Small-Cap Mining Stocks, Big-TimeOpportunityJune 17, 2017

by Frank Holmesof U.S. Global Investors

Last month I told you about the upcoming rebalance of the hugely popular VanEck Vectors Junior GoldMiners ETF (GDXJ), and how it would distress shares of junior, small-cap mining stocks. I said thenthat the rebalance could create some excellent opportunities for astute investors to accumulate high-quality, well-managed producers at discount prices.

That day has finally arrived, bringing with it a tsunami in the junior resource space, as I told CollinKettell on Palisade Radio this week. It’s a buyer’s market—if you know what you’re looking for. The lasttime the GDXJ underwent a rebalance of this magnitude was in December 2014, so I see this as a

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rare event savvy investors shouldn’t miss out on.

But first a reminder of what’s been happening with the GDXJ. Basically, it had become too massive forits underlying index—composed mostly of Canadian junior gold producers—with assets rising close to$5.5 billion earlier this year, up from $1 billion only last year.

Mo Money Mo Problems

Normally this wouldn’t be such a concern. But the GDXJ was getting precariously close to owning a 20percent share of several names in its index, which would have triggered all sorts of regulatory and taxconundrums in Canada and the U.S.

So the fund made several adjustments to its methodology, including raising the market cap threshold ofallowable companies to $2.9 billion, up sharply from $1.6 billion. This means it can now hold largeproducers that don’t appear in its index, the MVIS Global Junior Gold Miners Index. It also means thata number of smaller constituents were down-weighted or divested altogether, giving investors lessexposure to junior miners than what the fund’s name implies.

Before any of this took effect, though, many investors, hedge funds and other market participantsacted on the rebalance news by indiscriminately selling down their junior mining assets. Thisintroduced fresh volatility to underlying stocks and depreciated prices.

The selloff, I might add, was done mostly without regard for the phenomenal fundamentals and growthprofiles some of these companies reported.

These Miners Get High Grades

Take one of our favorite names, Wesdome Gold Mines. The Toronto-based producer has beenoperating in Canada for 30 straight years as of 2017 and currently carries no debt. Two of its mines,Eagle River and Mishi, are among Canada’s highest-grade gold mines. Last summer, the companymade headlines when it discovered gold at its Kiena property in Quebec, sending its stock up anamazing 49 percent to $2.24 on August 25.

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When Wesdome was added to the GDXJ in March, it cast newfound attention on the $417 millioncompany. Only a month later, the rebalance was announced, and since then, its stock has eased about19 percent.

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I see this as a can’t-miss opportunity for retail and institutional investors to start nibbling on Wesdomeand other junior miners that have been similarly knocked down only because of fund flows.

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That includes Gran Colombia Gold, the largest gold and silver producer in Colombia, and KlondexMines, whose Fire Creek Mine in Nevada was estimated to be the highest-grade underground goldmine in the world. (According to IntelligenceMine, Fire Creek averaged 44.1 grams per metric ton (g/t)in 2015, double the ore grade of the world’s number two project, Kirkland Lake Gold’s Macassa Mine,at 22.2 g/t.)

Gran Colombia announced this week that it produced 15,444 ounces of gold in May, representing anew monthly record for the company. This brings the total amount for the first five months of the yearto 68,783 ounces, an impressive 21 percent increase over the same period last year. The Canadian-based producer has a very attractive convertible bond that pays monthly.

I’ve frequently praised Klondex for its frugality, strong revenue growth and exceptional managementteam. The last time I visited Vancouver, I had the opportunity to chat one-on-one with its president andCEO, Paul Andre Hurt, who has 30 years of experience in high-grade mining. Not only is Paul a highly-respected chief executive in the mining space, he’s also a devoted father of five.

A Golden Opportunity

The GDXJ rebalance represents a rare opportunity to accumulate high-quality junior producers atdiscount prices. I always recommend a 10 percent weighting in gold—5 percent in gold stocks ormutual funds, 5 percent in bars, coins and jewelry.

Commodity prices have lately underperformed equities mostly on subdued oil demand growth, with theS&P GSCI commodity index falling about 4 percent over the last month. If we separate the indexcomponents, however, we see that precious metals have posted positive gains year-to-date along withindustrial metals.

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As I mentioned last week, gold imports in China and India, the world’s top two consumers of the yellowmetal, have advanced strongly this year on safe haven demand. China boosted its gold purchases fromHong Kong as much as 50 percent this year to 1,000 metric tons, the most since 2013. India’s importsrose fourfold in May compared to the same month last year as traders fear a higher tax rate on jewelry.

Index Summary

The major market indices finished mixed this week. The Dow Jones Industrial Average gained0.53 percent. The S&P 500 Stock Index 0.06 percent, while the Nasdaq Composite fell 0.90percent. The Russell 2000 small capitalization index lost 1.05 percent this week.

The Hang Seng Composite lost 1.60 percent this week; while Taiwan was down 0.42 percent andthe KOSPI fell 0.83 percent.The 10-year Treasury bond yield fell 4 basis points to 2.15 percent.

Domestic Equity Market

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Strengths

Industrials was the best performing sector of the week, increasing by 1.64 percent versus anoverall decrease of 0.06 percent for the S&P 500.Whole Foods Market was the best performing stock for the week, increasing 19.45 percent.H&R Block set a new high after fourth quarter profit beat expectations. The company reportedfourth quarter earnings per share (EPS) of $3.76, up from $3.16 in the prior year period.Analysts expected EPS of $3.53.

Weaknesses

Information technology was the worst performing sector for the week, falling 1.16 percent versusan overall decrease of 0.06 percent for the S&P 500.Kroger was the worst performing stock for the week, falling 27.58 percent.Institutional Shareholder Services is calling for Mylan investors to unseat all of the company’sincumbent board of directors. The shareholder advisory firm has cited “material failures of riskoversight,” including missteps during a pricing controversy over its EpiPen allergy shot that hasdragged the company’s stock price down.

Opportunities

Amazon.com is buying Whole Foods Market in a deal that shocked the grocery industry and setanalysts speculating about the next move in a huge sector that Amazon has been trying to crackfor a decade. The purchase gives the e-commerce giant, which has been experimenting withvarious physical grocery concepts and online food delivery, an instant footprint of 460 high-endbrick-and-mortar stores across the U.S., in Canada and in the U.K.Apple’s latest project is to turn your iPhone into a one-stop shop for all your medical info, CNBC

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reports. The firm reportedly wants your iPhone to hold everything from a record of your doctor'sappointments to your prescriptions. Additionally, CEO Tim Cook confirmed Apple is working onself-driving car technology. He said the company views it "as the mother of all AI projects."Morgan Stanley analyst Matthew Harrison reiterated his “overweight” rating on shares of Alexionafter Paul Clancy leaves Biogen to fill the open CFO position. The analyst sees "Clancy as ahighly credible choice that should help to remove fears around near-term Soliris stability". PaulClancy comes to Alexion from Biogen where he had been CFO for 10 years. The analyst seesClancy as a strong CFO who is well liked by investors and should be viewed as a stabilizing forcefor the company.

Threats

A winning trade this year has been to short volatility in the market. However, JPMorgan's quantstrategist warns it's not going to last, and when the shift comes, it's going to hurt bad. A bigreason why shorting volatility can be dangerous is the ever-present possibility that the market willmake an unexpectedly sharp move, according to Marko Kolanovic, the firm's global head ofmacro quantitative and derivatives strategy. The best recent example of this came on May 17,when the S&P 500 slipped 1.8 percent, only to make back most of the loss over the followingweek. Still, the damage to volatility bears was done, with the VIX — also known as the S&P 500fear gauge — spiking as much as 46 percent to 15.56. He sees this happening if the VIX, whichhas been hovering between 10-12, spikes up to 20, near the average level for the gauge. So whyis volatility so low in the first place? Kolanovic argues it's due to a series of unsustainable factors,including low correlations. With stocks moving more independently of one another, it's moredifficult for them to gather momentum in a particular direction, keeping price swings subdued.However, he thinks the current low levels of volatility are not a new normal and will not last longgiven the amount of leverage, rising rates, and impending unwinding of the Fed’s balance sheet.Credit Suisse put together a list of the large-cap stocks that hedge funds are dropping. These arestocks that, in many cases, a lot of funds still own, but that saw a big reduction in the number offunds investing in them during the first quarter of this year. A large number of hedge fundsselling a stock could be an indicator of a not-so-bright future for the company. The list is asfollows: Targa Resources, General Motors, Gilead Sciences, United Parcel Service, ReynoldsAmerican, Time Warner, Target, General Electric, Bristol-Myers Squibb, Mead Johnson Nutrition,Qualcomm.Snap has been struggling since its IPO. The company is still working to court the marketingindustry. A mere 7 percent of marketers said they used Snapchat in the first quarter of 2017,according to a recent Social Media Examiner survey charted for us by Statista. That leaves Snapfar behind Facebook, its direct competitor, which was used by 94 percent of marketers. However,everyone tends to trail Facebook. Perhaps more tellingly, other social networks like Twitter andPinterest also attract a greater share of marketers than Snap.

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June 15, 2017One Easy Way to Invest in the “AsianCentury”

June 12, 2017Hope for the Best but Prepare for the Worst (with Gold andMunis)

June 6, 2017In Gold WeTrust

The Economy and Bond MarketStrengths

China's retail sales rose 10.7 percent year-over-year in May, according to data releasedWednesday by the National Bureau of Statistics. That was above the 10.6 percent thateconomists had anticipated. China is the world’s second largest economy.Manufacturing in New York state rebounded this month to the highest level since 2014, anothersign of strength for America's factories. The Empire State Index only measures sentiment in NewYork, but economists track it because it provides an early read on factory output nationwide. TheEmpire State Manufacturing Index climbed to 19.8 after falling to minus-1 in May.The NFIB’s latest Small Business Survey was released this week, showing a continuation of thehistorically high levels of business confidence that emerged following the November election. TheMay survey came in at 104.5, unchanged from the previous month.

Weaknesses

The consumer price index (CPI) fell more than expected in May, dropping 0.1 percent andmissing the forecast for a flat reading. It rose 1.9 percent year-on-year, less than the 2.2 percentexpected.Retail sales fell 0.3 percent in May, the most in 16 months.The preliminary University of Michigan Sentiment Index for June came in at 94.5, belowexpectations of 97.0.

Opportunities

The Federal Reserve raised its growth outlook for the U.S. economy. It now expects real GDP torise 2.1 percent to 2.2 percent in 2017, compared to its previous outlook of 2.0 percent to 2.2percent. It also expects the unemployment rate to fall to 4.2 to 4.3 percent this year, down fromits previous projection of 4.5 percent to 4.6 percent.The all-important Eurozone flash purchasing manager’s index (PMI) readings will be released

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next Friday. Recent PMIs have been strong and consistent with over 2 percent real GDP growthfor the euro area.The Leading Index coming out next week will be an important gauge of future expectations for theeconomy. The consensus is for a positive 0.4 percent, ahead of the previous 0.3 percent mark.

Threats

The Federal Reserve raised the target range of the federal funds rate by 25 basis points to 1percent to 1.25 percent. While it maintained its forecast for one more hike this year, it alsoacknowledged that "inflation has declined recently." The divide between the Fed and the bondmarket is getting wider by the day. Fed Chair Janet Yellen characterized the recent weakeningtrend in inflation as fleeting. However, bond traders think otherwise. The rally in the fixed-incomemarkets that has pushed yields on 10-year Treasury notes down to as low as 2.10 percent onWednesday from 2.63 percent in March suggests traders believe the slowdown in inflation ismore than transitory, countering the Fed’s confidence in stronger growth and labor markets. Theconsumer price index data released this week was particularly meaningful, as the core readingcame in 0.1 percent below forecasts, the third miss in a row. Year-over-year, the reading came inat 1.9 percent, below the expected 2.2 percent. Retail sales data released at the same time wasalso weak.

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Treasury Secretary Steven Mnuchin on Tuesday set up the possibility of a government shutdown.His comments echoed a lot of rhetoric coming from the Trump White House. During a hearing

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before the Senate Budget Committee, Mnuchin was asked by Democratic Senator Tim Kaineabout a May 2 tweet from President Trump that suggested the federal government needs a "goodshutdown." His response: "It’s an unfortunate outcome. At times there could be a goodshutdown, at times there may not be a good shutdown. There could be reasons at various timeswhy that is the right outcome."The Fed laid out its plan to unwind its $4.5 trillion balance sheet at its latest meeting. The basicidea is that the Fed will stop reinvesting the principal of Treasury securities when they mature.Once the program begins, expected to be later this year or next year, the Fed will reinvest theprincipal of maturities only if it gets back more than $6 billion in principal returned in a givenmonth. The "cap" will then be increased by $6 billion every three months until it reaches $30billion a month. This is likely to push yields up, hurting fixed-income securities and creatingtighter financial conditions.

Gold MarketThis week spot gold closed at $1,253.75, down $12.88 per ounce, or 1.02 percent. Gold stocks, asmeasured by the NYSE Arca Gold Miners Index, ended the week lower by 4.04 percent. Junior-tieredstocks outperformed seniors for the week, as the S&P/TSX Venture Index fell only 1.93 percent. TheU.S. Trade-Weighted Dollar Index finished the week slightly lower by 0.12 percent.

Date Event SurveyActualPriorJun-13ZEW Survey Curent Situation 85.0 88.0 83.9Jun13 ZEW Survey Expectations 21.7` 18.6 20.6Jun-13PPI Final Demand YoY 2.3% 2.4% 2.5%Jun-13China Retail Sales YoY 10.7% 10.7% 10.7%Jun-14Germany CPI YoY 1.5% 1.5% 1.5%Jun-14U.S. CPI YoY 2.0% 1.9% 1.5%Jun-14FOMC Rate Decision-Upper Bound1.25% 1.25% 1.00%Jun-15Initial Jobless Claims 241k 237k 245kJun-16Eurozone CPI Core YoY 0.9% 0.9% 0.9%Jun-16Housing Charts 1220k 1092k 1156kJun-22Initial Jobless Claims 240k -- 237kJun-23New Homes Sales 593k -- 569k

Strengths

The best performing precious metal for the week was gold, off just 1.02 percent despite a Fedrate hike. The Fed may not be in a position to continue with multiple rate hikes. Mike McGlone, BICommodity Strategist, points out the current situation that both crude oil futures and Treasurybond yields are falling. Since 1983, the Fed has never sustained a rate hike cycle while bothcrude and Treasuries are falling.

Gold has risen from a three-week low as investors digest the latest rate hike and anticipate theprobability of additional rate hikes, reports Bloomberg. Suki Cooper, an analyst with StandardChartered, writes, “If the market starts pricing in the end to the current hiking cycle, this would

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remove a major headwind for gold and allow prices to breach the stubborn $1,300 threshold in asustained move higher.”Bloomberg reports that public sector investors increased their net gold holdings to an estimated31,000 tons last year, an increase of 377 tons. This is the highest level since 1999.

Weaknesses

The worst performing precious metal for the week was silver with a loss of 2.90 percent. Moneymanagers cut their net-long by about 10 percent this past week. For the second week in a row,gold traders and analysts surveyed by Bloomberg are bearish. This is the first time survey resultshave indicated two-week run of bearish outlook since December.Gold futures have had the longest losing streak in three months, as investors have anticipatedthe Fed’s actions this week. Bullion futures for August delivery closed down for the fourth straightsession earlier this week.Palladium has declined after what some analysts see as an unjustified surge. The overall automarket, including the Chinese auto market, is a key demand driver for palladium, and that marketis faltering.

Opportunities

As investors have sensed the Fed’s reluctance to continue multiple rate hikes, bullish goldinvestors are increasing their holdings in gold. Bloomberg reports that investors have added $675million into the SPDR Gold Shares physical bullion ETF, taking the ETF to a six-month high. Inaddition, gold futures have climbed 10 percent this year on doubts that President Donald Trump’seconomic agenda will make it through Congress and uncertainty around the U.K.’s Brexit plan.

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India’s gold market appears to be recovering after the demonetization scheme last fall and withefforts to improve transparency, reports Bloomberg. Some new policies under considerationinclude the start of a spot bullion exchange to make the supply of gold more transparent. Inaddition some taxes could be reduced, such as the import tax of 10 percent and a gold tax of 3percent versus the 5 percent that some had feared.Barron’s reports that ANZ’s senior commodity strategist Daniel Hynes thinks gold can gold above$1,250 in the short term and break through $1,300 this year. Noting economic conditions and thesigns of an improving market in China and India, Hynes goes on the say that the gold price mayactually rise above $2,000 by 2025.

Threats

Capital Economics takes the opposing view that the Fed will continue to raise rates, more so thanthe market seems to anticipate, and that gold will fall in the remainder of the year. The firmpublished a note this week stating their gold price forecast of $1,100 by the end of the year.Investigations into Trump are expanding to now include whether he may have attempted toobstruct justice, and exploring whether there is any evidence of financial crimes.The South African government’s new regulations requiring local mines to be at least 30 percentowned by black people has spurred the rand to weaken the most in more than two months.Nomura International Plc criticizes the new rule, stating that it will deter investment at a timewhen the country is in an economic recession. The controversy in Tanzania concerning AcaciaMining continues. Barrick Gold Corp., which owns 64 percent of Acacia, has stepped in to try toresolve the situation. Tanzanian President John Magufuli has demanded payment, and Barrickwill help Tanzania build a smelter. Shares in Acacia surged on the news.

Energy and Natural Resources MarketStrengths

Palladium was the best performing commodity this week, rallying 2.78 percent. Palladium pricesare on fire this year, so much so that the metal is the top performing commodity of 2017 so far,according to the Financial Post. The metal is up 32 percent for the year on the back of favorablefundamentals where mine production hasn’t been able to keep up with usage. It is expected thatsupply will lag demand for the sixth straight year. Although the future is anyone’s guess inregards to palladium’s price, a deficit in supply and growing demand for the metal are positivefundamentals.The best performing sector this week was containers and packaging. The group rose 1.77percent on the back of positive investor sentiment surrounding members of the index.Imperial Oil, a Canadian Petroleum Company, was the best performing stock this week, finishingup 5.04 percent. Despite tumbling oil prices, the stock rose on the back of being upgraded to abuy from the analyst community on Bay Street.

Weaknesses

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Copper was the worst performing commodity this week, dropping 3.07 percent. The commodityexperienced its biggest weekly drop since early May of this year on the back of disappointingeconomic data in the U.S. this week. According to an article in the Wall Street Journal, there isincreased doubt that President Donald Trump will be able to carry out planned infrastructurestimulus, which in turn will translate into weaker demand for the commodity.The worst performing sector this week was metals and mining. The group fell 13.03 percent onthe back of disappointing economic data out of the U.S. and the Federal Reserve’s rate hike thisweek.The worst performing stock for the week was First Quantum Minerals, a mining and metalscompany headquartered in Vancouver. The company fell 12.9 percent on the back of fallingcopper prices this week.

Opportunities

Solar power will kill coal faster than you think, according to an article written by Bloomberg thisweek. Solar power energy has been plagued for years as an inefficient and costly source ofenergy; however, the economics of the alternative energy source are now beginning to becomecheap enough to potentially push coal and even some natural-gas plants out of business fasterthan what was once previously forecasted. Seb Henbest, a researcher at BNEF in London, statedin the article that costs of new energy technologies are falling in a way that it’s more a matter ofwhen than if solar power and alternative energy sources gain more market share. A boom inalternative energy projects will require materials from various commodities which is a positiveread-through for raw material demand.

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Oil supply is estimated to outpace consumption in 2018, according to Reuters this week. OnWednesday, the International Energy Agency (IEA) said that growth in oil supply next year is

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expected to outpace an anticipated pickup in demand that will for the first time push globalconsumption above 100 million barrels per day (bpd). In addition, the IEA said that productionoutside of OPEC members may grow twice as quickly in 2018 as it will this year furtherincreasing consumption momentum.Copper demand for electric cars could rise nine-fold by 2027, according to Reuters this week. Asthe world gears up to increase production of electric vehicles, electric or hybrid cars and busesare expected to reach 27 million by 2027, up from 3 million this year, according to a studyconducted by the International Copper Association (ICA). The organization also stated in itsfindings that demand for electric cars could raise copper demand from 185,000 tonnes to 1.74million in 2027.

Threats

Crude oil chalks up its longest run of weekly losses since 2015, according to Bloomberg. Thisweek proved to be a very challenging one for crude oil as Libya restored production this week andthe surplus in U.S. inventories showed very little signs of subsiding. Bill O’Grady, chief marketstrategist at Confluence Investment Management, said that the current prices are an accuratereflection of fundamentals as inventory levels continue to remain stubbornly high and the factorsthat originally caused this trading range remain in place today.Decline in U.S. factory output shows manufacturing leveling off, according to Bloomberg thisweek. On Thursday, factory output declined 0.4 percent and industrial production came inunchanged after greatly disappointing analyst estimates of a 0.1 percent gain for factory outputand 0.2 percent gain for industrial production. This is concerning, as the month of April came inat the strongest clip in three years; however, this backtrack may be signaling that the U.S.manufacturing sector may be starting to slow down.The dollar index rallied this week after the Federal Reserve raised interest rates, hammering allcommodities. The Federal Reserve lifted its target policy rate by 25 basis points on Wednesdayto a range of 1 to 1.25 percent, according to the Financial Times, which lifted the U.S. dollar.Prices of oil, copper and most importantly gold all fell as a result of rising interest rates.

China RegionStrengths

Indonesia’s Jakarta Composite Index put on a strong showing for the week, rising 97 basis pointsin total return over the last five trading days; Vietnam’s Ho Chi Minh Stock Index also had a goodweek, rising 1.56 percent in the same time frame.According to a report from Citi Research, despite property controls tightening in China since mid-2016, leading indicators in the space have remained surprisingly resilient into mid-2017. Forexample, May 2017 floor space sales are up 10.2 percent year-over-year and floor space underconstruction continues to grow, up 3 percent year-to-date. Real underlying steel demand is mostcorrelated to floor space under construction, the report continues—and despite a near-termslowdown in land sales, Citi thinks these purchases still demonstrate confidence thatconstruction activity will remain strong in the medium-term.

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China ZhengTong Auto Services Hdgs. Ltd. (1728 HK) rose 18.39 percent for the week, thestrongest performer in the HSCI. Some analysts are optimistic regarding the company’s first-halfearnings potential following reports that BMW’s new 5 series pre-sales data demonstrate themodel is being “well received,” according to Bloomberg News.

Weaknesses

The Hang Seng Composite Index (HSCI) declined 1.52 percent over the last week, among thepoorest performances in the region as the index fell from its 52-week highs last week.Esprit Hdgs. Ltd. (330 HK) fell the most in the HSCI this week, declining by 25.68 percent in thattimeframe in presumed sympathy as HSBC cut its outlook for another apparel retailer, GlobalBrands (787 HK), which was the second worst performer in the HSCI, falling 20.87 percent.April year-over-year overseas remittances to the Philippines came in below expectations.Analysts were looking for a growth rate of 8.5 percent; instead, it declined by nearly 6 percent.

Opportunities

As China continues to attempt to ramp up its image and soft power globally, the Belt and Roadinitiative—which includes some $80 billion in projected financing—is playing out in part infrontier-bond underwriting, as places like the Maldives, Sri Lanka, and Papua New Guineadeepen ties with Chinese banks.

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Geely Auto will be “producing locally assembled Volvo cars” in Malaysia by 2022, the MalaysiaMail Online reports, citing International Trade and Industry Minister Ong Ka Chuan. Geelyrecently acquired a significant stake in the Malaysian state-backed automaker Proton. • The BOKGovernor Lee Ju-yeol stepped back from his talk earlier this week of tightening in Korea,reiterating that the Bank of Korea expects to maintain an accommodative policy in the near termeven as the U.S. Federal Reserve raised rates.

Threats

The government of Panama announced it is opening diplomatic relations with China this week,cutting the number of countries officially recognizing Taiwan’s government to a mere 20.There is a securitization boom in China, reports Reuters, as China struggles to wean its economyoff of excessive debt. The Asian nation’s market in asset-backed securities (ABS) surged 50percent in 2016 along and now exceeds a trillion yuan, the article continues. Analysts say thereare signs of risks building in this market however, saying that some securitized projects have hadover-optimistic cash flow projections. “It’s only a financial tool, but in recent years, ABS has beentrumpeted to the sky in China, and the rapid growth of the business even shares someresemblance to the budding stage of the U.S. subprime crisis,” said Song Qinghui, a Beijing-based economist.And finally, Dennis Rodman is in North Korea.

Emerging EuropeStrengths

Hungary was the best performing country this week, up 29 basis points.The Turkish lira was the best performing currency this week, up 94 basis points. The lira wasunfazed as the nation’s central bank left rates unchanged and indicated it will maintain a tightmonetary stance until the inflation outlook improves significantly.

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The health care sector was the best performing sector among eastern European markets thisweek.

Weaknesses

Russia was the worst performing country this week, down 3.21 percent. Russian equitiesslumped to the lowest level in a year this week as several U.S. senators struck a bipartisan dealto expand existing sanctions against the nation, reducing optimism the steps would be liftedunder President Donald Trump. The U.S. agreement would allow new sanctions against sectorsof the Russian economy, including mining, metal, shipping and railways and would put into lawpenalties that were imposed by President Barack Obama’s administration, including on someRussian energy projects and on debt financing. This proposal is the latest sign that somelawmakers intend to push back on Trump’s efforts to improve relations with Moscow.The Russian ruble was the weakest performing currency this week, down 1.28 percent againstthe dollar.The materials sector was the worst performing sector among eastern European markets thisweek.

Opportunities

Turkish economic growth unexpectedly accelerated at the start of the year to its best pace inalmost two years. GDP growth hit 5 percent in the first quarter of 2017 compared to first-quarter2016, and up from 3.5 percent at the end of 2016, when the economy bounced back after itsworst quarter since the financial crisis.Germany’s ZEW survey showed continued improvement in the current situation gauge,suggesting economic momentum is strengthening in the euro-area’s largest economy. Thesurvey rose again and by more than expected in June, now standing at 88 up from 83.9 in May.The signal is probably exaggerated, but the second-quarter picture indicates the economy iscontinuing to enjoy strong and stable growth. The detail of the survey also show Germany’sfinancial industry is becoming more upbeat about France, but more worried by the U.S. and theU.K.

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According to Financial Times, nowhere in the world have expectations for growth changed sorapidly and positively as in central and Eastern Europe. The consensus forecast for economicgrowth in the region this year is now 2.5 percent, 0.3 percent points higher than four months ago.Expectations for 2018 are even brighter at 2.6 percent, 0.1 percentage points higher thanforecast at the start of the year. Stronger-than-expected external demand in Western Europe, atighter labor market, an attractive environment for foreign investment, government stimulusmeasures, easy financing conditions and the revival of EU structural funds are all supportingstronger growth in the region.

Threats

The U.K electorate returned a hung parliament on June 8, creating further uncertainty for theeconomy. U.K industrial output posted a meager gain in April, which taken alongside weakness inprevious months, leaves it on a weak footing at the start of the second quarter. The collapse ofsterling coupled with more buoyant external demand should support the dominant manufacturingsector. But the outcome of the election has created more uncertainty about the sort of deal theU.K. will reach with the EU, which could mean the outward facing sector offers little offset to thelikely slowdown in the much larger services sector this year.Turkish president Recep Erdogan continues to strengthen his hold on the country, firing or jailingcivil servants by the tens of thousands., The number of educated, white-collar workers relocatingabroad has quadrupled to almost 10,000 a month, data compiled by the CHP opposition partyshow. That includes an estimated 6,000 millionaires just in 2016, a six-fold annual jump,according to Johannesburg, South Africa-based research group New World Wealth.Brussels will sanction Czech Republic, Poland and Hungary for refusing to take part in acontroversial scheme to share out refugees across the bloc. The EU introduced a plan to“relocate” up to 160,000 asylum seekers from Italy and Greece to other countries in the bloc. Butso far only 20,000 have moved – with zero going to the trio of central and eastern Europeancountries. As a result, the European Commission launched infringement proceedings – a long-winded process of sanction that could ultimately lead to fines – against Warsaw, Prague and

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Budapest.

© US Global Investors

www.usfunds.com

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