Gold has risen to new record highs in euro terms overnight in Asia when gold consolidated on last week’s 3% gains and rose above €1,360/oz for the first time. Significant consolidation has been seen in the last year between €1,200/oz and the previous record high at €1,359.01/oz. This record high was seen almost exactly a year ago on September 9th 2011. Gold is being supported by the unrest in South Africa which continues to destabilise the mining sector. Gold Fields said this morning that some 15,000 workers were still on strike at one of its gold mines outside of Johannesburg. The tally of workers on strike at the West Section of the KDC Gold Mine is about 3,000 higher than last week. All production at the mine has been brought to a standstill. With the US job growth contracting significantly in August, investors see that the Fed will be inclined to announce QE3 at this week’s policy meeting on the 12th & 13th. US gold futures and options climbed to 6-month high 144,775 contracts in the week ended September 4, according to data from the U.S. Commodity Futures Trading Commission. Gold ETF’s grew to a record high of 72.125 million ounces on Friday. Also, Hong Kong's July gold shipments to China was almost double on the year and exports for the first 11 months were greater than 2011, suggesting China will overtake India as the world's top gold consumer.
Stocks in Europe traded lower throughout the session, as market participants reacted to another round of weak data from Asia. In particular, China’s imports fell 2.6% on the year in August vs. Exp. 3.5%, underpinning the need for policy easing measures from the People's Bank Of China. Some of the weakness in equity space was also attributed to profit taking following last week’s gains. Spanish bonds continued to benefit from the ongoing speculation that the government will seek a full scale bailout. As a result, SP/GE 10y bond yield spread is tighter even though there is an outside chance that the constitutional court vote in Germany will delay this. On the other hand, IT/GE and NE/GE bond yield spreads are wider, reflective the upcoming issuance, as well as elections. EUR/USD and GBP/USD, both seen lower on the back of touted profit taking, as well as pre-positioning into near-term risk events mentioned above. Commodity linked currencies are also weaker, weighed on by the weaker data from China, which also showed that imports of crude oil hit a 22-month low. In terms of notable stocks news, Glencore said it will not improve its offer for Xstrata after the company raised offer for Xstrata to 3.05 from 2.8.
- China Output Growth Slows as Leadership Handover Looms (Bloomberg); Weak China trade data raises Beijing spending stakes (Reuters)
- Italy Q2 GDP revised down to -0.8% year-on-year on weak domestic demand (Economic Times)
- Troika disagreed with €2 billion in Greek "cuts" (Reuters)
- No Greek bottom in sight yet: Greek IP, Manufacturing Output plunge compared to year earlier (WSJ)
- France's Hollande sees 2013 growth forecast about 0.8 pct (Reuters), France plots tax hikes of up to 20 bln euros (Reuters)
- Euro Crisis Faces Tests in German Court, Greek Infighting (Bloomberg)
- Geithner sells more AIG stock (FT)
- Japan infuriates China by agreeing to buy disputed isles (Reuters)
- Euro crisis to worsen, Greece could exit euro: Swedish FinMin Anders Borg (Economic Times)
- ‘Lead or leave euro’, Soros tells Germany (FT)
- German MP makes new court complaint against euro plans (Reuters)
- Obama super-Pac in push to raise $150m (FT)
Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.
Quantitative easing hasn’t been about jobs. If this was about jobs or stimulating demand, Bernanke would have aimed the helicopter drops at the wider public, as many economists have suggested. This policy of dropping cash directly to the banks is bailing out a dangerous and morally-hazardous financial sector and too-big-to-fail megabanks that remain dangerously overleveraged and under-capitalised, needing endless new liquidity just to keep past debts serviceable. There has been plenty of cash helicopter-dropped onto Wall Street, but nobody on Wall Street has gone to jail for causing the 2008 crisis. Criminal banksters get the huge liquidity injections they want, and the rest get less than crumbs.
The last time we looked at monthly Chinese imports of gold from Hong Kong in 2012, the comparable country in question was Portugal (whose citizens, if not central bank, incidentally have run out of gold to sell), because that is whose total gold holdings (at 382.5 tons) Chinese imports had just surpassed. Fast forward a month later, and the update is even more disturbing. In July, Chinese gold imports from HK, after two months of declines, have picked up once more and hit a 3-month high of 75.8 tons. While it is notable that this number is double the 38.1 tons imported a year prior, and that year-to-date imports are now a record 458.6 tons, well over four times greater than the seven month total in 2011 which was 103.9 tons, what is far more important is that in the first seven months of 2012 alone China has imported nearly as much gold as the total holdings of the hedge fund at the heart of the Eurozone, elsewhere known simply as the European Central Bank, and just as importantly considering the import run-rate has hardly slowed down in August, which data we will have in a few weeks, it is now safe to say that in 2012 alone China has imported more gold than the ECB's entire official 502.1 tons of holdings.
Miracles of cosmetic surgery.
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Much has been said about Apple's recent victory over its key component supplier, Samsung, in a recent US court decision the direct result of which has been the halt of sales of several Samsung products which are already obsolete in cell phone year terms. The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company. Alternatively the Chinese politburo can one day decide to pull FoxConn's operational license, in the process bankrupting AAPL overnight. But these are of course M.A.D. scenarios which in rational, non-centrally planned market would never take place, and so we have no reason to worry about them. That said, it is increasingly becoming clear that patent warfare fought in partial domestic judicial systems, will be the next form of protectionism as pertains to that most faddy of technology: the ubiqutous smartphone. And while Apple may have won the first battle, the outcome of the war is still very much unclear: in fact, the return salvo after Samsung's big defeat on US soil may come quite soon, this time courtesy of another Chinese Apple "clone", HTC Corp, which if it goes against the Cupertino company, could have a large impact on revenues.
Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin? Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008. However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD. If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?
Central Banks United have the upper hand these days. So don’t mess with them…
At least not this week…
We came across this rather telling chart showing the net petroleum imports of the US and China. We present it on a standalone basis, as the price of oil, and certainly gas, will once again become a key sticking point in the days and weeks ahead, as always happens whenever there is either global coordinated monetary intervention, or relentless jawboning thereof. To present some context to the chart, which forecasts China overtaking the US and becoming the world's largest net oil importer in the world, the official US GDP number presented for public consumption is just under $16 trillion (or 98% of US debt), while China's is, publicly, less than half this number.
- Jobs Gauge Carries Election Clout (WSJ)
- Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
- Rajoy stance sets stage for EU stand-off (FT)
- China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
- Hollande faces questions on tax pledge (FT)
- Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
- Strike Grounds Half of Lufthansa's Flights (Spiegel)
- The weakest will win in the euro battle (FT)
- Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
- Obama Presses Plan for U.S. Resurgence (WSJ)
- Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
- Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)
The EURophoria which commenced yesterday after the repeatedly pre-leaked Mario Draghi speech, has continued into the overnight session, this time getting a helping hand from China, whose Shanghai Composite index is up by just under 4% or the most in eight months following an announcement that The National Development & Reform Commission, China’s top planning agency, said it approved plans to build 2,018 kilometers (1,254 miles) of roads, a day after it backed plans for subway projects in 18 cities. In other words China's empty cities will still be empty but will now be connected and have even better infrastructure. Irrelevant of how the extra money has been injected, or for what ends, the stock and bond markets around the world are enjoying the news, with the EURUSD rising to 1.2700 recently, the Spanish 10 Year sliding to under 6% and the lowest since March despite Industrial Output sliding 5.4% or more than the 5.2% expected, even as German 2 year yield rise to the highest since July despite strong German trade surplus and Industrial Production data, with European equities green across the board and the EURCHF in mid-1.21 territory on louder unfounded rumors the SNB will hike the peg to 1.22/1.23. And with the European action in teh rearview mirror (more below), all eyes turn to today's key report, the August Non-Farm Payrolls.
China and India have always been crazy for gold, and the yellow metal remains the choice store of value in those two countries, says Don Coxe, a strategic advisor to the BMO Financial Group. In an exclusive interview with The Gold Report, Coxe explains how demographic shifts are affecting the price of gold and delves into the logic of investing in gold as a long-term strategy. Coxe also draws an important lesson in economics from his reading of Lenin.