Two separate but specific factors made for a tough week’s trading for gold

In this week’s bulletin:

  • Despite the continued upwards trend, challenges remain for equity markets
  • An increase in the size of the Cypriot bailout poses a bigger problem for depositors and bank bondholders
  • Two separate but specific factors made for a tough week’s trading for gold
  • A new survey suggests that nearly one in four adults risk losing out on valuable retirement income due to losing track of ‘old’ pension pots

 

End of week sell-off dampens another strong run

  • Mining stocks tumble in Friday trading
  • Despite the continued upwards trend, challenges remain for equities

Global equities ended the week on a softer note as a wave of bullishness that had driven the S&P 500 Index to record closing and intraday highs in earlier sessions showed signs of fatigue. Disappointing economic data and corporate earnings triggered a bout of profit-taking on Friday but the US index still posted a positive return of 2.0% over the week. In the UK, mining stocks suffered some big falls in Friday’s trading as prices for metals and other raw materials came under heavy selling pressure. Despite these challenges, the FTSE 100 Index registered a positive gain of 2.2% for the week.

For European equities, banks proved to be amongst the best-performing sectors for the week as the prospect of continued liquidity from global central banks provided much-needed support. Finally, in the East, the Nikkei edged back from a near five-year high but still recorded a third successive weekly advance, gaining 5.1%, amid expectations that the Bank of Japan’s bold policy moves would bolster the economy.

Commodities toiled on the final trading day of the week; Brent oil tumbled to levels not seen since last July and copper shed more than 2% on the London Metal Exchange.

The pullback in equity and commodity prices came as disappointing data on US retail sales and consumer confidence heightened the growing sense in the markets that there remains a number of challenges yet to be resolved. This reflects a slightly more realistic view than the almost unanimously optimistic one proffered in the early months of the year.

Yet there is still plenty of positive sentiment on the back of the prospect of further liquidity support from the world’s central banks, particularly after the monetary easing measures announced by the Bank of Japan earlier in the week. However, the debate over how much longer the US Federal Reserve will maintain its $85 billion-a-month asset-buying programme was rekindled last week, as the minutes of its last policy meeting indicated “a number” of participants felt that tapering purchases around mid-year could be appropriate. It all makes for an interesting outlook for investors and one which will, no doubt, have further twists and turns as the weeks and months play out.

 

The road is long…

·         The size of the Cypriot rescue package increases by almost 40%

 

·         Depositors and bank bondholders are faced with standing the balance

Just when investors and interested observers thought that the Cypriot bailout was a done deal, it emerged last week that the size of the rescue package would need to be far larger than first thought. Rather than the original – and still considerable – sum of €17 billion, leaked draft documents from the European Commission (EC) show that the cost is now expected to be €23 billion, with the beleaguered Mediterranean nation facing the prospect of funding the additional burden.

“The dramatic increase in the size of the proposed rescue package for Cyprus both underlines the depth of the problems facing the country and poses further questions over the likely impact of future euro-zone bail-outs on depositors and bondholders.”

Jonathan Loynes, Capital Economics

The key factor behind the revision reflects a much weaker economic outlook for Cyprus. The country’s GDP is now projected to drop by 8.7% in 2013 and a further 3.9% in 2014, compared to previous EC forecasts of 3.5% and 1.3% respectively. However, many economists acknowledge that even the new projections incorporate a considerable degree of optimism for its medium-term prospects. Consequently, Cyprus could still be forced into further fiscal tightening to meet its borrowing targets, casting more doubt on the sustainability of the bailout.

As was widely reported, the implications and impact of the bailout will have a very real effect on the majority of the sunshine island’s population. The biggest burden of the increase in the bailout will fall on depositors and bank bondholders. Although deposits below €100,000 will still be protected, even bigger losses on larger deposits may prompt increased concerns amongst depositors in other eurozone countries with weak banking sectors.

The new rescue deal also includes the assumed ‘roll-over’ of up to €1 billion of liabilities in the form of government bonds due to mature over the three years of the bailout programme. There has been suggestion from some that this amounts to a sovereign default of sorts, which arguably undermines the previous official pledges that what happened in Greece would not be repeated elsewhere.

In terms of market impact, however, the initial casualty has been the price of gold – more of that below – based on reports suggesting that Cyprus may have to sell €400 million worth from its official holdings as part of the bailout deal. However, the call for Cyprus to sell gold was only a small part of the draft proposal and may well be a red herring.

 

All that glitters

·         Gold prices fall to their lowest level since July 2011

·         Safe haven status of the precious metal weakens

Two separate but specific factors made for a tough week’s trading for gold, for so long a so-called ‘safe haven’ for investors. Prices fell to a 21-month low as traders placed bearish bets after a recommendation by Goldman Sachs, while worries about selling by Cyprus also depressed prices. The market for the yellow metal has been weak since the start of the year and in the past few days hit a low of $1,493 per troy ounce, the weakest level since July 2011.

A fall of almost 5%, the largest weekly drop since March last year, was linked to guidance from a leading investment bank. Goldman Sachs lowered its price forecasts, publishing year-end targets of $1,450 and $1,270 per troy ounce for 2013 and 2014 respectively, “We see risks to current prices as skewed to the downside as we move through 2013”, adding that “the fall in prices could end up being faster and larger than our forecast”. The bank cited expected US growth later this year, and consequently the strength of other asset classes, as one of the factors affecting the gold price.

At the same time, uncertainty surrounding possible gold sales by Cyprus, to help fund its €13 billion contribution to a €23 billion bailout package, continues to unnerve investors. This itself raised fears of contagion, that other eurozone countries may look to sell their gold reserves in order to shore up their finances; both Italy and Portugal retain significant amounts of gold as a proportion of their economic reserves. These fears were tempered, however, as analysts confirmed that the Cypriot government needs to overcome a number of hurdles before any possible sale of its gold reserves, due to rules governing the central bank’s independence.

 

Please take (care of) all of your belongings

·         Losing track of lifetime savings risks lower income in retirement

·         Almost a quarter of UK adults have lost track of one of their pension plans

The days of a ‘job for life’ are widely acknowledged as being a thing of yesteryear. Indeed, the flexibility and mobility of the labour market today means that it is not uncommon for employees to have a few – and in some cases, quite a few – previous employers on their CV. Whilst an impressive résumé of relevant experience and a comprehensive knowledge of their chosen sector can be the key to achieving a more rewarding remuneration package with each move, for those who fail to keep track of their plans for the future, there could be some serious implications for their income in retirement.

According to new research, commissioned by the charity Age UK, nearly one in four adults have lost track of their pension pots and risk losing out on valuable retirement income. Annuity rates are nowhere near what they were a generation ago and consequently, as those approaching retirement come under increasing pressure to maximise their retirement savings, some 23% of UK adults have lost track of at least one of their workplace pensions.

The average person aged over 65 has worked for about six different employers, according to the study. But those of younger generations, aged 25–34, have already reached this number. While measures are being taken by the government to account for smaller pension pots likely to be created under auto-enrolment, existing pots may not be covered. Failure to consolidate pension savings accrued over a lifetime means that a pensioner could miss out on the highest level of income in retirement.

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