The Blockchain Could Potentially Be asDisruptive as Amazon Was in the 1990s

September 17, 2017by Frank Holmes

of U.S. Global Investors

A quote often attributed to St. Augustine, the early Christian theologian, is: “The world is a book, andthose who do not travel read only a page.” I feel blessed to be able to travel as much as I do—notbecause I’m a big fan of 10-hour flights or living out of a hotel room. I feel blessed because travelallows me to meet and speak at length with some truly fascinating and successful people, from CEOsof firms both large and small, to deal lawyers, to audit partners.

Hearing varying opinions on global issues and politics has helped expand the scope and depth of my“book,” or understanding of the world. In turn, I enjoy sharing some of these thoughts with you, asregular readers of Investor Alert and Frank Talk know well.

Opinions come a dime a dozen, of course, and in today’s hyper-partisan world, it’s impossible to expecteveryone to agree on all things all of the time.

Case in point: I recently polled readers on their approval of the way Donald Trump has handled his jobas president so far. This isn’t a scientific poll by any stretch of the imagination, but for whatever it’s

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worth, a combined 56 percent of participants said they approve of the president. Amazingly, that’sroughly the percentage of Electoral College votes given to Trump in November. (The exact figure is56.87 percent.)

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Some could easily take from this poll that Frank Talk readers are huge Trump supporters—and manyof them are—but that would be overlooking the fact that nearly 40 percent said they disapprove of theway he’s handled his job.

I share this because it serves as a relatively accurate cross section of the types of opinions andperspectives I come across during my travels. Some of those opinions end up informing my ownthinking, some don’t—but all of them are added to my “book.”

Now with North Korea launching even more rockets over Japan, the market makes new highs. This iswhat I was asked most often this week on CNBC Asia, Bloomberg Radio and Fox Business. As I saidthen, I’m bullish because the purchasing manager’s index (PMI) is up and oil prices are down, thanksto the ingenuity of Texas fracking, which has created a global peace tax break. The weaker dollar isfavorable for exports and gold.

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Bitcoin on Sale After the China-Dimon One-Two Punch

Someone whose opinion I greatly admire, even if I don’t always agree with it, is Jamie Dimon’s. Thehighly-respected JPMorgan Chase CEO was asked this week at a global financial services conferencein New York to share his thoughts on bitcoin—which can be as polarizing as President Trump. Somepeople love the cryptocurrency, some people hate it.

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Dimon, who’s decidedly in the latter camp, didn’t mince his words.

Although he likes blockchain technology, which bitcoin is built on top of, he began by saying he wouldfire any JPMorgan trader who was caught trading bitcoin, which he went on to call “stupid,”“dangerous” and “a fraud.”

“You can’t have a business where people can invent a currency out of thin air,” he said.

With all due respect to Dimon, some might point out that “inventing a currency out of thin air” is howwe got Federal Reserve Notes and other forms of paper money in the first place. Even he admits this:

“The first thing a nation does when it forms itself—literally the first—is forming currency.”

Bitcoin—and any of the 800 other cryptocurrencies—takes this idea to the next level, the maindifference being that no third party or monetary authority controls its issuances or transactions. It’s allpeer-to-peer.

Governments tend to resist anything that disrupts the status quo, which is why we saw China restrictnew initial coin offerings (ICOs) last week. I suspect we’ll see a few more countries attempt to regulateICOs in other ways, and as long as these regulations are fair and reasonable, I welcome them.

The bitcoin price was knocked down following the one-two punch of China and Dimon, falling 39percent from its peak of $4,919 on September 1. Yesterday it lost more than $611 a unit, one of itsworst days ever, but today the cryptocurrency rallied strongly again.

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With its ability to validate all transactions in an immutable electronic ledger, the blockchain has thepotential to be as disruptive as Amazon was in the late 1990s. When the company went public in 1997,there were serious doubts whether people would willingly give up their credit card information just tobuy a book. Since then, Amazon stock is up 8,000 percent, and founder Jeff Bezos briefly overtook BillGates in July to become the world’s wealthiest person.

If you’re curious to learn more about how blockchains work, I recommend that you watch this engagingtwo-minute video.

Gold Price Correlated to Money Supply Growth

In some ways, cryptocurrency more closely resembles gold. Just as there’s only so much gold that canbe mined in the world, the number of bitcoins that can ever be mined is set at 21 billion. But the exactamount is irrelevant. It could have been set at 21 trillion—the point is that supply is limited and finite.

The same cannot be said of the U.S. dollar, or any fiat currency, which today is printed “out of thin air”with abandon. This has led to hyperinflation in some instances and destroyed the value of severalcountries’ currency, including the Zimbabwean dollar and, more recently, the Venezuelan bolivar.

I’m not suggesting we’ll see the same thing happen here in the U.S. Nevertheless, rampant money-printing has certainly contributed to many people’s dwindling trust in traditional monetary systems. A2016 Gallup poll found that Americans’ confidence in banks is stuck below 30 percent, where it’s beensince the beginning of the financial crisis nearly 10 years ago.

When more money is printed, gold has traditionally been a beneficiary, for two key reasons: 1) If themoney-printing is accompanied by economic growth, greater access to capital might boost demand forluxury items, including gold (the Love Trade); and 2) If the money-printing isn’t accompanied byeconomic growth, inflationary pressures might prompt investors to increase their exposure to realassets, such as gold (the Fear Trade).

These were among the findings in a 2010 World Gold Council (WGC) study. Even after seven years,the findings still apply. As you can see below, the price of gold expanded over the years as more andmore money was printed.

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If we want to get really technical, the WGC estimates that for every 1 percent increase in U.S. moneysupply, the price of gold tends to rise 0.9 percent—nearly as much—within six months.

According to the most recent Federal Reserve report (September 7), more than $13.67 trillion in M2, orbroad money, are now in circulation. That’s up about 1 percent since the end of June, when M2 stoodat $13.54 trillion.

So will the gold price climb 1 percent in response? That would amount to only $13 an ounce, butremember, there are other factors driving gold, including negative real interest rates and geopoliticaluncertainty.

One final note: A former UBS metals trader was arrested and charged this week with fraud andconspiracy over his alleged role in placing “spoof” orders for precious metals futures contracts. AndreFlotron, a Swiss citizen, was arrested while visiting his girlfriend in New Jersey. Flotron began workingfor UBS in 1999 but was put on leave in 2014.

See Zero Hedge for more on conspiracies and convictions in court over price manipulation of preciousmetals. Many cryptocurrency advocates allege this is why Jamie Dimon is so aggressive in knockingdown bitcoin. The enthusiasm for bitcoin has accelerated this year with South Korean and Japanesebanks accepting them as a form of money.

Index SummaryThe major market indices finished up this week. The Dow Jones Industrial Average gained 2.16

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percent. The S&P 500 Stock Index rose 1.58 percent, while the Nasdaq Composite climbed 1.39percent. The Russell 2000 small capitalization index gained 2.31 percent this week.The Hang Seng Composite gained 1.29 percent this week; while Taiwan was down 0.28 percentand the KOSPI rose 1.81 percent.The 10-year Treasury bond yield rose 15 basis points to 2.2 percent.

Domestic Equity Market

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Strengths

Telecommunications was the best performing sector of the week, increasing by 3.89 percentversus an overall increase of 1.51 percent for the S&P 500.Range Resources was the best performing stock for the week, increasing 11.82 percent.Energy stocks posted their first, four-week winning streak of 2017, rallying behind the 5 percentupward move in WTI futures. Range Resources was one of the biggest beneficiaries, previouslybeing a big laggard.

Weaknesses

Utilities was the worst performing sector for the week, falling 0.40 percent versus an overallincrease of 1.51 percent for the S&P 500.Equifax was the worst performing stock for the week, falling 24.55 percent.Regeneron Pharmaceuticals toppled to a four-month low Monday after its drug Dupixent met itskey goals in a Phase 3 asthma trial, but lagged its own earlier results and Amgen's in one patientgroup.

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Opportunities

Laszlo Birinyi, the investing legend, has nailed the eight-year bull market at every turn, and seesstocks continuing to rise going forward. He thinks stock bears are ignoring the high levels of cashfloating around the market right now.Evercore upgraded their price target for Nvidia from $180 to $250. "[Nvidia] managementbelieves that investors still severely underestimate the impact of AI and the size of the potentialmarket ('Every PC/Server will have AI in the future')," C.J. Muse, an analyst at Evercore, wrote ina note to clients on Friday. "We are only at the cusp of AI’s growth potential and Nvidia iscreating THE AI computing industry standard."According to Brian Nowak, an analyst at Morgan Stanly, “80 percent (38 million) of current U.S.Prime members do not shop at Whole Foods." Given that statistic, he expects Amazon tointegrate the one to two hour Prime Now offering into Whole Foods. Prime has been Amazon'sbiggest advantage in the online retail space. Prime customers spend more money and makemore purchases than Amazon's non-Prime customers, and Amazon is constantly adding newfeatures to the service. Amazon is the first choice retailer for 93 percent of Americans, accordingto a recent survey done by RBC.

Threats

Buybacks, a strategy frequently deployed in the last couple of years to boost share prices, is onthe decline. Spending on buybacks, however, has slipped over the past six months. Investment-grade-rated corporations repurchased $64 billion worth of stock in the second quarter, down from$84 billion in the fourth quarter of 2016, according to data compiled by Bank of America MerrillLynch. The decline puts added pressure on the stock market, which has become accustomed tobuybacks pushing shares higher during lean times when real fundamental catalysts aren'tpresent. Ironically, one of the main reasons for the decrease in repurchase spending is that thelofty stock prices that have helped push the market to record highs are making it more expensiveto conduct more buybacks.Equifax’s unprecedented data breach, which potentially exposed 143 million American’s personalinformation last week, has already cost the credit agency $9.75 billion in market value, and thestock could plunge even more, Morgan Stanley says. In its updated bear case out Friday, theinvestment bank asks, "Where’s the floor?" and says Equifax’s stock could plunge as low as $50a share, about one-third of where it was before the hack.Oracle forecasts current-quarter adjusted profit largely below Wall Street's estimates andindicated to slowing growth in its soaring cloud business.

The Economy and Bond MarketStrengths

The outlook for faster U.S. inflation is at its highest since the spring. Breakeven rates, whichmeasure the yield spread between treasuries and similar Treasury inflation protected securities,

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on five and 10 year notes surged after the August CPI report showed an acceleration. The indexrose 0.2 percent month-over-month and matched estimates after five months of missing themark. Core prices were up 1.7 percent year-over-year, beating estimates.

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The U.S. Empire Manufacturing Index for the month of September showed a slight dip to 24.4from 25.2 last month but that was much better than expectations for 18.0.The NFIB Small Business Optimism Index for August increased to 105.3, above expectations of104.8.

Weaknesses

U.S. retail sales fell in August, likely impacted by Hurricane Harvey fallout on motor vehiclepurchases. Retail sales dropped 0.2 percent last month, the biggest decline in six months. Datafor July was revised to show sales increasing 0.3 percent instead of the previously reported 0.6percent increase.U.S. industrial output fell in August for the first time since January as Hurricane Harvey batteredoil, gas and chemical plants along the Gulf Coast and a cool summer sapped utility demand inthe east, the Federal Reserve said on Friday. Overall industrial production fell 0.9 percent overthe month after a July increase revised upward to 0.4 percent.Consumer confidence declined in September, after hitting a seven-month high in August. Theconsumer sentiment index, a survey of consumers by The University of Michigan, recorded 95.3in its preliminary report for the month. Hurricanes Harvey and Irma have greatly impactedexpected economic conditions in September.

Opportunities

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Wednesday's FOMC meeting will take center stage in the week ahead. The Federal Reserve iswidely expected to keep rates on hold, but announce plans to unwind its balance sheet. Investorswill also be looking for any changes to the Fed's economic and interest rate forecasts.In the euro area, September's flash PMIs next Friday will give a timely update on the economy.Recent PMIs have been pointing to firm GDP growth.The September preliminary U.S. Manufacturing PMI out on Friday is expected to show continuedrobustness.

Threats

Moody’s slashed Hartford, Connecticut’s general obligation rating two notches to Caa1 from B2and put it on review for additional downgrades. According to the firm, the city is in a “precarious”liquidity position with debt service payments every month “compounding the possibility of defaultat any time.”An increasing number of U.S. cities are saying it’s becoming a struggle to make ends meet.Nearly a third of those surveyed by the National League of Cities said they are less able to covertheir economic needs this year than they were in 2016, the most in five years. Aginginfrastructure and the cost of employee wages and benefits are the biggest drags on municipalfinances, officials said.August’s Leading Index out on Thursday is expected to contract from the previous month’s,pointing to a slowdown.

Gold MarketThis week spot gold closed at $1,321.28, down $25.17 per ounce, or 1.87 percent. Gold stocks, asmeasured by the NYSE Arca Gold Miners Index, ended the week lower by 4.44 percent. Junior-tieredstocks outperformed seniors for the week, as the S&P/TSX Venture Index came in higher by 0.99percent. The U.S. Trade-Weighted Dollar finished the week slightly higher by 0.45 percent.

Date Event SurveyActual PriorSep-13GE CPI YoY 1.80% 1.80% 1.80%Sep-13US PPI Final Demand YoY 2.50% 2.40% 1.90%Sep-13CH Retail Sales YoY 10.50%10.10%10.40%Sep-14US Initial Jobless Claims 300k 284k 298kSep-14US CPI YoY 1.80% 1.90% 1.70%Sep-18EC CPI Core YoY 1.20% -- 1.20%Sep-19GE ZEW Survey Current Situation 86.3 -- 86.7

Sep-19GE ZEW Survey Expectations 12 -- 10Sep-19US Housing Starts 1175k -- 1155kSep-20US FOMC Rate Decision (Upper Bound)1.25% -- 1.25%Sep-21US Initial Jobless Claims 300k -- 284k

Strengths

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The best performing precious metal for the week was gold, down slightly 1.86 percent. JeffChristian, managing director of research consultancy CPM Group, thinks that the price of gold isheaded much higher in the next three years, reports TheStreet.com. “We thought gold would finda bottom in 2015 and that by 2020 we could see gold set a new record gold price in nominalterms, above $1,700 an ounce,” Christian said.According to Deutsche Bank strategist George Saravelos, it doesn’t look like the U.S. dollar willsee a reversal of fortunes anytime soon, reports Business Insider. Since January, the greenbackhas lost around 11 percent versus a basket of peers. In a note to clients, Saravelos says thereare a couple of key changes showing that the dollar is in trouble. The first is that the market stillisn’t pricing additional rate hikes and the second is that the drivers of the foreign exchangemarket are seeing a fundamental shift. If the dollar stays low, gold could continue to shine.This week, Victoria Gold Corp. announced analytical results from its ongoing 2017 Dublin Gulchcampaign, specifically the Olive zone. Exploration drilling at Olive included 3.3 meters of 1.5 g/tgold, highlighting that additional, near-Olive gold mineralization exists at Dublin Gulch andvalidating the Potato Hills Trend mineralization model, according to a press release.

Weaknesses

Although all of the precious metals were down this week, the worst performer was platinum,dropping 3.83 percent. Platinum investors were spooked by Impala Platinum’s annual resultsearlier in the week, reports Business Day, as production came in below targets. In addition,Bloomberg reports that the company’s Zimbabwe unit has authorized the handover of 24,000hectares of land to the Zimbabwe government.Gold weakened on Thursday following the announcement of better-than-expected U.S. inflationdata for August, reports Kitco News. The U.S. consumer price index (CPI) rose 0.4 percent inAugust, led by increased gasoline and shelter costs. Gold prices plunged in an immediatereaction to the data released by the U.S. Labor Department.Canadian mining company Eldorado Gold on Monday threatened to suspend a major investmentin Greece in 10 days, reports the Associated Press, accusing the government of delaying permitsand licenses. Eldorado is one of Greece’s largest foreign investors, but its mines in the northernpart of the country have faced “vehement opposition from parts of local communities onenvironmental grounds, with protests often turning violent,” the article reads. The decision willtake effect September 21 unless talks with the government end permit delays.

Opportunities

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Alamos Gold announced its friendly acquisition of Richmont Mines, whereby Alamos will acquireall of the issued and outstanding shares of Richmont. The arrangement further enhancesAlamos’ position as a leading intermediate gold producer, reports Bloomberg. The acquisitionprovides Alamos with a high-quality, free cash flowing mine in a world class jurisdiction. In othercompany news, Centerra Gold has reached a comprehensive settlement with the government ofKyrgyz Republic, where the company agreed to make a one-time lump sum payment totaling $57million. The company will continue to work closely with the government to expeditiously satisfythe strategic agreement. U.S. Global’s gold portfolio manager Ralph Aldis is doing his own boots-on-the-ground review of another company this week, Klondex Mines. The photo below shows alarge gold bearing quartz vein in the company’s Hollister Mine, specifically from the Gloria Vein.After China outlawed new initial coin offerings last week, the Asian nation said it will ban thetrading of bitcoin and other virtual currencies on domestic exchanges, reports Bloomberg. Whiledealing another large blow to the cryptocurrency market, this could mean a rush to gold asinvestors move back to the yellow metal as a store of value. In addition, the People’s Bank ofChina has done trial runs of its own prototype cryptocurrency, the article continues, taking it astep closer to being the first major central bank to issue digital money.Amid a recent rally in the price of gold, many metal producers are seeking acquisitions.Shandong Gold Group, one of the biggest Chinese miners of the metal, is considering bids forEMR Capital’s Indonesian gold and silver mine, reports Bloomberg. China Gold International isalso exploring a possible bid. EMR Capital is a resources-focused private equity firm, and its saleof the Martabe mine could fetch as much as $1.5 billion, the article continues.

Threats

Rising gold prices, along with government measures to enforce India’s jewelry industry, arestifling demand in the world’s second-largest bullion market, reports Bloomberg. Typically buyingexplodes at the start of the traditional festival season of Diwali, but as bullion climbs nearly 10percent on the Indian market this year, paired with global tensions and reduced chances of afurther hike in U.S. rates, the demand outlook has soured, the article continues.

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According to Bloomberg, the U.S. is poised to experience its first annual decline in solar-panelinstallations, as a drop in rooftop demand slows growth in the world’s second-biggest market.Possibly adding to the decline is a trade complaint that could prompt President Trump to imposetariffs on imported panels. Imposing tariffs would mean “installations would significantly drop,”the article continues.An ex-trader with UBS Group has been arrested and charged with fraud and conspiracy over hissuspected role in manipulating the price of precious metals, reports Bloomberg. Andre Flotron, aSwiss citizen, is the second person publicly charged in the U.S. investigation into the fixing ofgold, silver, platinum and palladium prices, and could face up to 25 years in prison. “Flotron’sarrest extends the Justice Department’s examination of whether bank traders conspired to riginterest-rate benchmarks and manipulate currency exchanges from 2008 to 2013,” the articlereads.

Energy and Natural Resources MarketStrengths

Crude oil was the best performing major commodity this week rising 5.05 percent. Thecommodity breached technical resistance levels after the International Energy Agency (IEA)suggested the global demand outlook may be brighter than initially expected.The best performing sector this week was the S&P 1500 Oil & Gas Explorers and DevelopersIndex. The index of major producers rose 6.82 percent as the outlook for prices improves andthey rebound from the storm that brought the U.S. energy hub on the Gulf Coast to a standstill.San Juan Basin Royalty, a Texan trust that collects royalties from overriding interests in oil andgas properties in the San Juan basin of New Mexico, was the best performing stock in thebroader resource market this week. The stock rallied 12.84 percent nearing a 52-week high,

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tracking oil and natural gas prices, both of which posted their best weekly advance in at least twomonths.

Weaknesses

Copper was the worst performing major commodity this week dropping 2.93 percent. The metalheaded for its lowest close in almost a month, after data showed slowing growth in Chinesefactory output, fixed asset investment and home sales, hurting the demand outlook.The worst performing sector this week was the TSX Diversified Metals and Mining Index. Theindex fell 8.25 percent following a sharp drop in copper and industrial metals prices on the backof weaker macro data out of China.The worst performing stock for the week was Fresnillo PLC. The Mexican silver and goldproducer dropped 11.10 percent in response to weaker precious metals prices. Fresnillo wasamongst a slew of London listed precious metals companies which were affected by outsizedmomentum selling relative to its North American and Australian peers.

Opportunities

The IEA has revised upwards its growth estimate for crude oil to 1.6 million barrels per day. TheAgency cites stronger-than-expected OECD demand growth, particularly in Europe and the U.S.Despite acknowledging that hurricanes Harvey and Irma may slow U.S. oil demand growth in thethird quarter of 2017, the IEA revised its demand projections upwards for the third consecutivemonth.

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India's August gold imports are said to have surged 92 percent year-on-year. The South Asiannation imported 41.2 metric tons of gold in August, nearly doubling the 21.5 metric tons importedin the same month last year. The growth in demand for gold coincides with reports of higherinflation in food and fuel products which drove India’s inflation to 3.24 percent in August from1.88 percent in July.U.S. gasoline inventories drop the most since at least 1990 as the nation recovers from theeffects of hurricanes Harvey and Irma. The Department of Energy, in its weekly inventory report,showed a shocking draw of 8.4 million barrels from commercial gasoline inventories. The largestinventory draw since 1990 was fueled by lower refinery output as well as a spike in gasoline

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demand.

Threats

Chinese macro data for August published this week has disappointed macro analysts. Industrialoutput grew by 6 percent in August, far below the 6.6 percent increase expected by economistsand bucking the trend shown in recent PMI surveys. Fixed asset investment rose 7.8 percent,also below consensus expectations for an 8.2 percent rise. Both industrial metals and basemetals dropped on the announcement, suggesting the current price momentum may continue tofade as fundamentals do not support further strength.China’s yuan fixing is back in focus after the central bank fixed the currency at a weaker-than-expected level for the third day in a row Wednesday. The removal of a reserve requirement ruleon the trading of foreign-exchange forwards, are fueling bets that authorities want to limit gainsafter the onshore yuan surged more than 4 percent against the dollar in the three monthsthrough September 7. A weaker yuan increases the domestic price of imported iron ore andcopper, and slows down demand for these raw commodities.OPEC’s crude output may continue to rise as Nigeria says it will resist any attempts to curb its oilproduction when it meets with OPEC and Russia later this month, according to a Financial Timesstory. The African producer, which has been absent from the OPEC supply cut agreement as itstruggled to recover production following a series of terrorist attacks on its infrastructure, said itwill not join any supply agreement at least until March 2018, posing a threat to the cartel’s effortsto cut global supplies and boost crude prices toward $60 a barrel.

China RegionStrengths

The Philippines is the best performing country in the region this week, up 1.97 percent. Moody’sInvestors Service forecast that Philippine economic growth will exceed 6 percent until next year.The group added that conflict in the south, along with a deadly drug war, pose a rising risk butare unlikely to derail the economy. Moody’s cites the government’s focus on infrastructure,buoyant private sector investment and the recovery in external demand as helping the Philippinemarkets. The country is now Morgan Stanley’s top choice in Southeast Asia.The Malaysian ringgit was the best performing currency in the region this week, up 26 basispoints.Information technology was the best performing sector this week, up 4.35 percent.

Weaknesses

Singapore was the worst performing country in the region this week, down 59 basis points.The Chinese renminbi was the worst performing currency in the region this week, down 86 basispoints. China’s policy makers are pushing back against a surge in the yuan by lifting rules thatmade betting against the currency expensive. Effective Monday, financial institutions will nolonger need to set aside cash when buying foreign exchange for clients through currency

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forwards, the official Financial News reported, citing a People’s Bank of China notice. This newmeasure may decelerate the recent surge in the yuan and as a result may be beneficial forexporters. However, this measure may be negative for commodities importers.Telecommunications was the worst performing sector this week, down 1.19 percent.

Opportunities

According to Markit Economics, China’s Caixin Services PMI rose to 52.7 in August, the highestimprovement since May 2017, while the Caixin Manufacturing PMI came in at a six-month highof 51.6. The country’s official manufacturing PMI came in above expectations at 51.7. China’smanufacturing sector has been posting solid growth thanks to domestic infrastructure spendingand a recovery in exports, reports CNBC.

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Inflationary pressure emanating from the factory to the world is proving more resilient thaneconomists anticipated. China’s producer price inflation (PPI) accelerated to 6.3 percent inAugust from a year earlier, exceeding all but one of 38 estimates in Bloomberg’s survey ofeconomists. The surprise strength gives support for global inflation spanning from metals to fueland shows the effects of resilient domestic demand and reduced supplies of some commodities.China’s nominal GDP growth year-over-year has a high correlation to China PPI year-over-year.Bloomberg reports that China’s consumer and household confidence is the highest since 1996.The consumer confidence index climbed to 114.6 in July, up from 100 in May. Per capitadisposable income rose 7.3 percent year-over-year in the first half.

Threats

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North Korea threatened to inflict the “greatest pain and suffering” on the U.S. should the UnitedNations Security Council impose fresh sanctions against the country over its latest nuclear test.The U.S. is pushing China to exert more influence on North Korea. China is concerned about anymoves that could bring about the collapse of the North Korean regime, a scenario that wouldlikely lead to greater regional instability and potentially put a U.S.-backed Seoul government on itsnortheastern border. China is facing a delicate balancing act here, but it did vote in favor of UNsanctions on Korea that left out an oil embargo. China has also taken some bilateral moves, suchas not buying North Korean coal.China’s relations with the U.S. remain in flux. The U.S. just rejected a China-led purchase of U.S.chipmaker Lattice on national security grounds. Chinese officials warned that blocking sensitiveinvestments should not be used as a protectionist tool. Trade will likely be an ongoing stickingpoint in bilateral relations.Disappointing China data released Thursday: investment, industrial output and retail sales inAugust point to a second-half slowdown. During the first eight months of this year, investment infixed assets in urban areas such as factories and highways grew at the slowest pace in almost18 years, up 7.8 percent from a year ago, according to the National Bureau of Statistics(NBS).Meanwhile, industrial output in August registered the weakest growth of this year, up 6percent from a year ago, the NBS said. Retail sales rose 10.1 percent from the same month in2016, the smallest gain in six months.

Emerging EuropeStrengths

The Czech Republic was the best performing country this week, gaining 2.9 percent. CzechNational Bank’s Chief Economist Tomas Holub said that rising inflation may prompt the centralbank to hike rates further this year. The bank’s main rate was raised by 20 basis points from therecord low of 0.5 basis points at the last meeting in August. The Czech Republic is the firstEuropean country to raise rates.The Russian ruble was the best relative performing currency this week, losing 40 basis pointsagainst the U.S. dollar. Historically, the correlation between the ruble and Brent crude oil is high.In the past five days the price of Brent increased by 3 percent.Energy was the best performing sector among eastern European markets this week.

Weaknesses

Greece was the worst performing country this week, losing 3.3 percent. The third review maytake longer to complete. Until now, the government has targeted December for the completion ofthe review. The official’s comments indicate that more time will be needed to complete a total of113 prior actions, 95 of which have been completed by Christmas, wrote Alex Boulougouris fromWood & Company.The Hungarian forint was the worst performing currency this week, losing 1.6 percent against theU.S. dollar. European currencies fell while the dollar gained on increased expectations of ratehikes in U.S. later this year.

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Consumer staples was the worst performing sector among eastern European markets this week.

Opportunities

Germany will go to the polls on September 24 in a federal election. Angela Merkel’s ChristianDemocratic Union Party (CDU) is leading in the polls. Record-high employment, rising real wagesand low borrowing costs will continue to support consumer spending and economic growth.Turkey’s economy had a strong second quarter and growth is set to be even quicker in the thirdquarter, according to Capital Economics. Second quarter GDP was reported at 5.1 percent,exports and fixed investment were the main drivers of the economy.The Russian central bank resumed monetary easing, cutting its main rate by 50 basis pointsfrom 9.0 percent to 8.5 percent, after inflation fell to a record low. Central bank’s governor, ElviraNabiullina, has said the key rate can reach its nominal equilibrium level of 6.5 to 7 percent onceinflation is stable at 4 percent for one to two years. Many analysts expect more cuts to follow.

Threats

Russian equities are underperforming emerging markets after a strong 2016. In 2016, the MSCIemerging markets index rose 11.5 percent while the MSCI Russia index gained 56 percent. Thisyear, the MSCI emerging markets index is up 30 percent, while Russia is slightly down. Thisunderperformance should continue, says Win Thin from the BBH Global Currency StrategyTeam, as the group’s emerging markets equity model has Russia in an underweight position. Thecorrelation between Russian stocks and oil prices has fallen near 0.10, well below 0.70 seen in2015 and 2016.

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Putin is conducting a military exercise that is alarming officials across Europe. Russia sentthousands of troops into Belarus to defend against an imaginary invasion from the west. Belarussays only 12,700 troops are involved, a level just below the 13,000 that would trigger compulsoryinternational monitoring. Germany and Poland put the real total at more than 100,000. Putin maybe using this military move as an excuse to deploy more weaponry and personnel along Russia’sborders and keep them there, according to a presidential spokeswoman in Vilnius.Reuters cited Fitch analyst Ed Parker, who said the stability of Italy's government remains asource of risk for the euro zone. He added its biggest concern in Italy, is that we might not get a

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stable government. Furthermore, he highlighted that we can't completely discount the biggerdownside risk of a euro-sceptic party being part of a coalition.

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