Chuck Butler

We closed the books on the second quarter yesterday. One that probably will end up showing some real rot on the US economy’s vine. Yes, I do believe that rot is going to be exposed as we move along in July. So… We have that going for us!

The news from China, overnight, was not exceptionally good, and the fear mongers came out of the woodwork again, which wasn’t a good thing for Aussie dollars (AUD)… In fact, all of the commodity currencies got whacked and sent to their rooms without TV! So, here’s the news from China…

Chinese manufacturing slowed more than economists had forecast in June, and all those people pointing to China saying their economy would collapse, were dancing in the streets, for they now feel as though they were correct… I hate to tell them that a “slowing” is not a “collapse”!

But, that didn’t stop the selling of the commodity currencies, led by the Aussie dollar. I have to say that I truly believe the selling in commodity currencies to be overdone, and hopefully the markets will realize that soon!

One of my old fave economists, Stephen Roach, who now chairs Morgan Stanley’s Asia division had this to say about the “slowdown” in manufacturing… “China’s economic growth will slow over the second half of this year, which is welcome news given the slight uptick in inflation recently.”

The euro (EUR) held on to gains yesterday, and has rallied back above the 1.23 level. That lending story yesterday has really bolstered the euro the past two days.

And in keeping with the “scenario” that I’ve put out there for you regarding the strange way the markets are rewarding currencies these days… Sweden’s Riksbank did raise rates, like I said they would, 25 BPS (1/4%) and… The krona (NOK) lost ground! UGH! Raising interest rates is supposed to be a good thing for a currency! That is as long as the central bank is staying ahead of inflation… Which the Riksbank certainly did!

The Riksbank didn’t help the krona none too much, by backing off previous hawkish tones, and saying that they may not need as big of an increase in rate as the markets are expecting… UGH!

And Japanese yen (JPY) continues to be well bid, playing on both sides of the aisle again. On one side of the aisle is the “flight to safety” and on the other side of the aisle is the risk assets rally versus the dollar… I have to believe that the yen is getting very close to the level that will require the Bank of Japan to begin some verbal intervention, in an attempt to slow the appreciation down.

And that brings me to gold… The shiny metal was quite volatile yesterday going up, and coming down, then ending up. In fact, the volatility in gold recently has not been normal. I saw a report this morning from the person that was the most accurate forecaster in the second quarter… BNP Paribas… They issued a report saying that gold will reach $1,300 this year…

Look, why not? You all know that I call gold the “uncertainty hedge”, and while it is that, and we certainly have a ton of uncertainty in the world these days, gold is more than that… Gold will always be valuable… It may not be “as valuable” as it was yesterday, but it’s not going to be zero! It never has been, and never will be…

That’s how I see it anyway… Of course that’s just my opinion, and I could be wrong, but shoot Rudy, it doesn’t take a rocket scientist to figure out that there are so many concerns with everything from the solidity of the economic recovery, to wars, to oil spills, to our national debt, and so on… And the thing to ease the pain of these concerns… Gold…

I’m not trying to sound like Gordon Liddy in his TV commercial for gold… I’m just trying to make certain everyone knows where I stand on this…

So… Yesterday, I told you that Barclays said gold would end the year at $1,385, and today I’m telling you that BNP Paribas said gold would the year at $1,300… I’ll take either one, eh?

And before I head to the Big Finish, I want to talk a bit about Swiss francs (CHF)… The franc is pushing the envelope to parity again, as the Chinese “slowdown” triggered a “flight to safety”… And ever since the Swiss National Bank (SNB) dropped the words regarding the need to stem appreciation, from their statement, the franc has been back on the list of currencies investors flock to when the risk aversion clouds move in and darken the day!

In fact, the Swiss franc was the best performing currency yesterday and throughout the night and morning sessions in Asia and Europe respectively. There is something I need to make perfectly clear to everyone… This is a misconception that a ton of people still have, and that is… The Swiss franc is backed by gold… It is NOT! Yes, the Swiss have enough gold in their vaults to cover the outstanding issued francs… But the franc has not tie to gold; that was removed a decade ago… So, when the franc gets tossed in with flight to safety currencies, it’s really a misconception… But a good one for franc owners!

Then there was this… US stocks suffered a late-day selloff Wednesday to end the quarter with a thud. The Dow tumbled 96.35 points, or 1%, to 9773.95, a 10.4% loss for the second quarter and its worst quarterly performance since the first quarter of 2009.

The Dow fell 3.6% in June as investors fretted about the pace of global growth and the fallout from the Eurozone sovereign debt crisis, marking its second straight month in the red.

So… You see, the stock jockeys are in the same boat as the currency and commodity guys…

The only asset class that’s really on the winning side of the investment field, is Treasury Bonds… Oh boy! Let me get some of that whopping less than 3% yield, and hold something that will be diluted over and over again in the future as more and more Treasuries have to be issued to finance our ever growing debt!

Well… Today, in the US, we’ll get a ton of data prints from the data cupboard. First we’ll see the Challenger Job Cuts data for June. Then the Weekly Initial Jobless Claims… Later in the morning we’ll see the color of the June Manufacturing with the ISM Index… Construction Spending, Pending Home Sales, and Vehicle Sales will round out the day…  And then tomorrow is the Big Kahuna of data… The Jobs Jamboree…

I hear that the census hiring slowed in June… But I’m sure the BLS won’t let that information get in the way of them “adjusting” the report…

To recap… China’s manufacturing slowed more than forecast in June, and that news just ripped through the hearts of the commodity currencies, led by the selling of Aussie dollars, which I believe has been overdone. The euro held onto gains from yesterday, and added on to its gains this morning. Sweden’s Riksbank did raise rates 25 BPS, and gold whipped around all day yesterday, while the Swiss franc has been Steady Eddie, appreciating versus the dollar, and euro.

Chuck Butler
for The Daily Reckoning

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Chuck Butler is President of EverBank

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