conditions Index is an indicator developed by Federal Reserve economists to assess changes in the labor market conditions.
The European PMI Manufacturing Index is derived from original national surveys of manufacturing and service sector business conditions conducted by NTC Research.
The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining.