The EUR/GBP Confuses Investors

On Friday, the intraday trading pattern of the EUR/GBP cross rate was slightly different from what happened in the EUR/USD headline pair. The pair reached an intraday low at 0.8024 early in Europe. From there, a gradual rebound started.

We didn’t see any UK specific headlines to explain to price swings in the EUR/GBP pair. In the afternoon, the pair jumped beyond the 0.8050 mark as the ECB loosened the collateral rules to receive money at its money market operations. Contrary to what was the case in EUR/USD, EUR/GBP managed to sustain the intraday gains. However, a test of the 0.8100 pivot didn’t occur. So, the move was interesting, but it didn’t change to broader technical picture.

EUR/GBP closed the session at 0.8065, compared to 0.8043 on Thursday evening.  The pair is confounding investors. There were some comments but only minor on Governor King and his stance towards monetary policy and a review of the prior BoE minutes, but nothing that the markets did not already know. Perhaps in light of the stance of the BoJ and the FOMC they were worth reviewing.

What were surprising on Friday, were the markets ignoring the downgrade of 15 of the largest financial institutions by Moody’s. Late Thursday Moody’s downgraded many of the well known financial institutions around the world the immediate reaction surprised the markets, but by Friday morning investors shrugged it off.

This morning, the euro is again struggling not to drift south and this price pattern is also visible in the EUR/GBP cross rate. BoE Miles in an FT article advocated the need for a substantial additional round of QE to kick-start the economy. The dovish view of BoE’s Miles is well-known. There are also some negative comments from the BIS on the BoE’s policy of printing money. However, these remarks are largely ignored by markets. EUR/GBP is following the global trend south of the euro. 

The UK calendar is empty. So, global factors will have to do the job. For now, we assume that global euro weakness is the ‘by default’ stance on the currency market. This might still filter through into the EUR/GBP cross rate. 

What we can expect this week is a lot of rhetoric from the EU Finance Ministers, coupled with the German’s making on last hoorah, as Angela Merkel’s powerbase goes down the tubes. The Spanish bailout and the Greek demands will make the top of the list. This weekend, the Greek government made their demands on the EU pubic, and it will not be swallowed easily by the German’s

The pair tried several times to regain some strength, but there were no follow-through gains yet. We still prefer to sell into strength for return action lower in the range. But trading this week could be erratic effected more by news flow, statements, comments and press then technicals or basic fundamentals. Remember EU Finance Ministers love to talk to the press and love headlines.

Gold and Silver Update June 25, 2012

The BRIC (Brazil, Russia, India and China) nations announced today, an effort to stave off global financial turmoil are considering forming a foreign exchange reserve pool and swap arrangement-supporting gains in base metals. On similar note, China and Brazil announced a $30 billion currency exchange, a step toward a broader agreement among emerging markets to pool resources as a firewall against growing uncertainties.

Asian equities are trading down by nearly half percent as the European Central Bank announced it would further ease rules on the collateral banks can use in order to secure central-bank funding. The ECB move came with Spain due to formally request aid for its banking sector today, and ahead of this week’s crucial two-day European Union leaders summit, due to start Thursday. Ahead of the summit, reports over the weekend indicated that Greece delegation may present austerity and budget cut plans and may further support down side of base metals due to growing pessimism. In a surprise announcement on the Greek Prime Minister and Finance Minister stated that they were ill and unable to attend the meetings

The euro is trading down and is expected to remain weak in today’s session.

From the economic data front, the US manufacturing releases in the form of Chicago and Dallas may continue to remain weak due to weak demand while the New home sales may increase slightly compared to last month and may further support downside of metals pack.

Gold futures prices advanced near half a percent in early trading while the Asian shares plunged. Although the US equities rose last Friday amid ECB’s loosening rule for banking collaterals, the decision would be fatal for the euro as they were ready to buy the junk rated bonds. However, Germany is strictly opposing the matter as that would raise the tax burden on their investors. The market will therefore be watching the implementation of common Euro bonds and financial transaction tax. Both of these would be a negative factor for the shared currency. The same would have been reflected on a weakening euro at present moment. Therefore expect the early gains in gold would be pared of during the European hours. However, during the US session, reports are expected to highlight the poor manufacturing sector while new home sales are also likely to come down after the mortgage applications fell drastically and cheaper house price index would have demoralized the contractors to start up the projects. This would therefore be a supportive factor for gold prices.

Silver futures prices are also trading at a higher note. During the US session the manufacturing data and housing numbers could be weak which may create pressure on silver as silver falls both in the industrial metals groups as well as the precious metals category so it could be a double whammy.

What’s in-store for the Markets for the Week of June 25-29, 2012

The European Union, as it has over the past months, will set much of the global risk tone next week as EU leaders gather in Belgium for the latest Summit.  Spain faces a Monday deadline to submit a formal request for aid to the EFSF/ESM to recapitalize its banks. Key questions remain such as subordination of claims within the funding apparatus and whether credible capital plans will be presented.

 The EcoFin Summit discussions will center on refinancing sovereign and bank capital requirements through some or all of the following options:  the soon-to-be-enacted European Stability Mechanism, Eurobonds, a banking union, talk of a “growth pact”, an unappealing redemption fund proposal, or euro bills as an incremental step toward eventual Eurobonds. At issue is therefore whether more talk about needed long-run structural changes will appease markets that are impatiently seeking nearer-term solutions and thus the clear risk would be to repeat the pattern to date of disappointment coming out of major summits—especially in light of persistent German resistance to many of the proposals.  Also, Germany’s lower house votes on the ESM and fiscal pact on Friday and is expected to pass the enacting legislation. 

The eco calendar is fairly thin and focused upon German CPI and unemployment, Eurozone CPI, EC economic and industrial confidence, and UK and French GDP revisions.  Italy auctions bonds on the heels of Spain’s successful auctions but in advance of the critical EU Summit which may put the auctions at greater risk of pre-Summit comments and volatility.  

Japan issues its major monthly economic releases.  Japanese industrial production is expected to post the sharpest month-over-month decline in over a year while the highest frequency inflation gauges for Tokyo are expected to post ongoing deflation in both headline and core prices excluding food and energy. Retail sales, total household spending, housing starts, and the jobless rate will round out the broad picture for the Japanese economy

This week’s US data risk will be mostly focused upon three reports.  We think consumer confidence will take a step back as lower gasoline prices are offset by deteriorating jobs data and by weak equities up to the survey period.  Durable goods are also likely to come in soft with few aircraft orders and a likely softer vehicle orders component.  Personal spending isn’t shaping up well either given that we already know that retail sales slipped lower during May, although services spending may be more resilient.  In all, the main releases may extend the tone of disappointing higher frequency reports on the health of the US economy in the lead-up to the following week when the big releases like ISM and nonfarm hit.  Other releases next week include new home sales following a weak resale report, and pending home sales that may get a lift after the prior month’s sharp drop.  There are no expected revisions to the final Q1 GDP figures.

The Long and The Short of Crude Oil

In forecasting a credible scenario of the future development of the price of oil, we believe that it is necessary, above all, to anticipate that the global economy will need to tackle the further deterioration of the situation in the eurozone. After the actual stagnation in the first half of the year, a downturn is likely to occur in the second half. A prospective deterioration of the situation in Spain or Italy (or Greece, where, notwithstanding the positive outcome of its election, more problems are likely to occur) would likely make the price of oil continue to fall, with this to be followed by huge liquidity measures taken by leading central banks, which might help the price of oil to return to somewhere around its current levels. Of course, even this roughly outlined scenario involves numerous questions (such as whether it is actually manageable, i.e., politically feasible in terms of the ECB policy, to stop the rise in Spanish yields, etc.); however, in view of the current situation, the above-mentioned possibility appears to be more likely than the ‘oil shock’ scenario.

Today, crude oil has dropped, no plunged below the 80.00 price level to sell for 78.72, when just a few months ago, traders were saying that we would not see oil below the 100.00 level this year.

During early Asian session, oil futures prices are trading above $78.70/bbl in electronic platform. Oil prices have rebounded from its nine month’s low on threat from tropical storm formation in Gulf coast region. As per National Hurricane center, there is 70 percent chance of tropical storm formation very close to Gulf region, which may lead for supply and production disturbances. Though fundamental factor of supply disturbance is supportive for oil futures, prevailing economic concern may continue to weigh on oil prices. Most of the Asian equities are trading down in lieu of slow down of manufacturing sector of major nations like US, Europe and China. Other than this, Moody has downgraded a handful of major financial institutions in US and Europe. Spain needs as much as 62 billion euros in capital to withstand in this worst economic situation. Thus, prevailing economic concern may continue to limit the gains in oil prices. From economic front, IFO numbers from German are expected to paint a negative picture of the economy, which may weigh on Euro. So, ultimately the impact can be seen on crude oil prices for a down ward trend in the European session.

In the last few weeks, risky assets have seen significant sales, which have also had a particularly strong impact on commodity prices, and notably oil prices. With the redeterioration of the situation in the eurozone and poorer data from the U.S., the price of the Brent contract (ICE) with the nearest maturity fell by almost 20% in May. Thus oil is trading below US$100 per barrel, i.e., the lowest level since October 2010. The price has fallen hand in hand with the significant elimination of speculative long positions for both Brent and U.S. light oil WTI. In other words, what is known as the financial part of the market (such as hedge funds) reduced its bets on a further increase in oil prices. The investment bank Goldman Sachs (GS) has sprung a surprise and sparked a lively discussion in recent days, with its report predicting that the Brent price will be around US$128 per barrel in six months.  

Aussie’s Getting Richer

Australians became richer, owned more cars and lived in larger homes in a five-year period spanning the world’s worst financial crisis since the Great Depression. The proportion of households earning more than a$3,000 ($3,050) a week more than doubled from 2006 to 11%.

US stocks erased earlier losses ahead of report that show sales of previously owned American homes decreased last month. Chairman Ben S. Bernanke is signaling the Federal Reserve will probably add to its record stimulus should the economy fail to make sufficient progress in creating jobs for 12.7m unemployed Americans. The policy-setting Federal Open Market Committee yesterday extended its Operation Twist program and will swap $267bn in short-term securities with longer-term debt through the end of 2012.

Spain’s government bonds climbed for a third day as the nation sold €2.2 bn (USD2.8bn) of debt due in five years or less, exceeding the maximum target for the auction. Five year Spanish yields headed for their biggest three-day drop since December and Italian securities advanced amid speculation euro-area leaders will deploy bailout facilities to buy government bonds.

German Chancellor Angela Merkel balked at committing to direct sovereign debt purchases through the Euro-area bailout fund, pushing back on calls by the bloc’s leaders who support the measure as a way to ease the crisis.

China’s stocks fell; dragging the benchmark index to the lowest level in three months, after a report showed China’s manufacturing may shrink for an eighth month in June and the US cut its economic growth estimates. China plans to lower the entry barrier for foreign institutional investors looking to buy publicly traded securities in mainland exchanges, as part of reforms to add depth to the country’s capital markets.

Gold fell by 0.33% in New York as some investors sold back purchases after prices slumped the most since August. More monetary stimulus from around the world including China, the European Central Bank and the Fed will not be crucial to keep investors positive to gold. Silver also fell by 0.45%.

Crude Oil is down by 0.49% to the lowest price in almost two weeks on signs of an economic resilience (expected) in the US, however, supply also remained low. London-traded Brent crude fell from the lowest close in more than two weeks.

The Japanese Yen continues to decline against the USD, as the pair have broken above 80 for the first time in weeks. The euro has fallen against the USD to trade at 1.2555

Bernanke and Gold the Day After

Yesterday’s closely watched Fed’s policy meeting finally yielded results to extend the bond buying program known as “Operation Twist” through the end of the year, raising the money amount by USD 267 billion. However, this disappointed investors who had earlier anticipated QE-3, believing the Fed’s move was not strong enough to boost the economy and resulted in fall of riskier assets

This morning commodities are trading down. Asian equities have also declined in the early morning due to lack of easing from Fed coupled with weak HSBC flash PMI release from China. The private PMI has declined to 48.1 indicating slowing manufacturing activity and may continue weakness in the Chinese economy. The Chinese say they are in the middle of “repositioning” their economy. The HSBC numbers are given higher account then the government numbers that follow. Markets tend to go with the HSBC figures.

In Greece, three parties have formed a coalition government, however doubts about direct sovereign debt purchase may increase the borrowing cost of the peripheral nations and may cast a shadow over gains in today’s session.

Spain is scheduled for bond auction later during the session and may continue to weaken the shared currency “Euro” along with metals and energy. From the economic data front, the eurozone PMI along with the German may remain suppressed due to ongoing austerities and may further support downside.

However, the eurozone current account balance and US leading indicator may improve slightly and may provide slight support. Further the US manufacturing, labor and housing releases are expected to remain subdued due to weak economic development and may continue to weaken precious metals later during the session.

The plunge in gold this morning, saw it drop over 12.00 to 1602.00 could be the resultant of Asians responding to the Fed announcement. But we should be cautious about the stability of such fall. The recent fall would be due to anticipation of European reports that may replicate the agony of European distress later today. German and Euro zone manufacturing could be hurt and consumer confidence should remain feeble. Moreover, Spain is scheduled to auction bonds today but Merkel’s skepticism about direct buying of sovereign debt may again raise the yield over 7% which could keep gold under strain through the European session.

Irrespective of the immediate impact from the Fed decision, an insight into the details showed the Fed’s dim growth outlook with a pace ranging between 1.9-2.4%, and targeting further lower inflation to prepare the stage for next easing in June 31 meeting. The Fed commented on the poor jobs reports and continued to state that they would act if it was deemed necessary.

Markets Prepare for the FOMC Announcements Later Today

As investors eagerly  await the US FOMC rate announcement and press conference later tonight, expectations are high that the US central bank may provide additional stimulus measures to support the stalling economy. Shares rose and commodities steadied ahead of the highly awaited event.

Meanwhile, the euro gained against the US dollar on hopes that the Fed may resort to monetary easing in the midst of faltering economic growth and worsening debt crisis in Euro Zone. The euro has climbed against the USD, trading at 1.2718. Spot gold traded mostly steady in thin ranges today after posting its first decline in more than a week during the previous session. In the mean time, spot gold continued to consolidate, looking out for fresh cues for further directional moves. Base metals were steady to. Copper inched lower ahead of the US FOMC rate decision as investors remained wary of Spain’s worsening financial condition.

Crude oil dipped in Nymex after rising the previous session while Brent crude oil slipped towards 17 month low levels. Intensifying worries over Spain and flattering global economic outlook weighed on the overall market sentiments. However, fall in crude oil inventories and monetary stimulus hope arrested fall.

API data released earlier today reported a decline in crude oil inventories. EIA data is also anticipated to show a draw in crude oil inventories.

Market emotions remained subdued ahead of the much anticipated U.S FOMC rate decision, later today.

After two weeks of disappointing economic numbers and an escalating debt crisis in Europe threatening recovery for the U.S economy, the Federal Reserve FOMC meeting would be keenly looked at in anticipation that the Federal Reserve announces a new round of extraordinary monetary stimulus, such as big purchases of bonds to revive stalling U.S economic situation.  With the Presidential elections just a few months off, the Obama Administration needs to show positive economic recovery unless he and his government will be pushed out of office.

The Department of Energy crude inventories slated for release today is estimated to show a fall in levels.

With the crisis in the eurozone  taking leaps and turns, European finance ministers will be meeting  in Luxemburg on tomorrow to discuss the European crisis and evaluate the Greek election outcome. Also, topping the agenda would be enhancing the firepower of the EFSF. 

Overall, volatility is likely to the byword this week with markets expected to vacillate over events surfacing in Europe and the U.S. 

Crude Oil and Natural Gas Wait on the FOMC

Today is an important day for oil futures prices ahead of inventory data report and FOMC rate decision ending with FOMC meet.

As per American petroleum institute, crude oil and distillates stocks has been declined in the last week, whereas stock piling is witnessed in gasoline. Remember in recent months, the API reports has been more wrong then right, the markets are now ignoring these numbers.

The  US energy department inventory is due for release later today, where we can expect crude oil stocks to decline. However, ahead of summer season refiners are increasing their production to meet the demand which may lead to higher stocks of gasoline and distillates.

With the global slowdown, demand is currently weak. Markets are hoping a push from the FOMC may stimulate economic activity in the US, helping increase demand. Overall, inventory report may act as a positive driver for oil prices. Currently, most of the Asian equities are trading on higher side on optimism from FOMC meet with a monetary stimulus. Crude oil imports have been increased by more than 7 percent in the month of May, which is also expected to support oil price trend.

The third round of talk with Iran are scheduled to continue on a positive note, as geopolitical turmoil seems to be at an all time low. The embargo is set to go into full effect next month. Any threat with a mid point at Strait of Hormuz may support oil to take cues on supply concern. However, another round of talk is expected very soon though the date is not yet declared. Most importantly, market is eyeing for FOMC rate decision which may add positive stimulus for oil prices.

 This morning in electronic trading gas futures prices are trading above $2.561/mmbtu with gain of near than 1%. Today we may expect gas prices to continue the positive trend supported by its intrinsic fundamentals. As per National Hurricane centre, there are 60 and 70 percent chance of tropical storm formation near gulf coast region which may create supply concern to add positive direction in on gas prices.  As per US Energy department, natural gas storage is expected to increase by 64 BCF in the last week. Consumption of power sector have also increased by 6 percent, which may support gas prices to remain on higher side. As per US weather forecast, temperature is expected to remain high in eastern region, which may create demand for gas consumption.

The Too Little Too Late Scenario

In the eurozone, it will be interesting to see the political dynamics inside and outside Greece in the wake of this week’s elections. Will Greece be able to form a ‘stable’ and credible government?

 If so, how will the communication developed between Greece and the sponsors of the bailout package? It will not be easy to find a ‘middle of the road position’ that is politically and financially acceptable for both sides. Especially the Germans. Angela Merkel is not going to sit quietly.

Indications that both parties might fail to reach a new equilibrium might add to market nervousness. Outside Greece, the focus in Europe will remain on Spain. Even after the Spanish banking plan, the country remains under heavy pressure. The tensions on Spain have probably even more potential to hurt the euro than is the case for a failure to reach an agreement with Greece. The positivists among us might consider the option that the EU Summit next week will come with fresh ideas to address the crisis. However, who dares to hope that this summit will surmount the ‘ too little, too late’ approach that was the key characteristic of the management of this crisis until now. So, at least the from the EMU side of the EUR/USD story, we don’t see much reason to turn positive on the single currency, even not after the outcome of the Greek elections. 

Of course, the developments in Europe are only half of the potential input for EUR/USD trading. In the US, the Fed will take centre stage on Wednesday as it will announce the outcome of its two-day policy meeting. We see a quite a high chance that the Fed will take additional, even quite aggressive steps to support the economy. More operation twist is possible, but even additional outright asset purchases can’t be excluded. In theory, these measures should be a negative for the dollar. However, why should it lead to a sustained rebound of the euro? And the famous Bernanke Gold Bounce..

The Obama Administration will be pushing the Feds for aggressive action, the Democrats need to be able to show the road to recovery, if Obama and comrades want to remain in power come November. Talk about too little too late, the Feds need to do something NOW to give Obama any hope come elections in November.

 More monetary easing in the US might be (moderately) supportive for sentiment on risk, but it won’t solve the structural issues in Europe. So, we maintain the working hypothesis that any positive impact from more QE in the US on EUR/USD to be limited and probably short-lived. Maybe, markets might even see the action from the Fed as in indication that the likes of the US and the UK have still policy tools available to fight the crisis while the institutional context in Europe is a permanent obstacle to address the crisis. So, some consolidation in EUR/USD is possible short-term, but we maintain our euro negative bias as long as there is no perspective that the structural/ institutional loopholes in the EMU will be fixed. 

US Eco Data Rather Thin This Week

Last week, most US economic data surprised on the weaker side of expectations with especially the retail sales disappointing. Signs are now increasing that also the US economy is heading for a significant slowdown. This week, the focus will be on the FOMC meeting. Will the Fed act proactively to support the US economy?  Well know the answer to this question on Wednesday afternoon. Markets are expecting some type of aggressive action from the Feds, and the Obama Administration needs to pull a rabbit out of their hat, to secure re-election.

The eco calendar remains rather thin this week with only some housing data, the weekly jobless claims and Philadelphia Fed index. In April, US housing starts rose by 2.6% M/M to 717 000, equaling the 3.5 year high reached earlier this year. For May, the consensus is looking for a marginal increase by 0.4% M/M to 720 000, but we believe that the risks are on the downside of expectations. The weather was less favorable in May, while also labor market conditions are weakening again and credit conditions remain tight. Therefore we believe that the a downward surprise is not excluded. Nevertheless, a further increase in starts would bring them again to the highest level since October 2008. In April, US building permits dropped sharply after reaching their highest level since end 2008. For April, a pick up from 723 000 to 730 000 is forecast. We have no strong reasons to distance ourselves from the consensus. The final report released just a few hours ago, showed that housing starts were slightly under forecast while building permits were above forecast, thus cancelling the effects as markets perceived them as neutral.

Finally regarding the US housing market, the existing home sales will be published on Thursday. After rising by 3.4% M/M to 4.62 million in April, existing home sales are forecast to have dropped by 1.3% M/M in May, to a total level of 4.56 million. For the existing home sales we believe that the risks are also on the downside of expectations after pending home sales dropped significantly in April. After an improvement in US housing market conditions since the second half of last year, it will be interesting to see how the housing market weathers a new slowdown in activity.

Besides the housing data, also the Philadelphia Fed index will be interesting. Last week, the NY Fed manufacturing index weakened sharply after a rebound in May. The Philly Fed index, on the contrary, weakened already sharply in May, showing a drop from 8.50 to -5.80. For June, a pick up to 0 is forecast. While we believe that a slight increase is not excluded, we are somewhat more pessimistic and see risks for another downward surprise. 

Finally, US jobless claims are forecast to show a marginal drop in the week ended the 16th  of June. Over the previous weeks, US initial jobless claims edged up again, which might be a further indication that the US labor market is weakening again. After an unexpected increase in the week ended the 9th of June, jobless claims are forecast to have dropped slightly, from 386 000 to 383 000. We continue to see upside risks as the momentum in the US labor market seems to have eased. 

Gold and Silver React to Greece and Spain

Prices have changed very little from prior closing after the Spanish bond yield climbed to a record  level of 7.13%, casting a dim shadow over the European economic outlook.

 Asian markets retreated for the same reason and increased  the probability of the fourth nation  and one of the largest economies in the EU to seek for another bailout. Spain had initially sought a bailout of 1000bn euro to rescue its banks only, but now needs to have its overall debt restructured. 

Speculators are therefore eyeing the G-20 meeting as the focus now have shifted to Spain due to rising borrowing cost.

As expected, the pro-bailout party  The New Democracy win in Greece failed to stop the threat of contagion. The euro remained under significant threat of downside.

The threat of the situation should keep gold under pressure for the day. Although ambiguity over the market stance is not letting the metal fall either. As the Greek coalition talks move into the second day with Germany’s Merkel offering no flexibility on their emergency loan, the euro will continue to weaken today as economic sentiment and worries continue. Therefore, gold may come under pressure during the day.

A forecasted increase in US housing starts and building permits may support the dollar index, also keeping  gold under strain for the day. The G-20 outcome which is expected to include the  approval of a emergency loan and an  increase in IMF’s loan may support the market sentiment. Hence, gold may again find itself in a rigid range.

Silver futures prices are also quoting higher at the at present moment. But the early gains for the day may not sustain as the relief rally has failed to stop the spread of Greece contagion, raising the Spanish borrowing cost to the Euro area highest. An announcement is expected that  the nation seeking an international bailout and that would be a threat for euro. This announcement and the size of the request might increase market volatility and more markets back to risk aversion mode. This is therefore  a negative factor for the metal as well.

From the eco calendar, reports today might show weakening economic sentiment and a hazard to current situation. Therefore, silver may come under pressure also, an increase in US housing starts and building permits may support the dollar index, pushing silver to a downside.

US Consumer Confidence Continues to Decline

According to the preliminary estimate, University of Michigan consumer confidence dropped from its multi-year high in May. The preliminary estimate for June showed a decline from 79.3 to 74.1, while a softer drop to 77.5 was forecast. The breakdown shows that consumers were more pessimistic about both economic conditions (82.1 from 87.2) and the economic outlook (68.9 from 74.3). Remarkably, inflation expectations did not decline further, while the oil price extended its downward trend.

One year ahead inflation expectations stabilized at 3.0% Y/Y, while 5-year ahead inflation expectations picked up from 2.7% Y/Y to 2.9% Y/Y. Consumer confidence held up surprisingly well over the previous months while the labor market situation seemed to worsen again a bit. It is not a real surprise that consumer confidence weakened again during the month as sentiment on financial markets worsened due to the euro zone crisis, while also the recovery is showing signs of a slowdown.

Apparently, the declining oil price is unable to offset all those worries.

After a rebound in May, the NY Empire State manufacturing index weakened sharply in June. The headline index fell from 17.09 to 2.29, while the consensus was looking for a more moderate drop (to 12.50). The index is now again at its weakest level since November last year. The details show a plunge in shipments (4.81 from 24.14), number of employees (12.37 from 20.48), inventories (-8.25 from 4.82) and average workweek (3.09 from 12.05), while also new orders weakened significantly compared with the previous month (2.18 from 8.32). Unfilled orders (-5.15 from -4.82) weakened further, while delivery time stabilized at 0. Both prices paid (19.59 from 37.35) and prices received (1.03 from 12.05) dropped significantly. After a temporary uptick, the NY Empire State manufacturing index plunged again in June, with weakness broad-based across the details. The index is quite volatile and not the most reliable, therefore we will wait for further evidence. Nevertheless, US economic data continue to show a mixed picture, but there are increasing signs that the growth is slowing significantly.

In May, US industrial production dropped unexpectedly. Industrial production fell by  0.1% M/M in Mat, while the consensus was looking for a marginal increase (by 0.1% M/M). The breakdown shows that weakness was based in the manufacturing sector (-0.4% M/M), while mining (0.9% M/M) and utility (0.8% M/M) production increased in May. The breakdown of the manufacturing sector shows that the decline was led by motor vehicles and parts (-1.5% M/M) and machinery (-0.5% M/M), while production of computers and electronics fell only marginally (by 0.1%M /M). The rate of capacity utilization slowed from its 4-year peak in April, from 79.2% to 79.0%. Production in the US fell in two of the previous three months after a period of 10 consecutive increases, a clear sign that production in the US is slowing, as was already suggested by several business confidence indicators, although they did not always point in the same direction

The EURGBP and the New Plans from the Finance Ministry and the BoE

After remarkably calm trading on Thursday, trading in the EUR/GBP cross rate entered less calm waters on Friday. EUR/GBP jumped higher at the start of trading in Europe. The ‘pledges’ from central bankers that they were ready to intervene in case of market disruptions after the Greek elections continued to support the euro. Overnight, Fin Min Osborne and BOE’ King had announced measures to support lending, while the latter also suggested more asset buying (QE). This might have caused a slightly sterling negative reaction at the start of trading in Europe. EUR/GBP reached an intraday high at 0.8153. From there, sterling started an impressive comeback. In this respect, EUR/GBP also decoupled from EUR/USD headline pair. The UK Foreign trade data were much worse than expected, but as was often the case of late, poor UK eco data had no impact on EUR/GBP trading. Sterling simply extended its rebound. There were rumors of recycling of funds from currency interventions. EUR/GBP closed the session at 0.8045 compared to 0.8118 on Thursday. 

 After the close of the European markets, UK Finance Minister Osborne announced anew scheme to support credit availability for the UK economy. At the same time, the BoE will also activate its Extended Collateral Term Repo facility. The BoE governor indicated also that the case of further easing was growing. Sterling lost a few ticks on the announcement, but the impact was very limited. EUR/GBP closed the session at 0.8118, compared to 0.8098 on Wednesday evening. 

The new plans by the UK government, may or may not work but they are being hailed by investors and economists around the globe for taking risk and finding new and creative ways to deal with current economic situation. Unlike the EU which just keeps in head in the sand, Osborne and King have at least come up with a plan of action.

King highlighted that more QE is becoming more likely. This is a particularly smart move, whether or not the Bank does pull the trigger on more QE. This is because it tells the market that the new measures are not a substitute for QE. To do so would risk a sell-off in gilts – something that the market had already started to contemplate in the run-up to the Mansion House speech.

Clearly this is positive news. Quite how positive we will find out as the finer details of the measures emerge. Our hope is that it doesn’t repeat the Eurozone-style announcement where initial euphoria is very quickly wiped out. In stark contrast to continental Europe, the UK government and central bank are acting in unison. Hence despite continued undertones of reluctance on Mervyn King’s part, there must be a greater chance that this scheme succeeds where others have failed.

During the weekend, the reaction of EUR/GBP was very much in line with what happened in EUR/USD. EUR/GBP regained a big part of Friday’s losses, but the pair is still struggling to sustain above the 0.81 pivot. Overnight, the UK right move house prices were not that bad 1.0% M/M and 2.4% Y/Y. However, this is not the focus of markets at this stage. Later today, EUR/GBP traders will continue to watch the stories on Europe and Greece. The least one can see is that the first reaction of EUR/GBP to the Greek election result is far from impressive. So, for now the upside looks not that easy.

From a technical point of view, EUR/GBP cross rate is showing a temporary consolidation after sell-off since February. Early May, the key 0.8068 support was cleared. This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950.

From there, a rebound/short squeeze kicked in. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected last week. The pair tried several times to regain the 0.8100 area last week, but there were no follow-through gains yet. We still prefer to sell into strength for return action lower in the range

Greece in High Stakes Poker Game to form a Government Now That Elections are Over

After almost three years dealing with Greek bailouts and politics one would have thought it could not get more complicated and involved.

The election results, presented the New Democracy a clear winner, but not with enough seats to form an independent government, but with a vast majority.

That said, the rest should have and could have been simple.

The New Democracy, could ignore the second place winners, the left party of  Alexis Tsipras  known as SYRIZA, the party that wants to toss away the bailout and would not have a problem withdrawing from the EU or the euro. 

The New Democracy could achieve enough seats by joining with the third place party, PASOK, and claim a total of 159 seats a clear majority. This sounds like a smart move for the third place finisher to have the upper hand in negotiations with the winner party. This could catapult PASOK back in to the limelight and give them more power.

Simple except when it comes to Greek politics and complexities. PASOK is now implementing long term stategy into the negotiations to secure their control for a long time.

PASOK is now refusing to negotiate with the New Democracy, unless the SYIIZA part is included in the new government. This is not because they want the support of the party, they want the party locked into the packages, so that if Alex Tsipras calls for new elections in six or eight months, that he can not brand the two other parties with the failure off negotiations with the EU or continued Greek financial unrest.

What the parties are scare of is that Alex Tsipras will be able to call for new elections and take an overwhelming majority if he can prove that the two parties have not successful renegotiated with the EU, or increased jobs, reduced austerity measures and improved the situation in Greece, giving SYRIZA a clear mandate to evoke their promises to ditch the bailout, ditch austerity measures and to ditch the euro.

It seems to me that Tsipras, has out maneuvered the other parties to end up in the cat bird seat, it seems that Greece’s future government now lay out at his feet and the next move is his.

Greece always promises drama and intrigues and as of tonight they have not let us down.

Markets have an Eerie Calm before Greek Elections… Results Tonight at 930 maybe

Markets have an eerie calm before Greek elections. This past week, the G20 nations assured the world that there is cohesive plan among their countries to prop up and maintain global liquidity. They are not depending the EU and ECB to handle any crisis arising from Greece. Overall market panic is fading and this is good for risk assets. 

The reason, for the drop in risk aversion and anxiety are fit one of these scenarios:

1) Even a worst case scenario from Greece is likely to be met with central bank action;

 2) Traders are hesitant to add to their already record long USD positions ahead of what is likely to be a dovish Fed next Wednesday;

3) Outside of Europe, there is building evidence that China is increasing stimulus on both the monetary and fiscal fronts, while the US economy continues to roll along, removing some of the global growth downside fears.

 Whatever the case risk seems to be falling and calm prevailing.

The Greek Election  is unlikely to be the binary risk that many are predicting and for those with

deep pockets it might be worth being long EUR into.

The potential scenarios include:

1. EUR positive – The ND (conservative, pro-bailout) win a majority; risk of a Greek exit drops.

2. EUR negative (but not a collapse in EUR) – The SYRIZA (radical left, anti-bailout) win a majority and the risk of a Greek exit rises; however a round of negotiations with the troika would ensue, leaving lots of room for avoiding the worst case scenario. In addition a SYRIZA majority likely increases the risk of major and potentially coordinated central bank action, which provides a floor to EUR weakness & potentially, after the knee jerk reaction, a temporary rally.

3. EUR neutral ( most likely) – No majority and the parties attempt to form a coalition over several weeks. Should they fail another election will be held. Uncertainty builds, but with global central banks ready to step in, EUR remains supported.

Greek law stopped all public polls several weeks ago and there are no numbers to help markets predict the outcome.

At present, we know that the polls will begin to close at 7pm and we should get some on the spot updates. By 9:30pm, they are hoping to announce the winning party, but it could be later or longer. This also will not be the final result.

Unless there is a party with a large majority, the difficult part comes next and that is forming a government, which the parties were unable to do in May.

Whatever the outcome or events, we can expect markets to be volatile on Monday with investors, politicians and bankers on the edge of their seat.

Gold & Silver and the G20 Central Bank Plan

G20 officials stated that central banks from the major economies stand ready to take steps to stabilize financial markets by providing liquidity and preventing a credit squeeze if the Greek election result roils markets.

Sterling rose slightly against the dollar on Thursday after the British government and the Bank of England said it will act together with new monetary tools to address tightening credit conditions in the country.

The Fed will also be ready to act if required. This will be one of the first time that G20 central banks have working in unison around the globe. Markets are also expected the Fed to relax monetary policy or introduce some new stimulus plan, to help the ailing US economy jumpstart.

Gold futures prices have revived a tad in the early trading after a nice pull back in late yesterday. The lower US inflation would have increased the deflation concern which led the metal to a sharp drop from its intraday high but the same has raised expectation for Fed to embrace fresh easing and helped the metal to revive.

Asian equities are also having a tepid lukewarm day ahead of the most eyed Greece election on June 17. The Euro at present is showing slight weakness against the dollar after the Spanish bond yield rose to the record high of 7.01%, an unsustainable level.

Markets are expected to be busy  enough as diversified comments are coming from the leading financial chiefs ahead of the highly anticipated Greece re-election and Fed meet. While the G-20 leaders are ready to infuse liquidity to contain the credit squeeze, severe strain might emerge after an unexpected outcome of three elections this week end. France and Egypt are the two other countries having ballot creating nuisance in  market.

However, a coordinated attitude from central banks to provide liquidity may lead temporary support to the market. Gold is probably therefore taking the advantage out of it , however; the comments from the diplomats are still not convinced especially after the Fed let down the market expectation few days back. Hence, the splendid gain may be short-lived. Reports today may show the awful  state of US industrial production and a feeble confidence which may lend support to gold in evening. On the other hand, US treasuries inflows might rise and that is supportive for dollar. Said above, it is apparent that a disordered trading session is ahead today. While global concerns are fatal for gold, proactive statements from officials would be the accommodating cause for prices to stay strong. Hence, probable range for gold would be $1607-1642.

Silver futures prices have also revived a bit which may be due to the gain in global equities and comments from the officials for stimulus. However the  market may be very volatile today ahead of the Greece election and reports today may show the awful state of US industrial production and lackluster confidence which may lead silver to a down side in evening. On the other hand, US treasuries inflows might rise and that is supportive for dollar. 

The Masterplan to save the EU

“A secret plan to save Europe”: That’s how the German newspaper Welt am Sonntag described it this weekend. According to the paper, European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Eurogroup chief Jean-Claude Juncker and European Central Bank President Mario Draghi were all working behind the scenes on a master plan.

But it turns out the grand plan is not all that secret. At the last European summit on May 23, the four were explicitly given the task of finding a permanent solution to the crisis by the end of this month.

Already the goalposts have moved. The main question is no longer whether Greece can stay in the eurozone, but whether Spain, a far larger economy, will be in a position to rescue its struggling banks.

Yesterday, German Chancellor Merkel’s CDU party and the biggest opposition party SPD failed to resolve a row holding up parliamentary ratification of the EU’s new fiscal treaty and the ESM rescue fund. Merkel needs the backing of the SPD but in exchange they insist on a financial transaction tax as well as more steps to boost European growth and create jobs. Talks will resume next week (June 21). Another item on the agenda was a discussion about the German Council of Economic Experts’ proposal to create a European Redemption Pact(ERP). The pact includes a binding commitment of all participating countries to bring public debt ratios below the reference value of 60% within the next 20 to 25 years. To ensure that this objective can be reached within realistic primary balances, participating countries can transfer their excessive debt exceeding the 60% threshold at a certain date, into a redemption fund for which participating member countries are jointly and severally liable.

The UK Telegraph reports today that Merkel signaled a shift in favor of the ERP. Stern Magazine on the other hand says that German FM Schaeuble rejects the proposal as it would violate EU treaties. Anyway, it is clear that the Germans are looking into the proposal which might eventually be part of a solution (‘master plan’) to save the euro.

The Masterplan

The fundamentals of that master plan are likely to be agreed on at the June 28-29, 2012 EU Summit. Press reports suggest that Germany and France are preparing measures to propose at that summit. France is pushing hard for a banking union.

A first step would be giving the ECB responsibility for supervising systemically risky banks and their winding up in case of failure. A next step would be using the ESM to directly recapitalize banks and finally granting the fund a banking license so it can leverage itself and increase firepower. German Chancellor Merkel on the other hand keeps calling for a closer political and fiscal union. It seems as if both parties will need to given somewhat in on their diverging opinions on how to tackle the crisis. The draft conclusions for the June 28/29 EU Summit show: “The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centered around a much stronger banking and fiscal integration, underpinned by enhanced euro governance.” 

A Follow Up to the EUR/GBP and the USD/JPY

 Follow up to The Much Overlooked EUR/GBP

Yesterday, the resilience in the headline EUR/GBP cross rate was also visible in EUR/GBP. There was not really one event to explain the move. The pair was simply captured in a gradual uptrend/repositioning that lasted throughout the session. The pair was seen in the 0.8040 area at the start of trading in Europe. The rebound accelerated early in US trading, in line with the price pattern of EUR/USD. There was a lot of analysis on the screens that a deepening of the crisis in Europe would force the BoE to print more money. However, there was no specific reason why this reasoning would come into play right now.

EUR/GBP closed the session at 0.8098, compared to 0.8031 on Tuesday evening.

Today, the calendar in the UK is again thin. So, trading will again be driven by global factors/overall sentiment on the single currency. At least for now, the repositioning in EUR/GBP continues. The pair is again above the 0.8100 pivot.

From a technical point of view, the EUR/GBP cross rate is showing tentative signs that the decline is slowing. Early May, the key 0.8068 support was cleared.

This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected last week. The pair tried several times to regain the 0.8100 area early this week, but there were no follow-through gains. We still prefer to sell into strength for return action lower in the range.

After yesterday’s report, there was only one move that was really relevant for USD/JPY trading. The pair hovered in a tight sideways range roughly between 79.50 and 79.75. The pair was hammered as a poor US retails sales report hit the dollar across the board. USD/JPY tumbled to the 79.35/30 area. The pair is still trading in that area this morning.

Of late, there were some tentative signs that USD/JPY could draw some support from the rise in core bond yields. However, a sustained rise in (US) bond yields is far from a done thing. So it is too early to jump on that move. The topside in this cross rate might be capped for now. More overall dollar weakness might push USD/JPY back low in the recent consolidation pattern. 

Oil in the Shadow of the OPEC Summit

This morning crude oil prices are hovering near $83/bbl with a marginal move up of 0.20 percent from yesterday’s closing. Today is very crucial day for the oil futures as the market is eyeing the OPEC meeting results on production quotas. In addition to this, economic concerns from the euro-zone are weighing on the global financial market and creating speculation of lower demand.

Earlier today, Japanese production figures were released showing a drop in production with the report coming in well under forecast. The contagion from EU and the ongoing economic downturn is effecting the global economy. Lower production means less demand for energy, in turn lower demand for crude oil hence lower prices

Ahead of the OPEC meeting today, oil prices are expected to remain sluggish with the question of rising, cutting or keeping the production quota by OPEC members. As per OPEC monthly report, world market is well supplied though the production fell in May to 31.58 from 31.64 million barrels per day. In one side, Saudi Arabia, Qatar and UAE would like to raise the output and on the other side, Venezuela, Iraq, Angola and Iran are warning global crude supply excessive. Thus, oil prices may remain volatile; ahead of OPEC meet  which result is uncertain. As per government report from US Energy department, crude oil stocks have declined by 300K barrels in the last week in WTI delivery centre. Thus, fall in inventory level may support oil prices. From economic point, most of the Asian equities are trading down driven by lower sentiment from Euro-zone basically. Moody has downgraded Spain by three notches on yesterday. Ahead of Italy bond auction due for today and Greece election in the weekend, economic concern may continue to pressurize oil prices. From US, economic releases in the form of Consumer Price index are expected to fall which may paint a slight positive picture of the economic growth. But other data like weekly jobless claims may keep sentiment weak. So, we may expect oil prices to remain under pressure driven by above factors.

Currently, gas futures prices are trading below $2.193/mmbtu with marginal gain of 0.20 percent in electronic trading. The U.S. Energy Information Administration lowered its estimate for domestic natural gas production growth in 2012 for a second straight month but still expects output this year to be up 3.4 per cent from 2011’s record levels. So, in one side lower production estimate may support gas to trade on higher side, where lower demand may limit the gains. As per US Energy department, natural gas storage is likely o increase by 75 BCF, which may add pressure on gas prices. Most importantly, As per National Hurricane Centre, as of now there is no tropical storm formation is seen in North Atlantic region. Normal temperature in consuming region of US, may pressurize gas demand for the day.

The Japanese Yen, The Present, Past and Future

Last evening the, USD/JPY basically hovered in a rather tight range around the 79.50 pivot. However, underlying sentiment wasn’t that bad. The yen lost some ground in Asia as the IMF indicated that the yen was moderately overvalued. Interventions were also seen as a tool to ease volatility. The pair reached an intraday top in the 79.70 area early in Europe. From there a moderate correction kicked in. During the day, core bond yields trended cautiously higher.

However, it took until the rally in US equities started before USD/JPY was able to profit. USD/JPY closed the session at 79.53 compared to 79.44 on Monday evening.

This morning, sentiment on risk in Asia isn’t that bad, but the risk rally has no strong enough momentum to push USD/JPY beyond the recent highs at 79.70/83.We look out whether a rise in core bond yields might continue to support USD/JPY.

Investor demand for the JPY will be short-lived due to its weakening sovereign debt profile – which triggered a rating downgrade – and official intervention risk. The CNY and the INR adopted a weakening bias which spilled over to the rest of the Asian floating-currency group. The AUD is reacting negatively to commodity price shifts, a dampened global growth outlook and additional monetary easing.

The Asian region offers a mixed outlook. While the Japanese yen (JPY) has resumed its appreciating bias, the regional BRIC currencies, the Chinese renminbi (CNY) and the Indian rupee (INR), adopted a defensive bias in this heightened financial market environment. The JPY regained its status as a perceived safe-haven currency and extended its appreciating tone since mid-March.

The Japanese yen (JPY) continues to be perceived as a safe-haven currency in times of synchronized global financial stress. Since mid-March the yen has been appreciating against both the USD and the EUR in the context of deepening tensions in Europe caused by uncertainties regarding currency union sustainability and systemic erosion in the Spanish financial sector. We do foresee that the perceived safety premium will remain in place over the next quarter, yet the risk of decisive outright intervention by the Japanese authorities will escalate later in the year.

However, the view that deteriorating sovereign creditworthiness and fiscal conditions (which prompted a double-notch credit rating downgrade by Fitch in late May) will weigh on Japan’s mid-term outlook.

In the short term, reacting to a rise in risk aversion, flows into yen have been strong, pushing the currency up 2% in the month of May. Traders cut their short positions and added to longs, reducing the net short position to just US$-1.7 billion. Technical’s suggest ongoing downside risk; however a drop below 77 in USDJPY will aggravate intervention rhetoric. The near-term suggest a lower USDJPY; however Japanese fundamentals are weak, which should help USDJPY recover back up to 83.00 by year-end.