The enactment of exit strategies by the ECB as well as the Bank of England remained on hold this morning as both institutions left key interest rates unchanged, at 1% and 0.5% respectively. The central banks appear to be eyeing the continuing but fragile recovery in their respective economies and are opting to remain on the "loose" end of interest rate policies for the time being. The psychology of the moment remains defined by ensuring that growth really sticks and intangibles such as confidence show clear signs of having become fully repaired.
On the surface, however, things are not too bad at all, actually. German factory orders not only popped higher, but they did so at twice the rate estimated by analysts back in June. Business confidence surged higher on the back of quite decent growth in the service and manufacturing sectors, as did loan volumes to private and corporate entities. The common currency refused to roll over and die, and has instead been staging a comeback of major (10%) proportions since the dark days of June when its obituaries were written every hour on the hour.
Furthermore, something that was practically off the table just two months ago, happened this morning over in the Old World; Greece was cleared for the next tranche of EU/IMF loans - a resurrection of the type that should put to bed any lingering apprehensions about its fate. Such conditions should make for a Jean-Claude Trichet who could stand in front of a battery of microphones, perhaps as early as next month, and outline the exit strategy that some investors are already starting to price into their trades even as today's sentiment says "steady as she goes."
Mr. Trichet offered a dress-rehearsal of that yet-to-be-delivered speech this very morning, when he stated that Europe is bouncing back faster than anticipated and that the turmoil in the money markets has largely gone by the wayside. That, he said, is opening the door (the "exit" door that is) to a policy shift. Markets are betting no dice on the above until circa one year from now. We think they will find some scheduling...surprises in Mr. Trichet's jawboning, come September.
Gold prices opened with a $1.40 gain in New York this morning, quoted at $1,197.00 as against a US dollar trading at 80.70 on the index (down 0.25) once again. The yellow metal later eased back to the low $1,190s price levels as the dollar gained and climbed back to the 80.80 and then the 80.90 mark. Modest declines were noted in crude oil (falling to just above $82.00 per barrel) and the Dow (dropping 36 points to 10,644.00) following the jobless claims filings numbers.
Noise levels among the bulls are once again on the rise, despite yesterday's failure to hold above the round figure on a closing basis. Another attempt could be in the cards for today, but traders note the (once again) emerging battle of the funds versus the physical buyers (overseas). The market appears unable to accommodate both armies at once. Thus, gains are seen as capped for the time being, despite unequivocal declarations that the correction has run its course.
Silver gained one dime on the open, starting the session off at $18.38 the ounce. The noble metals gave back a modest amount of value at the open. Platinum fell $3 to the $1,576.00 level, while palladium was off by $1 at $495.00 the ounce. No change reported in rhodium once again, with the quote at $2,170.00 on the bid side. Jobless claims and their digestion dominated early action in the trading pits this morning.
The unemployment claims figure - as reported by the US Labor Department - jumped by 19,000 filings (to 479,000) in the latest reporting week. That is a three-month high. US unemployment remains at 9.5% and job growth remains on the sluggish side. Still, that's a pretty far cry from the 20.1% unemployment rate reported by Spain as of its latest tally.
Friday's US unemployment figures are generally expected to show that the economy shed jobs for a second consecutive month. We will see how markets might greet that little piece of statistical data. The safest bet is that volatility will be manifest in the wake of the numbers and that it might be exacerbated by pre-weekend book-squaring activities.
PIMCO's CEO Mohamed El-Erian is suggesting that the odds of a US deflation and double-dip recession are currently only at about the 25% mark, but he does so while noting that the rate at which firms and individuals are saving/accumulating/hoarding cash (up to 6.4% in American households) is countervailing government efforts to stimulate growth in the economy.
Meanwhile, US inflation (counter to the alarmism to be found in hard money newsletters) is running at the lowest level in forty years. Mortgage rates fell to their lowest level since 1971 according to the latest Freddie Mac survey. Of course, 1971 is when the survey was launched, so the actual headline becomes: "mortgage rates hit an all-time low."
Over in Asia, the outlook for the real estate market (a topic upon which we focused in preceding days) is dimming by the day. Chinese government efforts to curb rampant property speculation are starting to stick. Look for evidence of a shift in perception, no further than the most recent decline in LME copper values. The orange stuff lost nearly one percent in London this morning (to $7,450/ metric tonne) after having touched its highest level since end-April just yesterday. Of course, yesterday is when Chinese regulators asked domestic lenders to factor in a scenario of a 50 or 50% price drop in real estate when they run upcoming stress tests on their loan books.
Closing out today's roundup, it's time for a quick session of "Myth-Busting 101" once again. Yes, this is about the US dollar and about gold. Here we go:
Myth: Most hard money newsletters would like us to believe that everyone is now bullish on the dollar, and that they are totally misguided in this level of optimism.
Fact: According Elliott Wave analysts, at the present time, only 6% of dollar traders are bullish on the currency. That is a level of bullishness that is actually lower than the percentage (7%) that was recorded when the greenback hit its lows, back in late November of last year. Today, of course, the difference is that the US currency is nowhere near that dismal 74.17 (on the index) level. EW also suggests that "this is typical wave two behavior, whereby the sentiment extreme reached near the end of the correction often exceeds that which was present at the start of the previous first wave."
Myth: Gold is inversely correlated with conventional asset classes and is a good portfolio diversifier.
Fact: At least as far as the Baring multi-asset fund is concerned, that view is so...1980. Baring investment manager Andrew Cole opines that the rationale for holding gold in a basket of assets has morphed. Gold is no longer uncorrelated to other asset classes, gold no longer offsets risks in other sections of one's portfolio, gold now falls and rises along with [other]assets such as corporate credit, for example. Exceptions to this rule? But two. US [long] bonds and their British and German equivalents.
Mr. Cole still holds the view that one can make a long-term case for the presence of gold in an asset pie-chart, but cautions that the metal is no longer to be thought of as a [risk] diversifier." Wonder what the gold lobby might have to say about that. Not that you have not seen the evidence of tandem gold-equities/ gold-credit/ gold-dollar / etc. rises and falls over the past several years. You know you have.
Thus, we say, keep that yellow-tinged 10% insurance 'policy' up to date, folks. Just don't get carried away with formulae that might have applied to gold back when hair bands were in fashion.
Jon Nadler is senior analyst with Kitco Bullion Dealers in Montreal.