Gold traded close to the lowest level in more than a week. Comex Gold prices ended with moderate losses yesterday, on more profit taking and technical consolidation on the charts. A stronger US Dollar index has also lent selling pressure to Gold and Silver early this week. Gold and Silver yet are in Bullish zone with downsides seemingly limited amid prompt bottom fishing. Gold and Silver have been consolidating at lower levels since over a week now & seem poised to take on a new leap upwards. Gold Futures for December delivery on the Multi Commodity Exchange – MCX Gold was higher at 31,450 rupees per 10 grams, after hitting a high of 31,475 INR, a level last seen on October 1, helped by a weaker Indian Rupee. The Indian festival and wedding season will start picking up in late October and peak next month during Diwali and Dhanteras, traditionally the occasions for buying & gifting Gold Bullion or Jewelry in India. Comex Gold yet has substantial support around $1747 & then further below at $1720. Upside target remains steady at $1855. Silver has been struggling to break above the resistance of $35.20 & once it closes above this, it enters a strongly bullish zone. Silver has substantial support around $33.
Aluminum declined to the lowest level in a month, retreating for a fourth day, after Alcoa Inc. cut its forecast for global demand citing slowing growth in China, the world’s biggest user. Palm oil advanced for a second day to the highest level in more than a week after Malaysia, the second-biggest producer, signaled that it may reduce a tax on exports after prices slumped to a three-year low last week. Most Agro Commodities have been seen rising sharply as alerted last week after very sharp corrections. Rising Crude Oil rates along with rising Agro Commodity Prices are a deadly & a perfect combination for sharp Inflation rises. Gold & Silver would naturally be the choice for hedging against Inflation.
Tensions in the Middle East have also ratcheted up a notch as Syria and Turkey are exchanging artillery fire on their borders. Also, Iran’s President said he is very alarmed by his sanction-strapped country’s inability to meet its budget. Spain has yet to ask for formal EU bailout assistance, even though European Central Bank president Draghi said Tuesday the ECB is ready to implement its bond buying program should Spain ask for assistance. The US dollar index traded solidly higher yesterday on some short covering in a bear market. With little fresh economic data slated for release this week, the markets are likely to focus on the Euro-group meetings & outcomes.
The key focus will be on Spain and Greece, and while positive progress is expected to be made on both accounts, a number of banks do not expect that the event will provide headlines that deliver a major catalyst for the market. Spain Prime Minister Rajoy is likely to wait until after regional elections on Oct. 21. Meanwhile, on Greece no major action can be made on the decision to allow more time for the country to meet its goals until the Troika has completed its review. Chancellor Angela Merkel expressed solidarity and friendship with Greece during her Tuesday visit in Athens with Prime Minister Antonis Samaras. On the streets outside, however, protests revealed the strain Greek society is under. The German chancellor’s visit will do little to improve the situation. Merkel’s visit was not limited to her meeting with Samaras. She also met briefly with Greek President Karolos Papoulias. 40% of German exports are delivered to partners in the Eurozone. Any further fractures in the common market could hit Germany hard.
Total assets of Gold ETFs – Exchange Traded Funds exceeded the combined total of French and Italian gold stocks, indicating a sharp increase in Gold Investing. Analysts said the total assets of Gold ETF’s added another 95 tonnes in September, driving the stock to a new record high of 2,565 tonnes, which is more than the Gold stock in France and Italy, the countries with the 4th and 5th largest central banks. The world’s largest Gold ETF – the SPDR Gold Trust– has the largest stockpile of physical gold in its history 1,340.5 tonnes. Since mid – September the European Central Bank (ECB), the US Fed, the Bank of Japan, the Reserve Bank of Australia have been taking steps to ease their monetary policy in an effort to help their economies revive. When money is abundant in an economy and real interest rates go into the red, investors try to hedge their risks, usually choosing Gold as a shelter. Gold Prices are bound to move further up then.
Crude Oil has declined slightly from the highest price in a week in New York on speculation that Crude Oil stockpiles climbed in the US, the world’s biggest consumer of Crude Oil. November Futures of Crude Oil remain strong till trading continues to move above $91.45 with an upside targeted for $93.75 the first strong resistance. Crude Oil Futures once above $93.88 would look further up to rising towards $95.35 & then $97.39. Crude Oil Futures surged 3.4% yesterday amid increased tension in the Middle East. Crude Oil inventories probably rose 1.5 million barrels last week, according to a Bloomberg News survey before an Energy Department report tomorrow. The American Petroleum Institute will release separate supply data later today. London-traded Brent prices are still high and Saudi Arabia will work toward “moderating” them, Oil Minister Ali al-Naimi said yesterday. There’s upside risk on the geopolitical side, but then of course there are headwinds from slowing growth. Crude Oil surged yesterday after Turkish guns fired on Syrian artillery units and tanks for a sixth day. The attacks follow the deaths of five people struck by a Syrian shell in Turkey on Oct. 3. Tension between the two countries has risen with the 19- month rebellion against Syrian President Bashar al-Assad’s government, as Turkey has offered support for the rebels.
Eurozone nations like Greece & Spain face doom either which way they choose to go. The choice could only be between now or later. Simply put, they sit on a ticking bomb. All one hears of these day’s is, “Spain needs no aid program”, & the next day, headlines scream, “Spain may soon Request for a Bailout”. Spain seems to have taken center stage position of peaking crisis from Greece these days. Eurozone finance ministers met in Luxembourg on Monday to discuss Spain, Greece,Portugal and other issues related to the region’s debt crisis, including what needs to be done to establish a single supervisory authority for Eurozone banks. ESM Managing Director Klaus Regling said, “We are ready to provide the financing to the FROB for the bank recapitalization of Spanish banks, probably starting in November and we are preparing the transfer of EFSF to the ESM.” Meanwhile Eurogroup Juncker said, “To a large extent I’m satisfied with the fiscal consolidation measures taken so far by the Spanish government. It is neither up to me nor to us as members of the Eurogroup to advise the Spanish government to make a request.” German Finance Minister said, “Spain needs no aid program. Spain is doing everything necessary, in fiscal policy, in structural reforms. Spain has a problem with its banks as a consequence of the real estate bubble of the past years. “That’s why Spain is getting help with banking recapitalization. And of course Spain, like other Eurozone countries, is suffering from the problem of contagion, speculation on financial markets… but Spain needs no aid program. That’s what the Spanish government says again and again.”
The fourth quarter could mean more market volatility than what was seen in the third quarter, and that can have serious implications for the US Dollar. There are many issues that could roil the market, including the U.S. fiscal cliff and debt ceiling, an unresolved Eurozone Debt Crisis and the signs of prolonged economic weakness, and a slowing economy in China. Further there are numerous geopolitical tensions in the Middle East that could spill over. Investors & Traders continue to build net-long positions in Gold & Silver as the Eurozone crisis build up momentum, on expectation of Bailout requests by Spain, Greece among others. Commodity-based exchange-traded products (ETP) rose to a record $207 billion in the third quarter globally, led by Gold. Based on inflows and price increases, assets in the third quarter rose by $31 billion, bringing the total assets under management to $207 billion. Gold saw inflows of $7.7 billion last quarter, and including price increases, assets rose by $23 billion to $151 billion. The last time inflows were this large into gold ETPs was in the second quarter of 2010, when the situation in Greece had first come to a critical level. Silver saw $477 million of inflows in the third quarter, and the large price increases pushed up assets by $5 billion to $20 billion. Base Metals ETPs saw net inflows of $81 million, to bring third-quarter total assets to $1.9 billion. Central bank actions have supported commodity prices in general as the banks will likely keep monetary policy accommodative as countries need to work through debt problems. Spain may eventually request a bailout to support its ailing economy & that could trigger a big rally in Gold and all other commodities. People will be more positive on the Euro but till then, there’s going to be pressure on the Euro which will lift the US Dollar. Weekly Gold movements have seen rises for the last seven weeks but have been tapering off in the last week. Gold prices have been unable to take out the $1,800 an ounce area, with the market retreating from last week’s highs after a surprising U.S. labor report, but Gold has support around $1747. It’s clear that the buying momentum evident last month has undoubtedly slowed down – both Friday’s reaction and recovery post (jobs report) highlighted that sellers lack conviction while buyers are prepared to step in during pull-backs.
The black hole in Spain’s budget has grown faster than Prime Minister Mariano Rajoy’s attempt to cut it. Harshest austerity measures have failed to contain the deficit as the economy sinks deeper into recession. The Eurozone has already set aside 100 billion euros for Spain to recapitalize its banks, only around 40 billion of which is expected to be used in the coming weeks, but there are also expectations in financial markets that Madrid will also have to request a government Bailout in the coming weeks or months. Spain will miss its deficit targets in 2012 and 2013 and its debt will jump to more than 90% of GDP next year as it recapitalizes its banking sector, the IMF said on Tuesday. The International Monetary Fund said in its fiscal monitor report that the country’s deficit would reach 7% of GDP in 2012 and 5.7% in 2013, compared with European Union-agreed targets of 6.3% of GDP this year and 4.5% of GDP next year. Spain replaced Greece, Portugal and Ireland as the epicenter of the Eurozone debt crisis after it missed its budget targets by a wide margin in 2011.
Spain Government has pledged to rein in the public finances but overspending regions and the recapitalization of a banking sector crippled by bad debts from a decade-long property bubble is making the task difficult to achieve in the short run. Spain said last week the public deficit would reach 7.4% in 2012 but that would include one-off elements from the recapitalization of the banks that the European Commission has agreed not to take into account when assessing Spain’s efforts. The Commission will publish updated economic forecasts on November 7.
Economy Minister Luis de Guindos reiterated on Monday that Spain would meet the targets and said there was no need for additional measures despite a deepening economic contraction. The government has based its budget plan for next year on a recession of 0.5% while the IMF forecast a recession of 1.3% in the country in 2013. Under current policies, Spain would not return below the EU ceiling of 3% of GDP until 2017 and its debt-to-GDP ratio would hit 90.7% in 2012 and 96.9% in 2013, the IMF also said in the report. That takes into account a full disbursement of the 100-billion-Euro European credit line Spain sought in June to prop up its lenders. Madrid said last month it expected to tap only around 40 billion euros. But that would still put the debt at around 84.7% of GDP in 2012 and 90.9% of GDP in 2013, reported Reuters.
Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession. Spanish business people, upper middle class families and their loan guarantors, typically the parents of first-time buyers, now account for 60% of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession, reported Bloomberg. Spain’s worsening foreclosure crisis comes as ministers from all 27 nations in the European Union meet today. Carlos Banos, president of Madrid-based AFES, said parental guarantors “are the Saddest of all cases” the association sees. “The kids lose their homes, go live with mom and dad and then mom and dad lose the home that they worked all their lives to pay for because it backed their children’s debts.” “The economic crisis is wiping out businesses and the finances of families that were comfortably off” and “foreclosures are now massively threatening businessmen and families in high income areas,” Banos said. “Unemployment is the root of all of this and the worst affected areas are Madrid, Barcelona, Valencia and Andalucia.” Fitch Ratings has said repossessed properties in Spain are worth 48% less on average than the value assigned when their mortgages were originated. Under Spanish law, a bank can pursue a borrower for the difference if a foreclosed property is sold for less than the outstanding mortgage. Lenders can also garner present and future assets and earnings of borrowers and their guarantors, including pay checks and pensions. “These people completely lose their purpose in life,” Banos said. “Everything they had or will ever have in the future will go to the bank.”
Greece’s capital will grind to a halt today for German Chancellor Angela Merkel’s first visit since the financial crisis began, with 7,000 officers deployed around Athens to prevent violence at planned protests. Merkel has become the face of austerity in a country suffering a fifth year of recession, seen in Greece as mainly due to German-led conditions attached to emergency loans. While Samaras has called the chancellor’s visit a “very positive development,” opposition and union leaders are planning to use Merkel’s visit to capture Greeks’ anger and frustration. “Germany is doing whatever we can to help Greece on its difficult path,” German Finance Minister Wolfgang Schaeuble said yesterday. “The chancellor isn’t the troika. The chancellor is traveling to Greece the same way she travels to many other European countries and just as the Greek prime minister was in Berlin.” She last visited Greece in July 2007.
Eurozone Finance Ministers spent more than two hours discussing an upcoming report by the European Commission, the European Central Bank and the IMF – known as the troika – on Greece’s debt-reduction program, with divergences emerging inside the Eurozone and with the IMF over how best to proceed, officials said. While Jean-Claude Juncker, the chairman of the Eurozone’s 17 finance ministers, and IMF Managing Director Christine Lagarde both said they were pleased with Athens’ progress, they said more still needed to be done. Further discussion will take place once the troika report is published, probably next month. One point of contention was whether to grant Athens up to two more years to meet its budget and other targets. While the IMF is believed to favor leeway, countries such as the Netherlands and Finland have concerns about offering more time. Under the German insistence that nations eliminate excessive borrowing as a condition of financial support, Greece is completing the fifth year of a recession that has knocked 17% off annual output.
Eurozone finance ministers signed off on a further tranche of financial aid to Portugal on Monday and said the country was working hard to put in place the budget cuts and structural economic adjustments demanded of it. In a statement following a meeting in Luxembourg, the Eurogroup, made up of the finance ministers of the 17 euro zone countries, said Lisbon was carrying out its reforms faster than expected and was broadly on track to meet its goals. It has been given an extra year to meet its deficit targets. “The Eurogroup notes with satisfaction that the government’s active preparation of a return to the financial markets in 2013 has recently been met with success,” it said, adding that it had approved the next disbursement of 800 million euros from the Eurozone’s temporary EFSF bailout fund. A further 3.5 billion euros from the Eurozone and the IMF is expected to be disbursed at the end of the month, it said. The Eurogroup also welcomed the Portuguese government’s decision to backtrack on a plan to increase the social security burden on employees, an initiative that had met with widespread popular unrest. Portugal’s deficit target was lifted to 5% of GDP from 4.5% for 2012, and to 4.5% of GDP from 3% for 2013. The next 4.3 billion euros of Portugal’s package, worth a total of 78 billion euros, were also cleared for release. Those loans will come from the euro area’s temporary bailout fund, a separate pool of EU funds and the IMF, reported Bloomberg.
The IMF said the global economic slowdown is worsening as it cut its growth forecasts for the second time since April and warned U.S.and Eurozone policymakers that failure to fix their economic ills would prolong the slump, reported Reuters. Global growth in advanced economies is too weak to bring down unemployment and what little momentum exists is coming primarily from central banks, the International Monetary Fund said in its World Economic Outlook, released ahead of its twice-yearly meeting, which will be held in Tokyo later this week. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” it said. “The answer depends on whether Eurozone and U.S. policymakers deal proactively with their major short-term economic challenges.” The IMF said “familiar” forces were dragging down advanced economy growth: fiscal consolidation and a still-weak financial system, the same problems that have plagued the world since the global financial crisis exploded in 2008.
Crude Oil prices fell sharply yesterday on disappointing economic data & as signs of a slowdown in China and Europe reinforced worries about weakening demand for petroleum. Bold Quantitative Easing actions by global central banks have yet to convince consumers to start spending again. The concerns about China and Europe overshadowed supportive data from U.S. Energy Information Administration’s (EIA), which showed an unexpected fall in US Crude Oil stocks last week. US Crude Oil inventory fell 482,000 barrels last week, against forecasts that stockpiles would be up 1.5 million. Brent Crude Oil’s $107.67 low was the lowest price since September 20. WTI Crude Oil Futures slumped $3.75 to settle at $88.14 a barrel, below its 100-day moving average of $89.99. It dropped to $87.70 in post-settlement trading, its lowest since prices fell to $87.23 on August 3. European data showed that the service sector in the Eurozone has declined even further, diminishing chances that the region will see growth before next year. The service sector data came on the heels of manufacturing numbers earlier in the week, which showed factory activity in the euro zone fell to its lowest since early 2009. Even China’s normally robust services sector weakened to a two-year low in September, as the impact of the slowdown in the export-focused nation’s biggest customers hit home.
Besides growth concerns, investors are also fretting about the deepening Eurozone crisis. Greece is struggling to strike a deal with its lenders on disputed austerity cuts, while Spain is expected to be the next nation to request a bailout. Fuel Demand is expected to get hit on escalating economic unrest.
The markets have reacted primarily to what appears to be a steady stream of weak economic data out of China and the Eurozone as well. Technically a close below $90 for Crude Oil opens up the gates for a dip towards the $80.20 to $79.30 range. Crude Oil will regain upside strength on a closing above $90 again. Fundamental downside clarity in Crude Oil remains hazy due to the Middle East turmoil, including Turkey’s military hitting targets inside Syria in response to a mortar bomb fired from Syrian territory. In Tehran, Iranian police clashed with demonstrators and arrested money changers in Tehran in disturbances over the collapse of the Iranian currency, which has lost 40% of its value against the U.S. dollar in a week. Crude Oil prices may also find support at dips as markets see a spillover from major of the equities markets which are up. Chinese markets remain closed for the week on a national week long holiday.
Over the next five weeks, Crude Oil markets will be driven to wild swings by speculation over the outcome of the US Presidential election and geo-political concerns. Crude Oil prices might remain weaker due to window dressing activities by the US before the presidential election & also dominated by uncertainties and concerns over Spain & further concerns on whether the Chinese economy is stabilizing or sliding. US Markets ended modestly higher as better-than-expected U.S. labor and service-sector data fueled optimism. The pace of growth in the vast U.S. services sector, which dominates the country’s economy, picked up in September, while private employers added more jobs last month than expected, industry reports showed. The data came ahead of the first of three presidential debates Wednesday night in Denver and the governments closely watched monthly payrolls report on Friday. Spain’s Prime Minister, Mariano Rajoy, on Tuesday quashed speculation the country could apply for a bailout as soon as this weekend, but expectations are high that Spain will eventually request aid. A formal request could come around an Oct. 18 European Union summit, although Prime Minister Mariano Rajoy also has political incentives to delay a request until Oct. 21 regional elections.
Geo-political concerns include the still simmering dispute in the Middle East over a nuclear program in Iran that triggered tough sanctions from the United States and the European Union and plunged the Iranian rial to a record low this week. In additions, Turkey’s military hit targets inside Syria after mortar bomb fired from Syrian territory killed five Turkish civilians, marking the most serious cross-border escalation of the 18-month uprising in Syria.
Crude Oil may get bargain buying support on sharp dips backed by supply concerns & expected Inflation rise after mega money printing actions taken by major central banks in the last months. Crude Oil markets also appear to win some stability today from equity markets, where Japanese stocks inched up and the broader market indicator held steady. U.S. Labor department numbers on Friday are expected to show a slight improvement from the previous month. Employers are expected to have added 113,000 jobs to their payrolls, an increase from 96,000 in August, with the unemployment rate edging up by a tenth of a percentage point to 8.2%, according to a Reuters survey. Policymakers at the ECB may hold interest rates steady at today’s policy meeting to allow time for new details on the health of the Eurozone economy and for Spain to ask for aid.
Signs of a slowdown in China weighed on Base Metal prices, with Copper down after four days of swings. China accounted for 40% of refined Copper demand last year. Base Metals are lower, with the selling triggered by an overnight release from China showing that service activity fell to 53.7 in September from 56.3 in the previous month, a rather sharp fall considering the stable tone of the month-to-month changes in Chinese statistics. Although the index is still above the critical 50 mark, activity is nevertheless growing at its slowest pace in over a year.
Gold edged up, defying a drop in Crude Oil Prices and a firmer US Dollar, as the encouraging U.S. data bolstered bullion’s investment appeal as an inflation hedge. A strengthening Indian Rupee could help jump-start Gold Demand in India, the world’s largest Gold consuming nation. India’s Gold Demand has been softer for much of the year after a tumble in the INR made Gold more expensive for Indian Investors & Traders. The INR has been stronger against the US dollar so far for the past 2 weeks. Although the US Dollar is expected to weaken more sharply against most currencies, including the Indian Rupee, Gold prices in INR would remain yet very high on a year on year basis. Also as the International price for Gold would rise further on the weakening US Dollar, it will keep MCX Gold Prices high, though much weaker as compared to Comex Gold Futures. The most-traded Gold for December delivery on the Multi Commodity Exchange – MCX was 0.40%lower at 31,196 Rupees per 10 grams, at the time of writing. Silver for December delivery on the MCX was seen steady at 62,300 Rupees per Kg.
Spain is again the centre of focus in the Eurozone debt crisis. Spain’s Prime Minister Mariano Rajoy said “If interest rates on Spain’s debt were “too high for too long,” thus harming the economy and raising the government’s debt burden, “I can assure you 100% that I would ask for this Bailout.” “Europe needs to move toward a banking union now,” he said. “That would be a very good message toward the irreversibility of the Euro. What I do alone is not really going to help Spain get cheaper financing,” he added. “That is where I need support and action from all. I’m in favor of the EU, but I think we should have a lot more union than we have. We need to work hand in hand. We’re a club.”
The Euro slipped against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Protesters clashed with police in the country’s capital as Spain prepared for a new round of austerity measures in the 2013 budget. Equities and commodities as a result lost momentum, while the Euro again started downside movements against the dollar. ECB – European Central Bank President Mario Draghi’s vigorous defense of the bank’s bond-buying plan to a skeptical German audience on Tuesday had earlier underpinned the euro. Trading activity expected to be mostly subdued on Wednesday, ahead of the Jewish Yom Kippur holiday. The ECB will hold its next policy meeting on October 4 andU.S.non-farm payrolls data, a key monthly market driver, is due on October 5. The Euro could remain under pressure if Spain drags its feet over requesting an international bailout. This must happen in order for the ECB to begin buying its bonds and, until it does, the Euro is likely to weaken further. Worries about the size of Greece‘s deficit also weighed on the Euro, with Germany’s Der Spiegel magazine reporting it could be 20 billion euros, nearly double previous estimates. Investors are once again concerned whether the stimulus measures announced by ECB for the Eurozone & the Fed will have the desired effect of boosting the global economy.
Spanish Prime Minister Mariano Rajoy’s dispute with the leader of his country’s richest region erupted into the newest front of Europe’s effort to extinguish the financial crisis. Catalan President Artur Mas yesterday called early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25, saying the time has come to seek “self-determination.” The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to over 25%. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance, reported Bloomberg. Rajoy has a majority in parliament and says he is doing what’s necessary to pullSpain out of the financial crisis. He says he was elected to a four-year term in November and he intends to complete it. Catalan nationalists are pressing for greater autonomy. Austerity is eroding Catalans’ willingness to keep subsidizing poorer parts of the country. The region contributes a fifth of the economy, more than any other. It’s home to some of the largest companies, including CaixaBank and Gas Natural SA. It transfers 15 billion euros, or 8% of its economic output, to the rest of Spain each year.
Spain is at the centre of the Eurozone Debt Crisis on concerns the government can’t control its finances, bitten by its second recession since 2009 which has put one in four workers out of a job and pushed up borrowing costs. Spain will announce another round of the hugely unpopular austerity measures in a 2013 budget on Thursday, already prompting protests from a public battered by attempts to put the country’s finances in order. The conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions “green taxes” on emissions or eliminating tax breaks, reported Reuters. The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. It must persuade Spain’s European partners that it can cut the budget shortfall by more than 60 billion euros by the end of 2014. Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.
Protests against the cuts are gaining pace. More than 1,000 police barricaded Parliament inMadridon Tuesday against protesters who planned to form a human chain around the building later in the evening. Hundreds of demonstrators gathered in different points of the capital before marching to Parliament, saying they were angry that the state has poured public funds into crumbled banks while it is cutting social benefits. Meanwhile, Rajoy is holding back from applying for European aid, which would activate a European Central Bank bond-buying program and bring down Spain’s punishing debt premiums. Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections October 21, pushed short-term yields higher at auction on Tuesday.
After having weighed all possible options of higher taxation hikes & a selective reduction of tax breaks, it seems they aren’t enough to cover the potential shortfall. After slashing civil servants’ wages, raising value added tax by 3% – the main VAT has gone from 16% to 21% since 2010 – and cutting health and education spending, Rajoy is running out of options. More than 60% of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people. Under current rules the government must raise pensions in line with inflation in November. This VAT effect on consumer prices will cost the government an extra 3.5 billion euros in pensions costs, Conde-Ruiz says, wiping out the 2.5 billion euros it hopes to raise this year by increasing the sales tax.
“Its going to be difficult keeping the deficit to around 2% in the second half, when the first half was closer to 4%, especially since traditionally, the second half deficit is higher than the first,” said Juan Ignacio Conde-Ruiz, economist at Madrid’s Complutense University, reported Reuters. For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1% implying further saving needs of up to 10 billion euros for this year alone. Rajoy has been careful to highlight the importance of next year’s deficit target of 4.5% of GDP though any shortfall this year will have to be carried through and will weigh on 2013’s accounts.
The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country’s debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday. In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations. Half-year deficit data indicate national accounts are already on a slippery slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3% of GDP, including transfers to bailed out banks, making meeting the 6.3% target by the end of the year almost impossible.
A firm US Dollar and a shift in investor focus to the Eurozone debt crisis capped gains in Gold. Gold Bullion has rallied after central banks from the U.S. to Japan took steps to boost their economies, driving investor holdings in exchange-traded products to a record. A poor economic backdrop will keep global stimulus measures on the cards for a while and gold is set to profit from that. Spain will announce a new budget and reform plan on Thursday, while Greece will do the same later this week. We had alerted early this week that Gold movements may remain range bound for the week with an overall positive bias – For more read: “Gold Futures in Turbulent Times”. Gold Futures have been seen in a range of $1,753.20 to $1,790 an ounce over the last eight trading days. The consolidation suggests some near-term indecision about short-term direction, but also a preparation for a sharp next zoom upside. December Gold Futures are consolidating just above $1,750 & a move higher suggests that gold prices may have a slight upward bias. Where large Investors are already positioned long, there’s always an appetite to add more on dips. The $1855 upside barrier remains strong while the RSI (Relative Strength Index) remains overbought, suggesting the market may continue to consolidate or, possibly, pull back. Gold has seen a good run up from $1540 to $1787 in around 8 weeks & a loss of further momentum may very well frighten long term investors & fund managers and may give them cause to book some profits. I would suggest to take advantage of dips.
The Euro slipped yesterday against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Gold and Silver backed down yesterday from their day’s highs on some mild profit-taking pressure later in the session. Copper prices saw positive momentum & were lifted by encouraging U.S. economic data on consumer confidence and house prices. U.S. consumer confidence index rose to a seven-month high of 70.3 in September from 61.3 in August. Also, the S&P/Case-Shiller index showed U.S. home prices rose for the fourth straight month in July to their highest level in nearly two years. The go-ahead for infrastructure projects in China & positive development on the U.S. housing market, which among others, reflects the rising number of building permits and housing starts, should also prove stimulative for Base Metals.
Comex December Gold Futures at a high of $1790 have gained over 12% since the August mid. The surge was fueled on expectations of the Federal Reserve’s fresh round of quantitative easing – the QE3, with more gains occurring when the Fed exceeded expectations by announcing open-ended purchases of MBS – Mortgage-backed securities without a specific timeframe. The sagging Housing market may not recover soon enough as you need to have a job to pay for a Housing mortgage payment & unemployment, already a “Grave Concern,” is still rising. With inflation also expected to rise in the bargain, Gold Futures will continue to gain as a safe heaven asset class. To add more to the Gold Futures buying Euphoria, the ECB & Bank of Japan added to huge bond buying programs & China did its part by announcing an Infrastructure related monetary influx.
Riskier assets fell broadly & the US Dollar index measured against a basket of key currencies rose today while also dampening Gold Futures prices. Ample funds added through further monetary easing should underpin markets, but prices of assets tied to economic fundamentals were likely to be capped, such as crude oil and copper. But Gold Futures may draw investors back over the longer term as a re-flationary policy raises future inflationary risks.
European leaders are struggling to overcome a crisis-fighting stalemate as they face discord over a banking union, Greece’s ongoing debate on how to meet bailout commitments and foot-dragging by Spain and Italy on financial aid requests. Chancellor Angela Merkel and President Francois Hollande clashed on a timetable to introduce joint oversight of the region’s banking sector. Markets that surged this month on the back of a European Central Bank rescue plan and clarity over bailout funding may not offer European leaders the time they need as an easing in market pressure raises the risk of policy complacency. Deadlock over the banking union could delay until next year a key building block in resolving the crisis, compounding turmoil that’s so far engulfed five of the Eurozone’s 17 nations, reported Bloomberg. The news triggered a decline in Gold Futures as investors took up long US Dollar positions on expectations that fresh policy snags that could further delay solving of the Eurozone debt crisis. Spanish Prime Minister Mariano Rajoy has displayed reluctance to seek more help after ECB President Mario Draghi unveiled the central bank’s bond-purchase plan, linked to conditions for recipient states, on Sept. 6. Spanish Deputy Prime Minister Soraya Saenz de Santamaria said last week Spain will consider a bailout if conditions are acceptable.
Another uncertainty which persisted as major economies took action is whether China will ease monetary policy, with its economy on course to show slower growth for the seventh straight quarter over the current period. A senior official was quoted by state media on Sunday as saying that China plans to stick to its tight property sector policies, reinforcing officials’ reluctance to ease property market restrictions to bolster the economy.
Spain was considering freezing pensions and speeding up a planned rise in the retirement age, raising hopes for the country applying for a bailout, but uncertainty remained over whether and when such a move would come, reported Reuters. A credit review by ratings agency Moody’s, due by end-September, could prompt such a move if Moody’s downgrades Spanish debt to junk status. A bailout would allow the ECB – European Central Bank to step in and buy Spanish sovereign debt, which would lower borrowing costs in the large European economy. European Union paymaster Germany said on Friday that Spain does not need a European bailout, dousing financial market expectations that Madrid will gain early relief from European Central Bank bond-buying. Spain insisted on Saturday it will not rush to seek a sovereign bailout, even as the country suffers from a high deficit, soaring debts, a banking sector burnt by the bursting of a real estate bubble and a deepening economic contraction.
The unrestricted new US policy for quantitative easing to print more currency and bonds with no limits imposed whatsoever, signals rabid inflation with a huge potential for Hyper-Inflation. This will keep a strong floor supporting Gold Futures on all declines. Inflation will continue to rise as the Fed & the ECB will keep flooding the markets with paper until they are satisfied they have won & brought about a huge change. Higher Taxations, Austerity measures & Inflations will soon hit ceiling, and then – Bang, the great reversal will hit in a huge uncontrollable manner. New and heavier tax burdens will crush individuals and companies, smothering existing potential growth and blocking new start-ups. Banks are loaded with taxpayer cheap money furnished by the federal government. They can just hold it, and earn a small but steady interest income on the rate spread, basically doing nothing. With interest rates at drastically low levels, small savings accounts & other conventional safe money growing vehicles no longer seem enough & the need to overcome the speed of Inflation will lead investors to riskier asset classes. Massive money printing will also demolish the value of the held currency violently. Simple Day trading & not “Long term investments” would be the need for the Future. With so much of insecurity going around, even the most fundamentally strong investment may simply collapse. “Putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or even better said- Gambling. As such, those shareholders who fail to thoroughly analyze their stock purchases, such as owners of mutual funds, could well be called gamblers. Indeed, given the efficient market hypothesis, which implies that a thorough analysis of stock data is irrational, most rational shareholders are, by definition, not investors, but speculators.”
A lot of funds have lately been buying Gold since mid-August due to the fact that major central banks around the world have increased bond-buying programs and increased stimulus efforts. Gold Futures may witness some mild profits booking as October contracts close to expiry going by the end of the month and with the end of the second quarter also, means potential for profit-taking from fund managers who would want to show they’ve had a good month or quarter. A rise above $1800 may trigger technical buying stops which may lead to a potential resistance of $1855 for Gold Futures.
This week & most of the next week may keep Gold Futures in high turbulence mode as alerted last week: Gold Futures in Turbulent times. All dips in Gold Futures will continue to be bought as market participants remain bullish on Gold Futures Prices, which tend to benefit from easy monetary policy. Bullishness has set in more due to the slew of loose monetary policies announced a the last few weeks. Holdings in the SPDR Gold Trust, the world’s largest Gold ETF – exchange-traded fund, had climbed to 1,317.762 metric tons by Sept 21, its highest level since July 2010. Barring surprise developments in the Eurozone over the ongoing debt crisis or any Middle East tensions, this week would mostly be a quieter one. Key U.S. economic reports include the consumer confidence index on Tuesday, new-home sales Wednesday, then weekly jobless claims, durable-goods orders and gross domestic product on Thursday. Friday brings personal income and spending, the Chicago Purchasing Managers Index and Thomson Reuters/University of Michigan Consumer sentiment index.
Experts Speak: EconMatters (By Mindful Money via QFinance)
On Friday, in perhaps an example of the strategy of a good day to bury bad news, Spain announced some changes in its position on bank bailouts. Coming around an hour or two before the keynote speech of US Federal Reserve chairman Ben Bernanke, it did not get the attention it deserved except in one area. Longer dated Spanish government bonds fell in price as her ten-year yield rose by more than a quarter of a point to 6.86%.
There is to be a change in the Spanish bank rescue mechanism called the FROB which is to become a “bad-bank”. This is quite a change in itself as before the Spanish authorities had loudly proclaimed that a bad-bank was not going to be necessary in Spain. For those unfamiliar with the concept of a bad-bank it is an institution which will take the weaker assets off the books of the Spanish banks. In essence, those that represent airports which never opened and empty apartment blocks and of course the associated loans.
So we are seeing the usual type of clean-up which is another example of the privatization of profits and the socialization of losses. This is in spite of claims by Spanish ministers that this will show a profit. You see we know what happens here as we have the example of the Irish bad-bank called NAMA which was established with Irish ministers making exactly the same claims. The reality is that, according to the Irish blogger Jagdip Singh, it has so far lost just under 25% on its overall holdings.
As we survey the Spanish banking system, we see one where the size of property loans that are to use the euphemism “problematic” is around 180 billion euros. Or rather that is the estimate, so far as experience has told us that closer examinations tend to see such numbers rise. If we recall Bankia’s situation from the spring the estimate of the required bailout doubled in a fortnight.
The FROB itself is to be expanded to a capacity of 120 billion euros to cope with the requirements outlined above. This is up from the previous 90 billion Euros. All well and good until we recall that it actually only had a capital of 15 billion euros which as I pointed out on the 25th of May.
This leverage capacity can be increased up to 6 times with the approval of the Ministry Of Economy and Competitiveness. So 15 billion times 6 gets us to the 90 billion. However, as I pointed out then dealing with likely losses via a leveraged institution has an obvious problem. What if the losses turn out to be larger than the capital base? We await to see how the Spanish government will back the new increased FROB capacity.
More fundamentally exactly how will leverage solve problems which were created by an excess of leverage? Wasn’t the European Financial Stability Facility supposed to be backing this?
Exactly, but so far we seem to be lacking any real details of what will happen here apart from the original promise of up to 100 billion euros of bank aid. Even the 100 billion Euro capacity compares unfavorably with the new 120 billion FROB capacity.
I discussed the problems which led to Bankia’s nationalization back on the 8th and 25th of May. It published its latest figures after trading had closed on Friday and they showed a further loss of 4.4 billion euros. To stop it collapsing the FROB has stepped in but it is much lighter on the detail of how much this will cost, than hyperbole.
The restructuring will guarantee the solvency and long-term viability of BFA/Bankia Group. Really? One factor that seriously questions such hype is the way that in spite of all the state support Bankia has been bleeding deposits. She lost some 12.8 billion euros (10%) in the first six months of the year and we know that for Spanish banks overall the rate of deposit loss increased in July.
On Friday Spain’s Treasury announced that Spain had borrowed some 48.6 billion euros or 4.6% of its Gross Domestic Product in the year to July. This was more than the deficit target for the year but this has been revised several times now and is 6.3%. So the new deficit target looks under pressure to say the least and it was only set on August the 8th! Also the announced figures only cover the central government and we know that other porblems lie in Spain’s troubled regional government system. Even if we did not know this we would have been reminded by the fact that Valencia, Murcia and Catalonia have called for more government help in the last fortnight.
If we compare these numbers with last year’s we see that Spain’s central government fiscal deficit is running 1% of GDP higher than last year. Yet again proclaimed austerity seems to mean an increase in a deficit rather than a fall. As of the beginning of this month the austerity noose has been tightened by an increase in Value Added Tax to 21% and other changes but the past tax increases had led to a revenue decrease of 1% in the year to July as the economy weakened.
On Friday I reviewed the latest retail sales figures for Spain and they showed a fall of 7% on the year before at what you might consider to be something of a peak (summer) period. Today saw the release of the most up to date data we get as the purchasing managers report for August was released.
The Spanish manufacturing sector remained in contraction in August as output, new orders and employment all continued to decrease. That was the sixteenth fall in a row and whilst the rate of fall moderated slightly from 42.3 last month to 44 this on a scale where 50 represents unchanged it is still a substantial decline. And the detail remains a concern. A further decline in new orders was seen at Spanish manufacturing firms (…) A further sharp decline in employment was recorded in August. There was little sign of relief via possible exports as the figure for the eurozone overall also showed a contraction coming in at 45.1 for August.
I discussed at the beginning of this article the ten-year yield in Spain which is 6.8%. My point about an extreme yield curve is made by the fact that her two-year yield is 3.6% or 3.2% lower. It is not unnatural for the longer dated yield to be higher it is the size of the gap which is the issue. Why is it there? Because investors believe that the head of the European Central Bank Mario Draghi made a promise before the summer holiday to support shorter-dated Spanish bonds. Accordingly they have rallied and are awaiting the details of such support on Thursday when the ECB meets. There is plenty of scope for disappoinment.
If Spain is tempted to start funding herself with shorter-dated bonds to take advantage of cheaper funding rates there is a problem as the bonds will need to be refinanced relatively quickly and she becomes more vulnerable to bad news.
We see so many familiar themes represented today. My financial lexicon now has so many entries under the definition of austerity where it has come ever more to mean an increasing fiscal deficit. It also needs a subsection where it seems to involve ever higher taxes as public spending cutbacks prove elusive. Added to this we see that Spain’s new efforts to tighten the noose which began on Saturday are likely to plunge her even further into an economic depression. I fear for the last part of 2012 and the beginning of 2013.
On the other side of the coin we see the ECB presented as a saviour and indeed it does have some powers. The problem is that it can help Spain’s government to issue debt more cheaply if it chooses too but this does little to help the underlying economic problems and poses questions for its own future. With one of its main interest-rates already at zero and a balance sheet of approximately 3 trillion euros we can see that even enormous monetary stimulus efforts are not helping the Spanish economy much.
Any solution is in the hands of politicians in the eurozone which requires either closer co-operation or a break-up. But instead we seem likely to see more muddling through where on the evidence so far everything gets worse while politician’s claim success.
Does the Entire Eurozone actually want the Euro to survive? With growing Differences & also the In-differences, a gradual process of disintegration eventually makes a Eurozone breakup unavoidable. A Eurozone breakup may only be postponed & not avoided completely given the current conditions of being for & against the Eurozone Bonds Buying support & resentment. If the inevitable breakup is concluded as Un-avoidable & the only viable, logical solution of a way-out, a delay would in fact worsen the situation much more & the cost will most likely be in trillions of euros. A breakup at any point will be a costly & a painful affair, but will be a lot dearer after wasting additional trillions of Euros in a fresh round of official financing further on. Only if the Political Circles in the European Union realize this in time…. A Crushing Credit-Crunch, Rising Inflation, high oil prices undermine prospects of a timely recovery.
Even with rising political constraints in Germany, the ECB now plans to provide another round of large-scale financing to Spain and Italy with more bond purchases. European and global markets have had a recent strong run on hopes that a new plan being drawn up by the ECB, the central bank overseeing the 17 countries that use the Euro, could help the Eurozone tackle its problems. Investor appetite for Spanish, Italian and other peripheral debt also picked up, at the expense of German bonds. Germany’s der Spiegel magazine said over the weekend that the ECB’s new bond buying plan, due to be detailed at the start of September, could see the bank setting upper limits on bond spreads, above which it would start buying. Italian and Spanish bonds rose after the Spiegel report. The yield on Spain’s 10-year government bond fell 14 basis points to 6.27%, while the yield on Italian 10-year bonds was 5.73%, down 4 basis points.
However, policymakers remain in the early stages of thrashing out the details of any plan, reported Reuters. With many European policymakers on summer holidays, investors have had a respite from negative headlines. This week’s focus is on a meeting between leaders of Greece and Germany on Friday as well as details of Spain’s ‘bad bank’ plans, due to be announced on the same day. French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin on Aug. 23. Greek Prime Minister Antonis Samaras travels to the German capital the next day before going on to Paris on Aug. 25. Rumors are, Greece is expected to stage a disorderly Eurozone exit in the next few months.
The talks come as the ECB fleshes out plans to curb the turmoil in European bond markets, a move that would give governments time to push through measures to revamp their economies. ECB President Mario Draghi is trying to overcome opposition from Germany’s Bundesbank to a new bond-purchase plan. Announced on Aug. 2, Draghi said any ECB bond-buying would work alongside euro-area bailout funds and only if countries applied for support and accepted strict conditions in return. Italy and Spain, the countries now at the heart of the crisis as borrowing costs soar, have yet to say whether they will request ECB help. German Finance Minister Wolfgang Schaeuble said Aug. 18 that the sovereign-debt crisis mustn’t become a “bottomless pit” for his country. “There are limits,” he said, ruling out another aid program for Greece. At the same time, two German lawmakers said last week that Merkel is considering easing Greece’s bailout terms, as reported by Bloomberg.
Fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. Indeed, the Eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when Eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy. As a result, disorderly breakup of the Eurozone remains possible. US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential. Job creation faltered in April and May, so the US may reach stall speed by year end. The risk of a double-dip recession next year is rising with a looming US fiscal cliff. China has been witnessing a gradual slowdown of its economy though official data numbers cannot be heavily relied upon. The economic slowdown in the US, the Eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union. Eurozone Economies Darken….
The fiscal and banking union elements may be important to the restoration of the Eurozone. But the starkly naked question is, whether large-scale financing and gradual adjustments can restore Eurozone’s “Sustainable Growth” in time. Only if Italy and Spain are illiquid but solvent, and large-scale financing provides enough time for austerity (which seems difficult at this point in time), and economic reforms to restore debt sustainability, competitiveness, and growth, the current strategy will work and the Eurozone may survive. In the meanwhile, ESM or some form of fiscal and banking union may also emerge, together with some progress on political integration. The supporting Banks & nations may have to maintain continued large-scale financing with tons of patience to avoid a bailout fatigue. Medicine not given on time is “NO Medicine Given”. As for the Debt ridden nations, earlier engaged lavishness & arrogance has to be paid for, one day or the other & no amount of life support system will help the recovery without Self-correction & restraint. The periphery nations currently with unsustainable debt burdens will have to avoid a social and political backlash against years of painful contraction and loss of welfare to avoid an austerity fatigue. Also the risk of massive losses incurred on the back of massive and large-scale financing for Germany or the ECB might jeopardize the core Eurozone economies’ debt sustainability, placing the survival of the European Union itself in question. Despite the huge risk, Euro nations and the ECB are relying on large-scale liquidity to buy time to allow the adjustments necessary to restore growth and debt sustainability. Germany seems fixated on the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. With the kind of political Gridlock being witnessed over the past months, the Eurozone will face serious difficulties in achieving a full fiscal, banking, economic, and political union to overcome the full blown Eurozone Debt Crisis, triggering the question : Does the Entire Eurozone actually want the Euro to survive?. A gradual, timely & a mutually agreed upon Early Breakup would be graceful rather than a split after enduring graver & nastier conditions. ONLY a delay (as expected) in the breakup will prove whether the delay was rightly decided upon or not. To prevent a disorderly outcome & a complete disintegration of the Eurozone, today’s fiscal austerity should be much more gradual, a fiscal union with debt mutualization – Eurobonds, could be implemented & in addition a full banking union along with moves toward a greater political integration must be considered.
Eurozone Bond buying by ECB will not help solve the problems in Spain or Italy. It may simply delay the big blow by buying some more time & with that in fact, increase the impact later. The stabilization of economic sentiment from its current weak fragile state will require a much more constructive stance from EU partners, especially regarding the targeted speed of fiscal adjustment. The EFSF/ESM bond-buying request by Italy is only a matter of when & not an option. Political risks, debt burden, deepening recession, constructive reforms remain the four vital key issues. Global financial markets lack confidence that Spain or Italywill take sufficient structural reform measures, thereby weakening the timely ECB debt buying measures also.
The economy in Greece is expected to shrink around 6.6% this year and then 2.0% next year, much worse than June’s poll which penciled in declines of 5.8% and 1.3%, respectively. Greece is desperately trying to keep the country glued together, but has just dealt another setback, it seeped out that the next bailout payment of €31 billion, to be paid in June, then delayed till September, expected to be delayed once again, and this time only till October. The Troika was supposed to send Greece€31.2 billion in June. But during the election chaos, Greek politicians threatened to abandon structural reforms, reverse austerity measures already implemented, re-hire laid-off workers. The Troika then Instead of sending the payment, promised to send its inspectors, who in turn are technocrats, not decision makers. In late July, the inspectors returned to Athensyet again and left on Sunday. After another visit at the end of August, they’ll release their final report in September. The Troika, the ECB – European Central Bank, the EU – European Union, and the IMF – International Monetary Fund will be conducting a mega inspection in September, not for a few days, but for the entire month. Of the still needed €11.5 billion in austerity measures, €7 billion have been identified with the government, but they’re still looking for the rest. The meeting when Greece’s fate will be decided is rumored to be on October 8. One of the bailout conditions is to cut 15,000 civil servants by the end of 2012 and 150,000 by 2015. Given the unmitigated jobs fiasco, such cuts—if the coalition government can even agree on them—may trigger another revolt in the streets. And that could start at the end of August.
Greece that is out of money again, would default on everything, from bonds held by central banks to internal obligations. On August 20, the day a €3.2 billion bond that had landed on the balance sheet of the European Central Bank would mature. Europe would be on vacation. It would be mayhem. And now who would get blamed? Two weeks ago, ECB stopped accepting Greek government bonds as collateral for its repurchase operations, thus cutting Greek banks off their lifeline. Greece asked for a bridge loan to get through the summer, which the ECB rejected. Greece asked for a delay in repaying the €3.2 billion bond maturing on August 20, which the ECB also rejected though the bond was decomposing on its balance sheet. It would kick Greece into default. And the ECB would be blamed. No the ECB has cleanly passed the buck back to, surprisingly the Bank of Greece itself by directing Greece to sell its now worthless treasury bills with maturities of three and six months to its own bankrupt and bailed out banks under the Emergency Liquidity Assistance.
Economists see slow progress on Greece’s budget deficit. It will shrink from last year’s 9.3% to 8.0% this year, compared with its target of 7.3%, and just 6.8% in 2013. That would put Athens well off-track from its aim of getting the deficit below 3% by the end of 2014 from 9.3% in 2011.
A Greece exit from the Eurozone will set a repeatable precedent for others to follow. The departure of Greece from the Eurozone could lead to Spain, Portugal and Italy leaving too. Debt-distressed nations of the Eurozone may consider that preferable to a painful and potentially overbearing burden of repeat newer debts on their backs with little benefit to show for it but a hell of a lot to pay for. A Greece exit would most importantly, frighten it’s creditors to an extent that all other loans or Bailouts to other Eurozone nations would come to a grinding halt as the debt value would suddenly collapse to an almost paltry quantum. The credit squeeze on other Debt ridden nations would precipitate their departure from the Eurozone also. Unlike Greece, when nations like Spain or Italy, with a significant contribution to the GDP of the Eurozone exit the Euro, it would hurt the export competitiveness of the Eurozone in international trade. Heavy weights like Germany or France would experience further bank crises due to the high levels of debt from these nations on their Banks books. But the Euro may rise tremendously as balance of payments would show a much stronger picture.
Among the struggling Eurozone peripheral economies, only Ireland looks on course for a return to modest growth any time soon. While the survey pointed to a reduced likelihood depression-mired Greece will exit the Eurozone soon, it also underlined why Spain is the new focal point of the bloc’s sovereign debt crisis. Spain’s economic woes & spiraling unemployment, will keep markets in doubts on the medium-term solvency of Spain. As a consequence Spanish bond yields and the corresponding spreads over Bunds will stay high or even climb further.
Spanish Prime Minister Mariano Rajoy last week inched closer to asking for an European Union bailout for his country, where government borrowing costs have failed to recede much from near-unsustainable levels. In the present deteriorating conditions it seems very likely that Spain will opt for of a full sovereign bailout before the end of the year. ECB President Mario Draghi last week signaled that the ECB was preparing to buy Spanish and Italian bonds, but only after EU bailout funds were triggered and countries had asked for help.
A Reuters poll of economists suggested Spain’s economy will contract 1.6% this year and then 1.1% in 2013 – the latter forecast representing a sharp downgrade from the 0.7% decline in June’s survey. The current unemployment rate of 24.6% in the second quarter seems it has further to climb. The poll showed it ending this year at 25% and next year at 25.6%. The Eurozone’s No.3 economy will also fall further behind on its budget deficit targets, even in light of Eurozone ministers last week granting Madrid an extra year until 2014 to reach its goals.
Portugal too suffered a cut to its outlook for 2013. After shrinking 3.0% this year, the Portuguese economy is expected to decline around 1.0% in 2013, compared with a 0.6% contraction in the last poll.
Similarly, it looks unlikely to meet its target of cutting its budget deficit to 3.0% in 2013, with the poll instead showing it at 3.7% by the end of next year. Ireland at least looks on track to return to modest economic growth, starting with 0.3% this year and quickening to 1.5% next year. That would put it more in line with the outlook for Europe’s bigger and more resilient economies.
And unlike its peripheral peers, Ireland looks likely to beat its deficit target of 8.6% this year, with the poll suggesting it will come in at 8.3% of GDP. The findings backed up a separate poll of economists on Wednesday, which showed Ireland will benefit from stronger exports – Reuters poll.
People who think that higher inflation would somehow help the poor and hard pressed in the European Union should study economic history more carefully. It could lead the Germans to question the viability of the Eurozone, increasing the risk that the Euro will break apart for political reasons. The Germans didn’t turn over their monetary sovereignty to the ECB to facilitate bailouts of irresponsible governments and the crazed banks that funded real- estate bubbles. Throwing greater fiscal transfers from Germany into the mix will serve only to worsen the situation. Would Germany be wrong in their line of thought if they tried to save what they have rightfully earned? The stabilization of the Eurozone should not be a goal in and of itself, regardless of the costs associated with that course.
Three years into the Eurozone debt crisis, the gravity-defying German economy has stalled and some fear it could fall into recession in the second half of this year. Over the past week, Europe’s largest economy has been hit by a series of increasingly gloomy data releases, showing declines in manufacturing orders, industrial output, imports and exports.
In an unusually stark warning on Friday, the economy ministry said these figures and a sharp drop-off in business sentiment in recent months pointed to “significant risks” to Germany’s outlook. Next Tuesday’s, GDP – Gross Domestic Product data for the second quarter is expected to show modest growth of about 0.2%. But the danger of recession in the second half of the year is growing, at a time when Europe’s single currency bloc desperately needs growth from its economic powerhouse.
“The German economy is losing momentum – there’s no doubt about that – and in the third quarter the economy will shrink compared to the second quarter,” said Joerg Kraemer, chief economist at Commerzbank. “Things will go downhill from here. The German economy is not faring as badly as the rest of the Eurozone but it can’t disconnect itself, especially as growth in China has slowed and continues to do so.”
Germany is known for its export-driven growth, but the Eurozone crisis has hit its biggest market. Roughly 40% of Germany’s exports go to its partners in the Eurozone and 60% to those in the broader European Union.
China, one of Germany’s fastest growing markets representing roughly 7% total exports, is also slowing. Chinese data this week showed factory output rising at is slowest pace in three years, new loans at a 10-month low and export growth grinding to a halt.
Peter Bofinger, one of five ‘wise men’ who advise the German government on the economy, said recent industrial output data suggested the country was on the verge of a technical recession. “It’s not the case that Germany can counter the weaker international economic situation with its own dynamism,” Bofinger told Reuters. It is too early to predict how the looming slowdown could influence the intense debate in Germany over giving aid to struggling Eurozone partners such as Greece and Spain. The ARD survey showed that 84% of Germans believe the worst of the debt crisis is still to come.
The unanswered question is whether a weakening economy will make Germans less likely to support government rescue efforts for the broader Eurozone. Merkel has said repeatedly over the past year, most recently in a statement with French President Francois Hollande last month, that she will do everything to save the Eurozone. But not all Germans support that course and the chancellor’s room for maneuver appears to be shrinking at a time when both Greece and Spain may soon require new rescues.
Gold Trading remains modestly quite & range-bound but pleasantly now at a higher plane than as previously seen. Gold prices have climbed 1.6% since Aug. 2. Comex Gold Trading open futures positions at the end of the day as of yesterday, has continued to slide, falling another 2,816 contracts to 388,254. Gold Trading open interest on Comex is the lowest it has been since August 2009 and this will trigger higher volatility amid thin volumes. Thinner trading volumes & range bound trading conditions tend to mean more price movement volatility than might otherwise occur amid higher volumes with price movement triggers.
Equity Markets seem to have stabilized after last months weak trading & Crude Oil is also modestly higher. Gold ETF’s have started to show some signs of Gold accumulation again. Last month, global Gold ETF – Exchange Traded Fund holdings declined 367,000 ounces but so far this month, global Gold ETFs have risen 429,000. Market’s Risk appetite seems to have improved slightly.
Higher food prices emanating from droughts in the U.S. Midwest and drought like conditions in India ultimately could offer support to gold prices. Higher grain and ultimately higher food prices are historically supportive of gold prices.
Investors are turning a blind eye to the U.K.’s faltering economy, which is shrinking faster than Spain’s, as the value of the nation’s independent monetary policy outstrips its deteriorating growth prospects.U.K. economy contracted 0.7% in the second quarter, while Spain’s shrank 0.4%. While U.K. borrowing costs have plunged over the past year, those in nations such as Spain and Italy have surged. The worsening economic outlook has prompted banks to predict the Bank of England will increase stimulus again this year. Moody’s, which has a “negative” outlook on the U.K.’s Aaa rating, lowered its 2012 estimate for the nation’s economic growth to 0.4%.
A potential Greece exit – Since forming a government after the June 17 election, the second in six weeks, Prime Minister Antonis Samaras and his ministers have been in talks with the EU, European Central Bank and International Monetary Fund to keep aid flowing during the fifth year of recession. They are working on identifying 11.5 billion euros ($14.2 billion) of further budget cuts and are 3.5 billion euros to 4 billion euros short of the target, Finance Minister Yannis Stournaras said this week. Samaras has vowed to make the sale of state-owned assets a priority. Greece’s state-controlled Public Power Corp. SA (PPC) is scheduled to sell to competitors to meet four-year-old European Union demands that the country deregulate its energy market. PPC is a test of Samaras’s ability to prove to the euro area and IMF that Greece is meeting their demands to open markets to competition, scale back the state and cut red tape, reported Bloomberg. Greece first has to resolve a dispute with the EU over PPC that predates the debt crisis. Time is pressing for the Greek government, which is scrambling to meet an Aug. 20 deadline to repay 3.1 billion euros of debt held by the ECB.
Europe’s stock markets began their latest rally two weeks ago when ECB President Mario Draghi said the central bank was “ready to do whatever it takes to preserve the euro”, raising hopes of bold steps to help lower the borrowing costs of Spain and Italy. Evidence that the Euro-zone’s problems have slowed economic activity in the United States and Asia has added to expectations that other major central banks will soon announce their own plans to ease policies. Last week the ECB outlined a plan aimed at directly helping two of the worst hit nations – Spain and Italy- which are battling with high borrowing costs while their economies wallow in deep recessions. Only the Uncertainty over the timing and the details of this aid is keeping Gold Prices from rallying.
Commodity traders have seen a lot of assurances & will not act on intent only, instead now eagerly await some real action from Central Banks to pump up volumes in Gold Trading. Markets also are on the watch for indicators & signs of a pick-up in global economic activity to whip up risk appetite or for a slump to expect fresh Quantitative Easing from the Central Banks. A Chinese slowdown would mean Base Metals moving downside & a weak INR combined with scanty rains would mean sharply lower appetite for physical Gold demand from India, the world’s largest consumer of the yellow metal. Gold is traditionally a popular gift at festivals and weddings inIndia. Indian consumers seem to prefer to recycle household jewelry now as the festive buying season begins from August, instead of buying new sets. The high price of finished Gold, which has crossed Rs 30,000 mark, is stopping consumers from buying new jewelry. The availability of recycled gold has increased in the market by almost 50%. Gold trading & demand at the start of the festival season has been slow with rural buyers staying on the sidelines, preferring to hold on to their cash at a time when deficient monsoon rains threaten to dent their incomes. The rural population accounts for 60% of the gold demand in India. India’s appetite for gold has already taken a hit this year from a weak rupee and an import tax hike. People will prefer to stay in cash than buy Gold due to the drought-like situation in the country. Gold Trading has taken a huge hit in the Indian Markets this year.
Many investors are worried that the ECB’s condition for action – that troubled countries ask for help from the Euro-zone’s rescue funds – has raised the risk that the crisis in Spain and Italy may have to get worse before a move can come. The bloc’s new permanent bailout, the European Stability Mechanism (ESM), also still needs approval by the German Constitutional Court, which doesn’t rule until September 12.
The entire Gold trading community expects the US Fed to deliver on QE3 at its September meeting, pushing Gold, Silver and Base Metals higher. Gold Prices have surged 70% from the end of December 2008 to June 2011 as the Fed kept borrowing costs at a record low and bought $2.3 trillion of debt in two rounds of so-called quantitative easing. ECB President Mario Draghi said the central bank was “ready to do whatever it takes to preserve the Euro”, raising hopes of bold steps to help lower the borrowing costs of Spain and Italy.
Whenever the much awaited breakthrough is seen, the initial movements may point towards a wrong direction & set of a false alarm as seen most of the times before the onset of a huge rally or a meltdown. A sharp downside may be set off by an initial sharp rise or a potential rally may be first seen as a downside spark. Do not jump the gun at the initial onset of a Silver or Gold Trading breakthrough. Wait for the initial heat to settle down & wait for the momentum to set in. I yet stand by my view of a large upside rally in Silver, later followed by Gold as reminded several times earlier.