Archive - Jun 5, 2012 - Story

Global gold demand continues to surprise to the upside – especially sizeable demand from the Middle East and China. Confirmation of continuing huge demand in China came yesterday with data showing that Hong Kong shipped 101,768 kilograms of gold to mainland China in April, up 62% on the month - marking the second-highest monthly exports ever.  While demand from India continues it has fallen from the record levels recently but demand from other Asian countries is robust with reports of demand in Thailand, Vietnam, Malaysia and Indonesia. A new and potentially significant source of demand is that of demand from Iran. Iran imported a massive $1.2 billion worth of precious metals from Turkey in April alone. Turkish exports of gold, precious metals, pearls and coins to Iran rose to $1.2 billion in April from a tiny $7,500 a year earlier, according to figures released by the state statistics institute in Ankara yesterday. This is a massive increase in demand and suggests that there may be official involvement in the imports from the Central Bank of Iran.

Spain has now officially asked the European Union for aid for its banks. The markets seem to be responding as if the bank issue is isolated. It is not isolated. We are following the same schematic as we did with Ireland; first it was the banks and then it was the country and then the “Men in Black” showed up to take over. Spain says it is a 50 billion Euro problem and the reality is probably more like a 400 billion Euro problem. There is all kinds of cross lending between the banks in Spain and while Spain’s largest two banks have tried everything they could to isolate themselves; I predict there will be no escape for anyone. Now that Spain has asked for a bailout of their banks the European auditors will show up and I would bet large money that the values of many loans and the value of Real Estate and the securitizations tied to it will be found to have been vastly overstated. Then it will be the regional governments and their debts and the house of cards will implode. The Spanish Finance Minister kicked off the first domino this morning and we can all just stand by now and watch the rest fall.

• Spain says markets are closing to it as G7 confers (Reuters)
• Germany Pushes EU Bank Oversight (WSJ)
• Falling Oil Prices Are No Mystery (Bloomberg)
• Aussie Rises After RBA Cuts Rate Less Than Swaps Suggest (Bloomberg)
• Euro falls on Spain worries as market awaits G7 (Reuters)
• Bad News Piles Up for China's Economy (Bloomberg)
• Japan Lawmakers Push to Curb Central Bank (WSJ)
• Lawyer Kluger Gets 12 Years, Bauer 9 for Insider Trades (Bloomberg)
• All eyes on Wisconsin governor's recall election (Reuters)
• The Global Obesity Bomb (BusinessWeek)

And so those lining up at the bailout trough are now 4: remember all those lies Spain spoon-fed the gullible press that it didn't need a European bailout as recently as yesterday? You can now forget them. From Reuters: "Spain said on Tuesday that credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc's worsening debt crisis. Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain. Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and and prompting the Madrid stock market to rise. But his comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on expectations that a conference call of G7 finance ministers and central bankers may hasten bold action." Well, Germany got its wish: it got Spain to admit it is broke. Just as it wanted - because remember: all Germany is, is a true lender of last resort unlike the ECB: after all they are the decision makers. And Germany knows very well that it needs Europe desperate when it is forced to accept any conditions to the German DIP loan that Schrodinger Schauble proposes. Which means forget anything positive will come out of the G7, and certainly forget anything actionable will come out of the ECB's June 7 meeting. If anything, things will first get much worse, before things get better. And finally, don't forget just who benefits the most from EURUSD at parity or lower... That's right: Germany.

While the world patiently awaits, not even sure why because it is now absolutely guaranteed that it will be a huge disappointment, the G7 headlines which now appears to be merely an update session, and not one where any decisions will be taken, here is a sampling of this morning's schizophrenia out of Europe:

• FINNISH FOREIGN MINISTER URGES ORDERLY GREEK DEFAULT: ZEIT
• FINNISH FOREIGN MINISTER SAYS GREECE NEEDS 2ND DEBT DEAL: ZEIT

Yet...

• FINLAND'S TUOMIOJA SAYS NOBODY WANTS TO OUST GREECE FROM EURO

But... he just said... Sigh. And the US trading day has not even started.

Another day, another set of disappointing European economic data. While the final Euroarea Composite PMI index increased by one tick from the 45.9 Flash reading to 46.0 in the final, the prior revision was also upward from 46.5 to 46.7 thereby indicating that while things had not necessarily deteriorated much in the past 2 weeks, they did relative to benchmark. Also minutes ago German April factory orders printed at -1.9 on expectations of a -1.2 decline, and coupled with the prior revision from 2.2% to 3.2%, this confirms that the peripheral shakedown in Europe is impacting the core countries, as well as non-Eurozone targets increasingly more. This was confirmed when looking at the spread of domestic vs foreign orders. Again, per Goldman: "Domestic orders rose 0.4%mom after +1.8%mom, while foreign orders declined -3.6%mom after +4.4%mom. Within foreign orders, orders from the Euro area declined 1.8%mom after +0.9%mom, continuing the downward trend. Foreign orders from outside the Euro area declined +4.7%mom after +6.6%mom, still showing an upward trend (see chart below). There is no indication in these data that activity in the German manufacturing sector saw a sharp deterioration in Q2. Business sentiment, however, suggests that the sector is likely to lose some momentum going forward." Which means that once again, everyone's attention is now focuses on what external help can come: either from the G7 phone call in minutes, which will be a disappointment, or the ECB on Thursday, which we are confident, will also be a whimper, not a bang. As a reminder: there must be blood in the streets for coordinated intervention by both banks and fiscal authorities in Europe, for it to be effective.