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September was about FOMC meeting, rates and everything that surrounded it. Interestingly enough, Donald Trump was quite silent (in comparison to August) and delivered only a couple of expected harsh tweets on the Federal Reserve. Asked about his view on President’s stance on the monetary policy, Jamie Dimon put it best – “Have never known a President who wanted higher rates”.
Market was sure about a rate cut and that it got. Still (or rather “as always”), Powell, with his struggle to give something good to everybody, managed to keep nobody happy. 0.25% cut was probably too much of a compromise move (with FOMC itself being divided), press conference was weak, as the Chairman desperately tried to sound convincing yet not to give away any truly valuable information on possible FED moves, strategy or what it is really dependent on – data, markets or politics. Probably, that reassured the participants that the central bankers “have no clue”.
In terms of data, figures confirmed that the US economy grew more slowly in the second quarter, and slow growth is expected to persist through the end of the year. The official score card for the economy, gross domestic product, grew at a 2% annual pace from April to June, that was unchanged from the previous estimate. The biggest drag on growth still is the ongoing trade war with China. Unless that is revolved, the country is likely to remain constrained – the dispute has reduced exports, manufacturing, farming and business investment. In addition, Americans cut back on spending in August and saved more, but rising incomes suggest the drop-off is unlikely to persist. Consumer spending rose 0.1% last month, marking the smallest gain in six months. Incomes rose 0.4% for the fifth time in six months, however most of it ended up in savings. The savings rate climbed to 8.1%. Meanwhile, the pace of inflation showed little change. The increase in the PCE price gauge over the past 12 months was unchanged at 1.4%, well below the Fed’s 2% target.
In Eurozone, unemployment rate surprisingly dropped to its lowest level in more than a decade, thus continuing its five-year long downward trend. However, manufacturing sentiment in the area fell in September to the worst level in nearly seven years (an 83-month low) – flash manufacturing PMI read was 45.6 points, down from 47 in August, with Germany’s manufacturing PMI sliding to 41.4 points (43.5 in August), the worst reading in more than a decade. In addition, new orders for goods and services fell for the first time since January, dropping at the sharpest rate since June 2013. The deterioration comes as the ECB, which cut interest rates in September and said it would restart bond purchases, has asked Eurozone countries to use fiscal measures to help prod the economy forward.
Two widely watched indicators on China’s manufacturing activity came in above expectations – a private survey of China’s manufacturing activity PMI was 51.4 for September, the highest reading since February 2018. PMI readings above 50 indicate expansion, while those below that level signal contraction. The improvement in the survey was mainly driven by firmer domestic demand, as foreign sales have continued to be dampened by the ongoing U.S.-China trade war. The release of the private PMI survey followed the announcement of China’s official manufacturing PMI. The official data came in at 49.8 in September — the fifth straight month of contraction. On the other hand, profit growth in China’s industrial enterprises slowed for the fifth month – weighed down by slower production and sales, stagnation in prices and a higher statistical base a year earlier.
In all, September was a good month for stocks around the globe. Indexes of developed markets broke the levels of short-term resistance and showed gains over 1%, with FTSE 100 being up by more than 2%. News from “trade war fields” were generally positive. Japan signed a trade deal with the United States under which over 90% of US food and agricultural products exports will either be free of any duty or receive preferential tariff access. In return, the US will either remove or lower duties on some $40 million of agricultural imports from Japan. China reported purchases of a “considerable” amount of U.S. soybeans and pork ahead of the next round of trade talks in Washington, which is expected to be very difficult as it targets intellectual property rights.
To remind the counterparty of its economic influence, Trump’s administration issued a statement proposing to limit the opportunity for US investors to invest in Chinese companies, as well as delisting Chinese companies from US exchanges. This news greatly upset investors and indexes dipped into the red zone. Later this initiative did not find further development and the statement was withdrawn, but, as they say, the bad feeling remained.
The recent upward move in sovereign bond yields could continue in the coming weeks, as the initial shock of monetary easing wears off. Going forward, there is enough room for Central Banks to disappoint the markets and under-deliver in the form of narrative for further yield cut guidance, mainly because the stock market is back at this year’s highs and there seems no signs of stress in the markets (despite the fact that forward-looking macroeconomic indicators are shouting warning signs quite loudly). That, of course, could easily change. There are also rising deflation risks that cannot be ignored for too long. A global economic slowdown seems almost unavoidable and Central Banks will most probably go for an aggressive monetary stimulus, thus reigniting the global yield compression. So far, however, the success of their monetary efforts (except for the inflated asset prices) is quite questionable.
Gold finally approached XAU/USD levels of 1550 for the second time and failed to break out. We thought that 1550-1580 area would be very challenging for gold bulls. “Longs” in futures positioning accommodated positions, which now match all-time highs. Correction lower would be very healthy for the metal and we watch XAU/USD 1370-90 area to go long.
Silver traded above XAG/USD 19.50 and profit takers were quick to sell at those levels. 21 USD per ounce mark is key on longer-term charts and we expect a fight ahead of that level. Indicators also warn that silver might struggle to go higher right away. Ideally for silver bulls is to see market to stay above XAG/USD 16.30 level. We expect that 16.70-90 area can see buyers.
Having said all that, we remind investors that stock indexes in 10 years (US especially) have done a phenomenal move. But if we look at S&P 500, we see it doing a “distribution phase” for the last two years (please, refer to the graph). One thing is certain – US stock bulls, please, be careful.