11-Jun (Reuters) —  The European Central Bank bought no government bonds for the 13th week running last week, ECB data showed on Monday as the bank judges the controversial programme of diminishing benefit in the face of the deepening euro zone debt crisis.

The ECB has bought hardly any bonds from euro zone countries since Mario Draghi took over as president in November as policymakers have become increasingly wary of the risks piling up on the balance sheet and the lack of incentives for reforms.

The programme’s effectiveness has also been put into question after the ECB took immunity status in the Greek debt restructuring while private bondholders booked losses – a scenario investors are worried could be repeated elsewhere.

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Spanish Bailout Relief is Short-lived

11-Jun (USAGOLD) — The market initially reacted favorably to the weekend agreement on a €100 bln bailout of the Spanish banking system. However, the relief rally in equities and the euro proved short-lived as the devil is apparently in the proverbial details.

By mid-morning in NY, the euro had given back all of its gains and was probing back below 1.2500. The Spanish IBEX index, which earlier had been up more than 6% turned negative on the day and and Spanish yields were back on the rise. It would seem that €100 bln bailout buys about half a day of relief…

I think there was broad acknowledgement that the bailout of the Spanish banks did nothing to solve the long-term problems of Spain or the eurozone as a whole. Focus was already shifting to next weekend’s Greek elections. However, when the debate started about where the funds for the bailout would come due to issues about subordination, the euphoria evaporated.

It seems that if the funds came from the new European Stability Mechanism (ESM) — as was the original plan — private bondholders would be immediately subordinated. That sparked a debate about whether the funds could come from the existing — but winding down — European Financial Stability Fund (EFSF), which doesn’t require subordination of the private bondholders. I think the market flashed-back to earlier in the year when there was a lengthy drawn-out process to get private Greek bondholders to “volunteer” for haircuts.

There have also been comparisons to the US TARP program, but as PIMCO’s Bill Gross pointed out via Twitter this morning: U.S. TARP bought [preferred] stock. EU buys senior Spanish debt. Big difference.

…well as it turns out, some in the EU are trying to ensure that it’s not even senior debt.

So why should Spain’s private bondholders be protected? Because I think there is a fear that the private bondholders throughout the periphery would stampede to liquidate their exposures if they got the sense that they were about to be subordinated to the ESM. Yields would rise further and the crisis would deepen.

While gold was unable to sustain overseas tests back above $1600, it remains comparatively buoyant, well above the low end of the range at 1527.45/1522.40. In attempting to paper over the Spanish banking crisis — with not nearly enough wallpaper — it didn’t take long for the market to realize that it’s going to take a lot more than €100 bln to provide even a short-term solution. Meanwhile, the broader eurozone debt crisis continues to fester, as do the fiscal crises in the US, the UK and Japan, amid ongoing risks of a hard-landing in China.

There quite frankly isn’t enough fiat on the planet to paper-over all of it…but that likely wont stop global policy makers from trying. And that’s exactly why many central banks, sovereign wealth funds, pensions, hedge funds and individual investors are clamoring for the protection of physical gold. Do you have enough gold in your portfolio?

08-Jun (Globe & Mail) — Gold is back in the news, big time, and not just because the price may be on the verge of another upswing or that Peter Munk is turning Barrick, the world’s biggest gold company, into a CEO meat grinder. It’s because Germany, it appears, wants to make gold the effective currency of the euro zone before the region plunges to the bottom of the seas like a concrete U-boat.

The weakest euro zone countries are tapped out financially and economically. But a few of them are brimming with gold reserves. Take Italy, the euro zone’s third-largest economy. The Italians love gold and it’s stashed everywhere, in their central bank and in their jewellery and safe deposit boxes. (I once saw a religious-festival parade of children in a mountain town, with each child groaning under the weight of heavy gold necklaces and other baubles). At last count, the central bank had 2,451 tonnes of gold, valued at close to €100-billion ($128-billion). That’s not a fortune compared to Italy’s €1.9-trillion national debt, but it’s not bad when Rome is raiding the pantry to pay its ever-rising debt.

Germany’s idea is coyly named the European Redemption Pact and it is nothing if not creative. While details are scant, here is roughly how this gilded baby would work. Countries with debts greater than 60 per cent of gross domestic product – the (ignored) limit under the European Union’s Maastricht Treaty – would transfer those debts into a redemption fund, which would be covered by joint bonds. The scheme has been called “euro bonds lite.”

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PG View: Quite frankly, I don’t think the ERP is really a viable plan, but it’s worth noting that gold is increasingly a part of the ongoing conversation…

11-Jun (Wall Street Journal) — A mooted rescue package worth up to EUR100 billion for Spain’s beleaguered banks failed to restore confidence in the country’s creditworthiness as concerns mounted that the deal will load more debt onto the Spanish state and threaten to subordinate bondholders behind official creditors.

An early rally in Spanish and Italian debt quickly reversed with yields on both Spanish and Italian 10-year government bonds climbing more than 20 basis points.

“The proposed bailout strengthens rather than weakens Spain’s pernicious sovereign-bank nexus and threatens to accelerate the ongoing rapid decamping of foreign investors. The feel-good vibe looks to be dissipating more quickly than we expected,” said interest rate strategists at Rabobank International.

Following weeks of speculation, the Spanish government on Saturday confirmed it will seek outside assistance for its troubled banks, while European finance ministers said the euro zone stands ready to provide the funds, if requested.

[source]

10-Jun (RTE News) — After a 2.5-hour conference call of the 17 finance ministers, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to €100bn in total,” a Eurogroup statement said.

Spain said it wanted aid for its banks but would not specify the precise amount until two independent consultancies – Oliver Wyman and Roland Berger – deliver their assessment of the banking sector’s capital needs some time before 21 June.

[source]

London Trader – Staggering 515 tons of gold sold in 4 hours

“With many global investors still rattled by the recent price action in gold and silver, today King World News interviewed the ‘London Trader’ to get his take on these markets. The source told KWN that not only was a shocking amount of paper gold sold in just 4 hours yesterday, but it was also confirmed that the mainstream media is not reporting the staggering amount of physical gold that has actually been purchased by China recently. Here is what the source had to say: ‘China has purchased hundreds of tons of gold in the last couple of months. China is not disclosing what their true reserves are. Russia is delaying disclosure and so is Iran. We saw record gold imports of over 100 tons through Hong Kong to China in April, as reported by the mainstream media, but what has been reported is just the tip of the iceberg.’”

King World News

The London Trader continues:

“What we’ve seen is a dramatic acceleration of physical gold purchases as the price has been drawn down. Staggering amounts of physical gold are being purchased. The acceleration of physical purchases, at these lower levels, is the reason why gold has been holding firm and building such a nice base.

I want to be very clear about this, in addition to what is being reported by the mainstream media, we have seen hundreds of tons of additional physical gold being purchased by China over the last three months….”

08-Jun (USAGOLD) — Gold extended to the downside in overseas trading, at the end of a week where no central bank (beyond the PBoC) seemed inclined to ease further, despite mounting global growth risks. In addition, speculation that a Spanish request for a bailout was imminent pushed the euro back below 1.2500 and the corresponding rise in the dollar added further weight to the yellow metal.

The ECB and BoE formerly held steady on monetary policy this week, while Ben Bernanke, in testimony before the JEC on Thursday, avoided any clear indication that further easing or more quantitative measures would be forthcoming from the Fed. Yet by tossing out the pat platitude that “the Federal Reserve remains prepared to take action as needed”, Bernanke provides that glimmer of hope once again, allowing the market to shift its expectations forward a couple weeks to the June 19-20 FOMC meeting.

While the PBoC cut its benchmark lending rate by 25bp, there was a general hope that western central banks would acknowledge the significant erosion of global economic conditions and would act. However, with rates already at or near zero and multiple “extraordinary measures” enacted, I can understand why central banks are reluctant to play what might arguably their final card: What if it doesn’t work? The credibility of those central banks would be severely damaged. What if they act now and there is some new crisis lurking just over the horizon? They might be depleted to the point that their only option would be massive influxes of liquidity…inflation risks be damned.

With inflation in the eurozone still running above target, the ECB can argue that In keeping the refi rate at 1.0%, they are simply fulfilling their price stability mandate. However, the real motivation might be that at 1.0% the ECB has a couple more bullets to fire in the future, even if hording the ammo invites a bigger more devastating crisis ever nearer. In the meantime, it allows the ECB to ratchet up the pressure on eurozone politicians to attack the crisis more meaningfully from the fiscal side.

In the end, as we’ve always said, any real solutions are going to be painful and fraught with risks. This is exactly what prompts world policymakers to continually avoid making the tough decisions, foisting the responsibilities back on the central banks, and presumably absolving those politicians of any responsibility for the mess we’re in. It’s nice to see the ECB, and perhaps more appropriately the Germans in particular, calling attention to this chicanery.

• US wholesale sales +1.1% in Apr, well above expectations of +0.4%, vs negative revised +0.4% in Mar; inventories +0.6%.
• US trade deficit narrowed to -$50.0 bln in Apr, outside expectations of -$49.5 bln, vs negative revised -$52.6 bln in Mar.
• Canada housing starts moderated to 211.4k in May, below expectations of 214.0k, vs negative revised 243.8k in Apr.
• Canada employment +8k in May, on expectations of +10k; unemployment rate steady at 7.3%.
• Canada had a deficit of -C$0.4 bln in Apr, on expectations of a +C$0.2 bln surplus, vs negative revised +C$0.2 bln in Mar; exports -1.2%.
• UK PPI Input (nsa) -2.5% m/m in May, vs -1.5% in Apr; +0.1% y/y in May, vs +1.2% in Apr.
• UK PPI Output (nsa) -0.2% m/m in May, vs +0.7% in Apr; +2.8% y/y in May, vs +3.3% in Apr.
• Germany trade balance (sa) €16.1 bln in Apr, vs upward revised €14.0 bln in Mar; exports -1.7%; imports -4.8%.
• Italy industrial production (sa) -1.9% m/m in Apr, well below expectations of -0.7%, vs upward revised 0.6% in Mar; -11.9% y/y (nsa).
• Portugal Q1 GDP (final) confirmed at -0.1% q/q and -2.2% y/y.
• Greece Q1 GDP (final) revised down to -6.5% y/y, vs -6.2% previously.
• Greece CPI +1.4% y/y in May, vs +1.9% in Apr.
• BoK holds repo rate steady at 3.25%, in-line with expectations.

07-Jun (Bloomberg) — The Bank of Japan (8301) may debate overhauling its asset-buying program next week after its campaign to end deflation was undercut by government bondholders’ reluctance to sell as financial turmoil deepens.

Governor Masaaki Shirakawa and his board gather June 14-15, days before a Greek election that may determine whether the nation leaves the euro, triggering deeper European trauma. The euro crisis has already sparked a surge in demand for bonds that left the BOJ unable to meet targets for purchases twice in May.

The disruptions to the central bank’s program coincide with increasing pressure by Japanese lawmakers for Shirakawa to step up efforts to support the economy, which is forecast to slow after it strengthened last quarter. BOJ board members may extend the maturity of the debt they buy or increase purchases of riskier assets, according to Bank of America Merrill Lynch.

[source]

08-Jun (Dow Jones) — The Bank of France Friday said the French economy will contract in the second quarter of this year according to the central bank’s monthly index of business activity.

French gross domestic product will fall 0.1% in the second quarter from the first three months of the year, the Bank of France said in its survey on industry and services. Last month, it had forecast a stagnation in GDP in the second quarter.

[source]

08-Jun (Bloomberg) — European Central Bank Governing Council member Ewald Nowotny said any delay in Spain requesting a European Union aid would increase the costs of a bailout.

While declining to comment on rumors that Spain may ask for aid this weekend, Nowotny said that he “of course considered it sensible to request aid, because the longer you wait with revamp measures, the more expensive it gets. Therefore, I consider it sensible as part of a coordinated plan,” Nowotny told reporters in Vienna today.

“Spain currently has a problem with its banks and of course a real estate bubble,” Nowotny said. “This means we have a situation that isn’t completely dissimilar to what we had in Ireland.”

[source]

08-Jun (Financial Times) — Spain could request bailout aid for its struggling domestic banks as early as Saturday during conference calls between officials from all 17 eurozone finance ministries, making Madrid the fourth member of the single currency bloc to need a rescue from EU authorities since the outbreak of the sovereign debt crisis.

People briefed on planning for the calls, one with senior officials and a second with finance ministers themselves, said leaders want to move pre-emptively in order to assuage growing market uncertainty. The decision was first reported by Reuters.

There were signs on Friday that the Spanish government may back away from a formal request for aid after news of the calls was made public. Spanish media quoted deputy budget minister Fernández Currás on Friday as saying the reports were “false”.

[source]

07-Jun (MoneyNews) — Stocks rose on Wall Street Thursday after China cut its benchmark lending rate in another bid to boost its slowing economy, but an early rally faded after Federal Reserve Chairman Ben Bernanke gave no signal of immediate action to prop up the U.S. economy.

The Dow Jones Industrial Average was up 80 points at 12,494 shortly after noon. It had been up as much as 140 points earlier. On Wednesday the stock market had its biggest gain of the year on hopes that more economic stimulus might be on the way in the U.S. and Europe.

China cut its benchmark lending rate for the first time in nearly four years, adding to efforts to reverse a sharp economic downturn. It was the first rate cut since November 2008.

“Markets received a near-term shot of adrenalin from China,” said Matthew Kaufler, portfolio manager at mutual fund group Federated Investors. “China is the world’s economic locomotive at the moment and it can’t afford to slow down at a time when other major economies are in precarious positions.”

[source]

07-Jun (USAGOLD) — Gold has tumbled back below $1600 after a Chinese rate cut was offset by a steady stance by the BoE and no strong indication from Ben Bernanke that further Fed accommodations are imminent. Additionally, comments by German Chancellor Merkel about ‘more Europe’ seemed to improve risk appetite, lifting stocks and diminishing the appeal of the yellow metal as a hedge.

China surprised the market by cutting its benchmark interest rate by 25bp to 6.31% amid rising risks to growth, however they seem to be the only ones willing to ease further. Perhaps because they are the only major player with the room to move. The ECB has the room, but they are probably saving those bullets for a more serious firefight. The BoE held steady on rates today and refrained from upping their asset purchase target beyond the current £325 bln. And finally, Fed chairman Bernanke, in testimony before the JEC, regurgitated the usual platitudes that the Fed stands ready to act if needed.

Regarding Merkel’s comments: When Chancellor Merkel said Germany was ready to back use of “euro-area instruments,” I think the market misinterpreted that as an indication that Germany was suddenly willing to consider eurobonds. Her statement was subsequently clarified as “existing euro-area instruments.” That’s a pretty significant distinction, and so the substance of Merkel’s comment was that Germany is prepared to stick with the status quo…which clearly hasn’t worked.

The euro has already retreated from earlier gains above 1.2600 and gold is off the lows.

• US initial jobless claims -12k to 377k for the week ended 02-Jun, below expectations of 380k, vs upward revised 389k in previous week.
• BoE leaves repo rate unchanged at 0.5% and refrained from raising the asset purchase target beyond current £325 bln.
• UK CIPS Services PMI steady in May at 53.3, above expectations of 52.4.
• Ireland CPI unch in May, vs unch in Apr; 1.8% y/y.
• Switzerland unemployment rate (sa) edged higher to 3.2% in May, vs 3.1% in Apr.
• Switzerland CPI unch in May, vs +0.1% in Apr; -1.0% y/y.
• Greece unemployment 21.9% in Mar, vs 21.4% in Feb and 15.7% a year ago.
• France unemployment rate rises to 10.0% in Q1, vs 9.8% in Q4-11.
• PBoC cut benchmark lending rate 25bp to 6.31%, and deposit rate 25bp to 3.25%.
• Australia unemployment rate ticks higher in May to 5.1%, vs upward revised 5.0% in Apr.
• Japan Leading Index (prelim) -1.3% m/m in Apr, vs +0.6% in Mar.
• Japan coincident index (prelim) -0.2% m/m in Apr, vs +1.3% in Mar.

07-Jun (The Wall Street Journal) — The U.S. economic recovery faces significant risks, including from the European sovereign debt crisis and uncertain U.S. fiscal policy, Federal Reserve Chairman Ben Bernanke said in testimony prepared for a congressional hearing on Thursday.

Still, the Fed chairman stopped short of signaling Fed action to combat these risks, other than to say that the Fed remained “prepared to take action” to protect the U.S. economy and financial system if stresses on the financial system escalate.

In all, Mr. Bernanke’s testimony was more restrained than comments offered this week by other Fed officials, including Wednesday evening comments by vice chairwoman Janet Yellen, which laid out detailed arguments for why the Fed might to take new actions to bolster the economy and protect it from risks to growth.

[source]

Transcript of Chairman Bernanke’s opening statement: http://www.federalreserve.gov/newsevents/testimony/bernanke20120607a.htm

06-Jun (Financial Times) — The pattern is now all too familiar and has been a regular feature since the financial crisis.

Fears of systemic stress and weak US economic data spark dramatic declines in Treasury yields, followed by the Federal Reserve launching a new round of bond purchases, confirming the pre-emptive positioning of bond investors.

…Bond investors are on guard for any hint on Thursday, when Ben Bernanke testifies about the outlook for the economy before the Senate Banking Committee.

“A temporary soft-patch assessment will increase the odds of an extension in Operation Twist, while concern about a renewed downturn would imply QE3,” says Steven Ricchiuto, chief economist at Mizuho Securities.

[source]

07-Jun (CNBC) —  Greece’s unemployment shot up to 21.9 percent in March, rising sharply from the 15.7 percent rate in the same month last year and up from 21.4 percent in February, the country’s statistics agency said Thursday.

Greece has been struggling through a financial crisis for the past two years, and has been relying on billions of euros in international rescue loans from other eurozone countries and the International Monetary Fund since May 2010. In return, it has made deep spending cuts and imposed major tax hikes, leaving the country mired in a deep recession.

[source]

07-Jun (Financial Times) — Switzerland’s central bank spent tens of billions of francs defending the country’s currency from haven flows as the eurozone crisis escalated in May.

The Swiss National Bank said that its stockpile of foreign exchange reserves rose to SFr304bn in May – a record high – up from SFr238bn the previous month.

The increase marked what foreign exchange analysts believe is the first time that Switzerland has intervened in the currency markets since September.

…Foreign exchange analysts estimated that the SNB had spent as much as SFr65bn buying euros to keep the franc weak in May, after adjusting for valuation fluctuations. That was higher than many estimates.

[source]