Gold unimpressed with Europe’s “grand solution”

In the Lead: “Yawn”

Well, the “grand solution” that was so eagerly and anxiously awaited by global markets and investors from the EU was finally delivered overnight. However, the plan is neither “grand” nor does it offer a final “solution” to the problems that continue to plague the region. One, more concrete, item that the meeting yielded was the addition of €200 billion more to the ammunition pile with which to combat the debt maelstrom. Aside from that, there is very little lipstick that sticks available to place on this porcine, at this juncture.

While we can now talk of a “fiscal union” of sorts, the fact that the UK and three other nations have opted not to throw in their respective hats into the fiscal wedding ‘ring’ is indicative of perhaps more pain to come – at least on the political front. President “Sarko’ wasted no time in blasting Britain’s David Cameron for being a holdout. For his part, the British PM remained adamant that interventions into the national budgets of some nations by others are more loathsome than black pudding.

Don’t look now, but the “ultimate” (yet, by now the fifth) agreement to save the union and the common currency are not playing very well with those who have sizeable money at stake. Quietly, or perhaps not so quietly, a number of European chief executives have been slip slidin’ away their dough into…Germany. Obviously, at least as certain Spanish CEOs are concerned, the possibility of a fragmentation of the euro and a return to peseta is not comforting when millions are involved. A growing number of corporate chiefs in potentially affected countries have either moved money to Germany, are planning to do so, or have set up ‘plan B’ blueprints for moving headquarters to Scandinavia or to shut down altogether. Grand Accord? “Yeah, right” they say.

The blueprint that was delivered after the “all-nighter” in Marseille by the aforementioned members of the EU places the burden for action upon the ECB at this point. Markets appeared to react with tepid, barely-heard ‘applause’ to the accord on the fiscal front. In fact, aside from some mild gains in European equities and Dow futures, plus a few assorted knee-jerk corrective advances in the commodities that got clobbered on Thursday, the niche that matters most – Italian, Spanish and other bonds – showed that yields continued to climb even after the Marseille marathon meeting.

To make matters worse, Moody’s kept up the ratings machete action and lowered the status of BNP Paribas, Soc Gen, and Credit Agricole this morning, noting that “liquidity and funding conditions have deteriorated significantly” for them. The downgrades of the trio place France’s AAA rating at risk even more in the wake of an already-issued red flare this week by S&P. France’s top four lenders are thought to be some €7 billion short of adequate capitalization at this point.

Asian stock markets on the other hand finished the week on a sour note as they did not interpret the fiscal union to be comprehensive enough for their tastes. Miners in the Aussie market got clobbered especially hard (BHP Billiton and Rio Tinto among them). At the end of the day, the Marseille Accord leaves a lot of questions unanswered, and that is the nebulosity that the markets are reflecting today. We warned in a video clip yesterday that with optimism having been stacked so high on just one side of the table, the markets (esp. gold) were potentially setting up for disillusionment today. That, so far, appears to be the case.

The agreement has made for EU leaders wading into thoroughly uncharted legal waters at this point. Nobody knows how you pull off tougher budget rules at this point. Market players are still wondering if the penalties on future deficit offenders will stick as well as who will dole such sanctions out and via which legally-sound means. It also remains uncertain just how the region’s governments will deal with the boosting of the rescue funds via the IMF.

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