Geopolitical Risk in Middle East and China Currency and Trade War Risk Supporting Gold

Support is at $1,600/oz, $1,580/oz and below that strong support is seen at the lows reached on September 26th of $1,532.70/oz. Market participants are divided as to whether this is consolidation prior to a resumption of the bull market, whether a further sell off takes place or whether a bear market has commenced. Strong physical demand being seen internationally, but especially in Asia, would suggest that gold may have bottomed and the bull market is set to continue in the traditionally strong autumn and winter months. The fundamental factors that have driven the gold market in recent years - macroeconomic, monetary, systemic and geopolitical risk – also suggest gold’s bull market is set to continue. Geopolitical risk is seen in the bizarre alleged plot by the Iranian revolutionary guard to use a purported Mexican drug dealer to assassinate Saudi Arabia's ambassador to the United States.

Daily US Opening News And Market Re-Cap: October 11

  • Market participants keep a close eye on the outcome of the EFSF ratification by the Slovak parliament. In the latest news, Slovak lawmakers have adjourned the EFSF session until 2pm local time
  • The Troika Commission said Greece will miss its 2011 target, however it will get the new aid tranche when the Eurogroup and IMF approve results of their review, most likely in early November
  • According to sources, haircuts of 40%-60% on Greek bonds are under consideration, however the debate is over whether the haircut should involve the ECB and EU governments
  • ECB's Nowotny and Trichet said that the EFSF will not be leveraged with ECB funds
  • Strength in the USD-Index weighed upon EUR/USD, GBP/USD and commodity-linked currencies

Frontrunning: October 11

  • New bankruptcy ripples may emerge in tough economy (Reuters)
  • Europe’s banks may get €200bn bailout (Independent)
  • US to unveil criteria for picking “systemic” firms (Reuters)
  • China Props Up Bank Shares (WSJ) as reported yesterday
  • Europe warned of systemic crisis over debt (Reuters)
  • US Voters Will Weigh Ballots Focused on Budgets, Higher Taxes (Bloomberg)
  • Regulators stand up for new capital rules (FT)
  • Jobs Panel Pushes Help for Start-Ups (WSJ)
  • Dutch favour tough stance for Eurozone (FT)
  • BIS Report Aims to Debunk Banks’ Criticisms on Capital Rules (WSJ)

Frontrunning: October 10

  • Belgium to Buy Dexia’s Consumer Unit for $5.4B (Bloomberg)
  • New $1.4 Trillion U.S. Stimulus Is in Sight: Douglas Holtz-Eakin (Bloomberg)
  • Banks to be forced to boost liquid assets (FT)
  • Trichet Reminds U.S. Euro Built to Last (Bloomberg)
  • White House Aims to Lure More Foreign Investment (WSJ)
  • Fannie and Freddie debt fuels anxiety (FT)
  • Merkel and Sarkozy set euro deadline (FT)
  • ‘Time short’ for eurozone, says Cameron (FT)
  • Former PBOC Adviser: China To Continue Tight Monetary Policy (WSJ)

Market Developments This Week Very Gold Bullish; Bears Focus on Price, Not Value

The continuation of ultra loose monetary policies and new rounds of QE is supportive of gold in all currencies. Negative real interest rates mean that there continues to be no ‘opportunity cost’ to own gold which is a key driver of gold’s bull market. In time, quantitative easing will be seen for what it is - bailing out banks and financial institutions and a form of currency debasement. Developments in gold and wider markets this week are bullish. There are continuing signs of very significant demand in the Middle East, India, Vietnam and China. There are reputable reports of shortages of gold bars in Hong Kong, Singapore and Vietnam, of shortages of silver bars in India and delays in delivery and rationing of silver coins internationally. The CME decision to increase the amount of gold accepted as collateral and the LCH. Clearnet decision to allow gold bullion to be used as collateral shows the financial system is increasingly seeing gold as an asset on a par with cash and bonds.

Market Snapshot: Did Credit Just Capitulate?

Another day, another 12 swings of greater than 0.75% in S&P futures as volume slid to the lowest in a week and second lowest in two weeks. Credit and equity markets stayed largely in sync (as they have for the last few days - with slight beta-adjusted underperformance of credit) until around lunchtime and then a funny thing happened to investment grade credit. At around 12:30ET, the most liquid credit index, IG17, gapped tighter as ES and HY reversed briefly off the highs and then IG did not stop - compressing 3-4bps more into the close - notably outperforming HY and ES (its far higher beta cousins). At the same time, the less liquid but hugely levered (and exposed to correlation traders, tail-, and jump-risks), IG9, cracked very notably tighter (from our runs around 15bps) to 147bps. IG9 had held up as markets rallied but this move's magnitude and velocity suggest more than just some hedge adjustments and while the rest of the risk assets we cover were all levitating, this 'capitulation' stands out among them. Dollar weakness of course helped fuel the equity strength and commodities and PMs pushed on all day with gold the most subdued.

Market Snapshot: Reaction To Trichet - We Are Not Impressed

Out of the gate, credit and equity markets seemed happy that Trichet was offering CBPP2 and a Euro-TLGP II program in Oct/Dec but that quickly subsided (what no rate cut?) as rather surprisingly the market realized for itself - with little cajoling from us - that while short-term roll risk was reduced, capital still remains a 'problem' as the seemingly known (haircuts/exposures) unknowns and we assume unknown unknowns (contagion impact) remain tangible and this does nothing solve the underlying problem of insolvency. We were pleasantly taken aback by this reaction (and not in a Schadenfreude manner) but more simply that the market is 'getting it' - kicking the can by extending more and more credit (as Peter Tchir alluded to earlier) simply has its limits - and perhaps we are there.

Summarizing The ECB's Press Conference Disclosures

Update: "a word out of line" - Trichet says not appropriate to leverage the EFSF... Not what the market wanted to hear.

On one hand, the ECB keeps Germany happy with no rate cut, on the other, he promises as much liquidity as possible (but probably not enough - see below) and paints a very bleak picture of the economy in the period ahead.  Bottom line: no recapitalization from the ECB, but the central bank will make rolling of existing debt as easy as possible, and allow insolvent European banks to pledge any assets they have for cool cash.

Watch Trichet's Last ECB Press Conference Live

Update: Trichet announces two fixed rate LTRO tender operations, one 12 month in October, and one 13 month in December, very much as expected. In other words, the ECB will repo even more crap than it has already.

Update 2: Trichet announces CBPP2 - a new €40 billion Covered Bond Purchase Program, i.e. a new €40 billion QE program as the ECB will purhcase covered bonds in primary and secondary markets.

A historic press conference is about to unfold, in which the current ECB president, in a state of complete denial about the imminent implosion of his continent, will mumble for 45 minutes one last time and attempt to preserve his "legacy" after which he will hand over the "printer" briefcase and secret codes to none other than Goldman's Mario Draghi. And Goldman, as is well known to Zero Hedge readers, is certainly not nearly as shy as ole' Tricky to print when needed. Expect some vague promises of more liquidity, possibly the reopening of a 1 or 2 year repo line in which the ECB will accept even more used banana peels and sexual prophylactics in exchange for euros, and an overall deflationary bias. It doesn't matter. It is too late. More importantly, today's "shot rules" are a shot of Jager every time the words "price stabeeleetee" are uttered. Trichet's full prepared remarks transcript can be found here.

Daily US Opening News And Market Re-Cap: October 4

Risk aversion has again dominated the European session in what is becoming a familiar theme. The postponement of the decision on the next Greek aid tranche weighed heavily on sentiment which was compounded by several other factors. Goldman Sachs cut their forecasts for global growth saying they expected the Euro-area to experience a “mild recession” and this was later echoed by S&P who also noted they see a 40% chance that Western Europe would experience a recession. Developments in the financial sector have been in focus with Dexia shares at one point falling 30% after reports that its exposure to troubled Eurozone sovereign debt amounts to more than its entire equity base, with the French finance minister having to say that France and Belgium will guarantee the banks creditors. Furthermore, Deutsche Bank cut their 2011 forecast for their core business area saying that Q3 results for this year will be significantly lower than forecast; the banks shares fell 8% before bouncing with the DAX index lagging its European peers. Elsewhere, there were solid government debt auctions from Austria and Belgium while the Italian government bond yield spread over Bunds tightened due to renewed market talk that the SMP was again buying in the Italian curve. Moving into the North American session the key data will be the Durable Goods and Factory Orders, while comments will be anticipated from both ECB’s Trichet and Fed’s Bernanke. Later into the session there will second round of Operation Twist purchases from the Fed while the Belgian cabinet will hold an emergency meeting to discuss the Dexia situation.

Goldman Raises US Recession Odds To 40%; Sees More Fed Easing, Expects Recession In Germany And France

We won't comment on the supreme imbecility of being able to predict something as amorphous as a recession in decile increments, but for what it's worth, here it is. Just out from the crack Goldman tag team of Hatzius and Dominic Wilson, who usually don't work together unless they have to make some big statement: "We now see the risk of a renewed US recession as around 40%." (this was 30% before - expect every other Wall Street idiot to follow suit with an identical prediction). Also, those wondering if Goldman is content with getting shut out on its IOER cut demand, we have the answer: no. To wit: "We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify." Lastly, as relates to the saving grace in Europe, little surprise there - Goldman, whose plant Mario Draghi is about to take over the ECB, expects the very same ECB to open the spigots: "The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December." As for European economic prospects, well, sacrifices will be made: "we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery." And with a former Goldmanite about to take over the European money issuance authority, we have a bad feeling about what will transpire in Europe after October 31, when Trichet finally exits stage left.

Frontrunning: October 3

  • German conservative MP says "Greece is bankrupt" (Reuters)
  • Eurogroup to discuss EFSF leveraging, Greek reforms (Reuters)
  • Europe Aims to Dodge ‘Scapegoat’ Label (BBG)
  • UK Treasury Fears Effects of a Euro Break-up (FT)
  • Dollar Beating All Assets in September Undermines S&P Downgrade (BBG)
  • Japan Tankan Sentiment Below Pre-Quake Level on Global Slump (BBG)
  • Osborne Reaches for Middle Ground (FT)
  • Hong Kong Banks Face Higher Credit Risks in Midterm, KPMG Says (BBG)
  • Greece to Miss Deficit Targets Despite Austerity (Reuters)
  • US Congress Presses China on Currency (FT)