Clash of the Titans
By Jon Nadler
Although as yet unable
to break out of the price channel it has carved
out recently, gold looked quite a bit more
buoyant today and was once again seen testing
the upper end of its range. However, aside from
short-term fund plays following various economic
or geopolitical news items, the bulk of would-be
players remained sidelined ahead of next week's
Fed meeting and was effectively watching the
dollar and crude oil for the Wednesday session.
The technical side of the gold equation still
points to possible better buying opportunities
down the road. A breach of levels above $930 to
$945 is required to get the bull back on the
main track and right now the metal is still
battling to get back to $900. Yesterday's rumor
that Iran pulled $75 billion out of Europe and
presumably bought 'some' gold with the money
failed to move gold the slightest bit.
Gold picked up about 1% on the day and apart
from a mid-morning dip, the metal retained the
premium as the financial markets were rattled by
more ominous forecasts. Spot prices rose $8.50
to $890.60 an ounce as the greenback orbited
around the $1.55 mark against the euro. Silver
climbed 30 cents to $17.32 while platinum added
$31 to $2084 and palladium gained $7 to $464 per
ounce on anticipation of labour action in S.
Africa in the coming week. The dollar was
basically hovering near 73.50 on the index this
morning at last check.
The stock market had a migraine for most of the
day, preoccupied with FedEx, Morgan Stanley, and
Fifth Third. Background soothsaying by RBS
calling for a major late summer stock implosion
roiled market a bit today as did estimates that
the aggregate cost of the credit black hole
could reach $1.3 trillion. The interest rate
hike camp promptly scaled back expectations to
50/50 and pushed timeframes back a couple of
months on the news. See below why it may not be
wise to start betting in either direction just
FedEx delivered a package full of bad news to
the markets today, sliding to a loss in its
fiscal year's final quarter and sounding bleak
on prospects for better times in the coming
year. You already know the usual suspects the
delivery giant has pointed to. One of them is
the weak economy (albeit UCLA forecasters
indicated that they do not expect a recession
and see near 1% growth in the US economy
instead). The other culprit on everyone's mind
was covered by US President Bush later this
morning as he made a statement on the matter. As
expected, he called for a lift on the ban on
offshore oil drilling as he pedals hard to
appear as if he is doing something about the
anger and frustration visible at gas stations
across the US.
Oil traders had a busier day than they thought
they might. While inventory data was supportive
of initial gains, the Bush statement took some
wind out of the speculative sails as it alludes
to the beneficial effects on prices that such
output might engender. The barrel of black gold
slid to near $133 later in the morning. Morgan
Stanley's earnings fell by 57% and although it
met analyst expectations, that news along with
the one that Fifth Third will raise $2 billion
and sell assets while reducing dividends
provided a supportive environment for this
morning's rise in bullion. Bank stocks have
failed to take any comfort from the Fed's
'steady as she goes' interest rate posturing and
are still looking at their tattered books while
hoping that Dr. B does not decide to hike rates
just yet. The subject of who might raise rates
first (or not) has many an analyst preoccupied
these days. The UK's Telegraph reports on the
subject and relays some ominous signs:
"The clash between the European Central Bank and
the US Federal Reserve over monetary strategy is
causing serious strains in the global financial
system and could lead to a replay of Europe's
exchange rate crisis in the 1990s, a team of
bankers has warned.
"We see striking similarities between the
transatlantic tensions that built up in the
early 1990s and those that are accumulating
again today. The outcome of the 1992 deadlock
was a major currency crisis and a recession in
Europe," said a report by Morgan Stanley's
Release the Hawks!
Just as then, Washington has slashed rates to
bail out the banks and prevent an economic
hard-landing, while Frankfurt has stuck to its
hawkish line - ignoring angry protests from
politicians and squeals of pain from Europe's
Indeed, the ECB has let the de facto interest
rate - Euribor - rise by over 100 basis points
since the credit crisis began.
Just as then, the dollar has plummeted far
enough to cause worldwide alarm. In August 1992
it fell to 1.35 against the Deutsche Mark: this
time it has fallen even further to the
equivalent of 1.25. It is potentially worse for
Europe this time because the yen and yuan have
also fallen to near record lows. So has
Morgan Stanley doubts that Europe's monetary
union will break up under pressure, but it warns
that corked pressures will have to find release
one way or another.
This will most likely occur through property
slumps and banking purges in the vulnerable
countries of the Club Med region and the
euro-satellite states of Eastern Europe.
"The tensions will not disappear into thin air.
They will find fault lines on the periphery of
Europe. Painful macro adjustments are likely to
take place. Pegs to the euro could be
questioned," said the report, written by Eric
Chaney, Carlos Caceres, and Pasquale Diana.
The point of maximum stress could occur in
coming months if the ECB carries out the threat
this month by Jean-Claude Trichet to raise
rates. It will be worse yet - for Europe - if
the Fed backs away from expected tightening.
"This could trigger another 'catastrophic'
event," warned Morgan Stanley.
The markets have priced in two US rates rises
later this year following a series of "hawkish"
comments by Fed chief Ben Bernanke and other US
officials, but this may have been a misjudgment.
An article in the Washington Post by veteran
columnist Robert Novak suggested that Mr
Bernanke is concerned that runaway oil costs
will cause a slump in growth, viewing inflation
as the lesser threat. He is irked by the ECB's
talk of further monetary tightening at such a
Why is this man crying?
The contrasting approaches in Washington and
Frankfurt make some sense. America's flexible
structure allows it to adjust quickly to shocks.
Europe's more rigid system leaves it with
"sticky" prices that take longer to fall back as
Morgan Stanley says the current account deficits
of Spain (10.5pc of GDP), Portugal (10.5pc), and
Greece (14pc) would never have been able to
reach such extreme levels before the launch of
EMU has shielded them from punishment by the
markets, but this has allowed them to store up
serious trouble. By contrast, Germany now has a
huge surplus of 7.7pc of GDP.
The imbalances appear to be getting worse. The
latest food and oil spike has pushed eurozone
inflation to a record 3.7pc, with big variations
by country. Spanish inflation is rising at 4.7pc
even though the country is now in the grip of a
full-blown property crash. It is still falling
further behind Germany. The squeeze required to
claw back lost competitiveness will be
Morgan Stanley said the biggest risk lies in the
arc of countries from the Baltics to the Black
Sea where credit growth has been roaring at 40pc
to 50pc a year. Current account deficits have
reached 23pc of GDP in Latvia, and 22pc in
Bulgaria. In Hungary and Romania, over 55pc of
household debt is in euros or Swiss francs.
Swedish, Austrian, Greek and Italian banks have
provided much of the funding for the credit
booms. A crunch is looming in 2009 when a wave
of maturities fall due. "Could the funding dry
up? We think it could," said the bank."
Such a scenario could end up to the dollar's
benefit as holders of euros could lighten up
under those conditions and seek to court the
greenback once again. Or, perhaps another, more
Markets remain nervous and are seeking direction
as the amount of jawboning has declined
dramatically from last week's levels and as the
tone of the little that is being said sounds
just a bit more...accommodative. This still
leaves room for tests of higher resistance areas
ahead of the tipping point that Tuesday's Fed
meeting and Wednesday's decision might bring.