Peripheral stock indices continued to outperform today, as market participants reacted to yet another reiteration of support for ECB’s pledge to do all necessary to defend the Eurozone. As a result, banks in Europe are trading up with decent gains, with health care sector in the red given its traditional appeal as a safe-haven investment. German DAX continues to consolidate above the key 7000 mark, being driven higher by Daimler and Deutsche Bank. Looking at other asset classes, there is visible outperformance in the short-end of the curve, with the in-focus Spanish 2s tighter by around 20bps mark. The ongoing speculation of an intervention in the bond market also weighed on the German Bund, which underperformed its US counterpart. USTs come off overnight highs to trade little changed, with the move attributed to deal related selling. In the FX market, the EUR continued to re-price risks surrounding what is inevitable an unlikely scenario of a Eurozone break up. To the upside, resistance levels are seen at the 55DMA line at 1.2395 and then at 1.2400, which is also an intraday option expiry for the session.
The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated 'Jackson Hole' conference in two weeks. Citi's Tom Fitzpatrick believes "it would be irresponsible to do so and that we need a more 'responsible fiscal policy' which will not materialize as long as we have an 'irresponsible monetary policy' bailing policymakers out". However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting 'caught behind the curve' which must be balanced with the 'mistake' of one-monetary-step-too-far with very real inflationary consequences.
The World Gold Council released its quarterly report today, Q2 2012 Gold Demand Trends Report and can be read in full on the World Gold Council website here. Accumulation of gold bullion from central banks was the bright spot in demand last quarter, as total demand fell 7% globally, which was driven by a 38% fall in consumer demand from India. Price sensitive Indians have been shunning gold and many have been opting for far cheaper poor man’s gold – silver. Jewellery and investment demand both fell. Jewellery consumption was down 72.3 tonnes at 418.3 tonnes, while investment fell 88.3 tonnes to 302 tonnes. The report shows how while record levels of demand from western markets, China and particularly India have been followed by a decline – the seismic shift that is central banks going from being bet sellers to net buyers has provided a new fundamental pillar of support for the gold market. Physical demand slowed down in western markets and especially in India in recent months but large buyers continue to accumulate - both hedge funds and central banks and this is providing fundamental support to gold above the $1500 to $1,600/oz level. 2Q total central bank gold purchases were double the level reported a year ago as emerging market sovereign nations sought to diversify away from the dollar and euro and heightened economic insecurity. Gold purchases among central banks hit its highest quarterly levels (157.5 metric tons) since the sector became a net buyer of the yellow metal in 2Q 2009.
European equities opened higher, risk appetite boosted following overnight comments from Chinese Premier Wen that easing inflation in China left more room for monetary stimulus. However, summer thin volumes saw these gains pared, with particular underperformance in the FTSE 100, which currently trades in negative territory, despite stronger than expected UK retail sales for July. European CPI data for July was in line with market expectations, with no reaction seen across the asset classes following the release. Elsewhere, reports that Spain is to accelerate the bank bailout and is about to receive an emergency disbursement from the EUR 100bln bailout failed to support domestic bond market; the Spanish 2-year spread with respect to the German equivalent trading 6bps wider, though the Spanish 10-year spread is tighter on the day by 3.2bps and the 10-year yield is lower on the day, currently at 6.852%. The Spanish IBEX is outperforming on the back of this news, led by Bankia and Banco Santander.
As Goldman observed last night, the "metaboring" meme continues, as things go from boringer to boringest. Nothing notable has happened overnight. Some things that did happen was news that Spain is about to receive an emergency disbursement from its €100 billion euro bank bailout because of restriction imposed by the ECB on bank borrowings; Italian banks announced plans to dispose of more bad loans to avoid "potentially bigger losses" (to whom? the ECB?), non-voting Fed member Kocherlakota saying that cutting IOER would have a minimal impact (are you paying attention former visiting Fed advisor David "the Fed will bail everyone out always and forever" Zervos), UK retail sales coming in stronger on bigger gas and food purchases (so aside from being ignored for inflation purposes these are useful when extrapolating economic "growth"), July Eurozone inflation coming in just as expected unchanged at 2.4% Y/Y, China FDI collapsing 8.7% as data revealed the longest run of declining inward investment growth in China since the 2008-09 financial crisis sending local markets to 2 week lows as the MOFCOM said the country's 2H export outlook will be even more grim and Premier Wen said easing inflation (not in food) allows for more room to adjust monetary policy, a statement that had zero impact on domestic stocks. As a result we have seen minimal flattening in Spanish and Italian 2s10s, and a continued gradual drift lower in the EURUSD. And this, aside from another week of initial claims that will have the prior week's data revised higher, and a Philly Fed, may be as good as it gets, as volume is set to plumb another multi-year low, and with the 2s10s flattening again, guarantees that bank profits in Q3 will be atrocious, forcing banks to fire even more (or cause various unnamed market makers to accidentally activate 1000x buy algos).
41 Years After The Death Of The Gold Standard, A Look At "How We Ended Up In This Economic Purgatory"Submitted by Tyler Durden on 08/15/2012 20:53 -0400
As we await the latest developments out of the Eurozone and Washington, JPMorgan's Kenneth Landon takes a moment to look back on this very important day in history. If you want to understand current events, then you first have to understand history. How did we get here? More specifically for financial markets, how did we end up in this mess -- this economic purgatory? This being August 15, 2012, students of the history of monetary economics no doubt are aware that this is the 41th Anniversary of the breakdown of Bretton Woods. It was on this day 41 years ago that President Nixon defaulted on the promise to exchange gold for paper dollars presented for exchange by foreign central banks. The crisis in confidence that we observe today resulted from cumulative effects of those measures.
Yes, we all know that Europe is in deep, deep, trouble, and we all know that Europe has a major fiscal deficit issue which is why well over half of the Eurozone is effectively locked out of the capital markets, and only has funding courtesy of various back door Ponzi schemes funded by the ECB, and we also all know that on a consolidated basis Europe's debt/GDP is very high. But the truth is that at least Europe is taking small steps to rectify its historic profligacy and is at least pretending to be implementing austerity (in some cases actually truly doing so). How about the US. Well, the chart below should answer that particular question. Because while the consolidated GDP of the US and Europe are nearly identical, they differ very materially in terms of both fiscal deficit, and total Debt/GDP. The chart below shows precisely where the differences lie between the United States of Europe and the United States of America.
As far as I can see the ECB has one of two “Bail Mary” options. They are: 1) Massive money printing and buying of sovereign debt, 2) The issuance of Euro-bonds along with across the board banking backstops.
In 2005, the French and Dutch “unexpectedly” voted for sovereignty, and killed the EU constitution. Germans might vote next.
As was seen in Iraq, it is the people who suffer most from sanctions and economic and civil war and the Syrian people are indeed facing increasing hardships. Hunger is a problem that is growing more acute by the day. As the prices of what little food is available soar, there are increasing signs of desperation among parents seeking to feed families. Prices of fuel and medicine have also soared amid shortages compounding the misery of Syrians and leading to another humanitarian crisis. Professor Nouriel Roubini and other financial experts have pointed out that “you cannot eat gold.” However, people in nations suffering from currency and economic wars can testify as to how they can use gold in order to buy food, fuel and medicine for their families in difficult times. To wit, Syrian President Bashar Al-Assad announced measures facilitating imports of gold bullion coins and bars. Gold bullion imports no longer require a special permit and travellers are allowed to bring gold bullion coins and bars with them into the country, the decree said. Gold is, as it has done throughout history, protecting them and their families from the ravages of currency devaluation and economic collapse.
As for backstopping EU deposits... no entity on earth has the capital to do this. Total Eurozone deposits stand at €15 trillion. Even deposits at the current EU “problem” countries (Spain, Italy, Portugal and Ireland) are €5.5 trillion. That’s nearly TWO TIMES the size of the ECB’s balance sheet and over FOUR TIMES the size of the various EU bailout funds (the EFSF and ESM, the former of which only has €65 billion in capital left by the way).
It is important to note that markets were also unusually calm during the two weeks of the Chinese Olympics in 2008. The 2008 Summer Olympic Games took place slightly later in August than the London Olympics – starting August 8 and ending August 24. Only days after the ending of the Chinese Olympics came massive market volatility in September and then seven months of market turmoil. Similarly to this Olympic year, in Olympic year 2008, gold traded sideways to down in a period of consolidation prior to further gains. Gold bottomed in September 2008 in euro and sterling terms. Another brief bout of dollar strength saw gold bottom in November 2008 in dollar terms. Besides the eurozone crisis (and the significant risk of the German Constitutional Court deciding on September 12th to reject the recently cobbled together alphabet soup response to the crisis (ESM etc etc) and significant instability in the Middle East, there is also the not inconsequential risk from the US Presidential campaign and the upcoming ‘fiscal cliff’.
While Frau Merkel remains beach-bound somewhere, hence the lack of 'Neins' recently, her deputy chancellor Michael Fuchs made it unequivocally clear this morning in a Handelsblatt interview that Germany had "reached the limit of its capacity" over additional EFSF payments to Greece and reiterated the double-whammy that the ESM should NOT receive a banking license and that the ECB should NOT act as "money printing press in disguise" by extending emergency loans and bypassing EFSF/ESM. A decision about whether Greece should be given the second tranche of its loan will not be made until October, after the Troika finalizes its first review of the second rescue program in September. However, BNP Paribas notes that there have been a couple of developments worth noting over the past week and more are likely in the coming weeks.
And suspicions arose immediately that the Troika was laying the publicity groundwork for something that bailout-leery Germans would oppose.
When we wrote Part I of this paper in June 2009, the total U.S. public debt was just north of $10 trillion. Since then, that figure has increased by more than 50% to almost $16 trillion, thanks largely to unprecedented levels of government intervention. Once the exclusive domain of central bankers and policy makers, acronyms such as QE, LTRO, SMP, TWIST, TARP, TALF have found their way into the mainstream. With the aim of providing stimulus to the economy, central planners of all stripes have both increased spending and reduced taxes in most rich countries. But do these fiscal and monetary measures really increase economic activity or do they have other perverse effects?... The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings.... The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come.