A wave of “Europhoria” swept over the markets overnight in the wake of the announcement of a deal to tackle that which ails some of the region’s countries and many of its banks. The day-long standoff that threatened to take on the characteristics of a Mexican one ended when banking representatives lost the arm-wrestling match with the “Merkozy” team and decided that taking something is better than taking very little at all.
This “EuroCup” showcased the “passing” skills of the Franco-German team at the end of the evening. Perhaps the banks made a wise decision in all this; they are, after all, in need of raising €106 billion in fresh capital in order to comply with the tougher rules coming from the European Banking Authority. Thirty of those billions needing to be raised are for Greece’s banks. The other 69 that fall short of capitalization minimums will have to duke the remaining 76 billion out, somehow.
In brief, the latest (final?) plan calls for creditors to receive half of what they invested into Greek debt (a “crew cut” but not a head-shave) and for the EFSF to be boosted to the magic €1 trillion mark. Men in black (suits) were photographed exchanging many manly hugs after the meeting finally came up with the aforementioned figures. French President Sarkozy said that Greek bondholders “voluntarily” agreed (finally) to a 50% write-down of the value of their holdings.
The IMF will also have a larger role to play in the new European financial equation, as might…China. Monsieur “New Papa” Sarkozy plans to call China’s Hu Jintao today to ascertain if he might “contribute” to a new fund aimed at fixing the debt problem. Coincidentally (not) the EFSF’s chief executive is scheduled to visit…Beijing tomorrow. UK Chancellor Osborne tried to cool down expectations of IMF largesse toward Europe by saying that “we would not be prepared to see IMF resources reserved for the Eurozone.” Yes, there are many other countries out there – hats in hand – waiting to receive some dough from the International Monetary Fund.
It is just a bit funny that the word “voluntary” has come into the post-game conversation to describe that which debt holders have accepted. It was their contentiousness that had in large part kept the guessing game and agonizing process of coming to a resolution on the front pages for weeks. But, hey, an “involuntary” write-down would have meant that we had a “credit event” on our hands. You know how markets tend to react to “credit events.” As for the now larger EFSF, well, it could be large enough to avert the so-called ‘contagion’ and the need for holdings fresh, similar summits on the subject of what amounts to write downs for Spanish or Italian debt.
The common currency soared to a near two-month-high (above $1.40) while the US dollar was left by the side of the road like a jilted lover by the specs. Stock markets went into orbit while shares of banks such as SocGen and Deutsche Bank soared by nearly 10%. The Dow was preparing to have a very, very good day today. Something else that the US stock market might well celebrate today is the release of US economic metrics. Despite the incessant gloom and doom being doled out in generous heaps in various newsletters, the American economy showed that it performed a whole lot better than such expectations.
It was anticipated that US economic expansion took place at an annual ‘speed’ of 2.8%.The actual number was 2.5% and albeit it was under the forecasted figure, stock futures remained higher in the 45 minutes prior to the opening bell on Wall Street. Such a number is more than double of those that came in for Q2 and spooked not only the aforementioned financial scaremongers but the markets and the Fed as well. Ironically, the progress that the US economy made on the quarter probably took place because the American consumer and the country’s business community did not cower in a cave and stopped investing, producing, or consuming. Household purchases, for example, rose by 2.4% in the period, which was higher than had been projected.
Jobless claims filings were also on tap this morning. The data shows that initial requests for benefits fell by a modest 2,000 cases to 402,000 in the latest reporting period. Dire warnings and smug predictions as to why the ‘double-dip’ is knocking on the door any minute, and as to the Fed getting the champagne bottle ready with which to launch QE3 will have to be kept in the nearest freezer for the time being. But, hey, such is the nature of recommendations. To wit: Goldman Sachs gave Olympus a "Buy" rating on Oct.12, after which…the company lost half its value. The firm is firmly convinced that gold will advance in 2012. Contrarians, rejoice.
Spot metals dealings opened with gains this morning, but such advances were more sizeable in the industrial metals than they were in gold. With the US dollar being much lower on the trade-weighted index and with risk appetite having probably turned voracious after the EU announcements, one might have expected the yellow metal to try to test the upper reaches of its recent upward correction (near $1,750). But, as they say, it’s never too late to try.
In any case, the gains that gold achieved over the past couple of sessions now appear to have slowed as the semi-resolution of the European crisis does imply the waning of some safe-haven searches and the quest for making a buck in certain other assets possibly reasserting itself. We did find it a bit curious that gold’s advances on certain recent days were “lumped in” with the “rising risk appetite” explanation. Bullion should be (or has been, historically speaking) all about trying to maneuver around risk. Ah, but that was in the good old days when “sharky” hedge funds were not throwing all kinds of money at all kinds of (ETF) walls to see what sticks…
New York trading had gold starting the day off at $1,727 per ounce with a gain of $1.50. Silver climbed to $33.75 and posted a 39 cent advance. The much-promised narrowing of the gold-silver ratio to 30, or 20 to 1 appears to still be nowhere in sight as the two are orbiting around the 51:1 level. Platinum rose above the $1,600 mark and was ahead by $18 at a bid of $1,611 the ounce. Palladium moved $17 higher and touched the $664 level. The noble metal is now nearly 20% higher than the recent lows very near $550 recorded only some three weeks ago.
Gold’s 30-day gain stands at roughly 4% as of this morning. The yellow metal diverged from the rest of the complex around the 9 o’clock hour as some profit-taking arose indicating some sighs of relief in the wake of the EU summit, and some players looking for buck-making opportunities elsewhere (as in the stock markets). We might well have a $1,700 to $1,750 range to contend with but it is too early to make meaningful bets on same. Players first need to learn how solid the ‘ice’ is that has formed at the $1,700 pivot point recently.
We leave you now with the formal words of EC President Herman Van Rompuy as uttered after the big summit last night – gilded with the warm glow of optimism and forward-looking:
“The Euro Summit decided to reflect ‘on a further strengthening of economic convergence within the euro area, on improving fiscal discipline and deepening economic union, including exploring the possibility of limited Treaty changes.’ The full European Council will revert to the issue in December on the basis of an interim report by myself in close cooperation with Presidents Barroso and the President of the Eurogroup. The report will be finalised by March 2012.
“We do not want to repeat some of the errors from the recent past. In taking today’s decisions, we lay the foundations for our future. All Members of the Euro Summit are determined to follow this path.”
Them’s soothing words. See the Dow add 261 points in the first seven minutes of trading.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America