22-Sep (Bloomberg) — The Federal Reserve’s effort to reduce borrowing costs with an unconventional policy tool may also be highlighting limits to its power to fix what ails the U.S. economy.

Investors sought safer assets for a second day after the Fed announced it would shift $400 billion of its Treasury securities holdings into longer-term debt. Treasury 30-year bonds rallied, sending yields to the lowest level in almost three years, while the Dow Jones Industrial Average suffered its biggest two-day loss since December 2008.

[source]

22-Sep (HousingWire) — The Dow Jones Industrial Average plunged about 500 points Thursday before closing down 391 points, or 3.5%, as dim economic news from monetary policymakers and the growing European debt crisis spooked investors.

Global financial markets are reacting to a series of negative reports, including Treasury Secretary Timothy Geithner’s assertion that political instability and a debt crisis overseas are the greatest risks to the American economy, according to a Reuters report.

Fears of a European debt crisis hurting U.S. growth prompted the Senate Banking Committee to invite a panel of European economists and banking experts to discuss how their debt issues will impact the fledgling U.S. economy.

[source]

22-Sep (The Wall Street Journal) — Investors staged a flight from risk in global markets that sent U.S. stocks plummeting and 10-year Treasury yields to 1940s levels, after a gloomy outlook by the Federal Reserve renewed fears of a global economic slowdown.

U.S. stocks hit successive lows throughout Thursday’s session as investors sold off assets perceived as “risky” and fled to the dollar and to government bonds. The selloff started Wednesday. The Fed moved to increase the share of longer-dated Treasurys within its portfolio by $400 billion by June 2012, while selling shorter-term paper. But the planned effort, which investors dubbed “Operation Twist,” was overshadowed by a gloomy statement from the central bank noting “significant downside risks” to the global economy. The Fed also noted “strains” in global financial markets, widely interpreted as a reference to Europe’s sovereign-debt crisis.

[source]

PG View: Investors may be fleeing stocks in favor of the dollar and bonds, but they are unlikely to stay there. Growth risks that tanked stocks are just the catalyst for additional central bank measures that would be dollar negative. And the yields on US Treasuries simply don’t accurately reflect the true risks.

22-Sep (Financial Times) — European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.

A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way.

[source]

Gold Retreats as Global Growth Risks Mount

22-Sep (USAGOLD) — Weak PMI data out of China and the eurozone have weighed heavily on global shares and the commodity complex on Thursday, just a day after the Fed offered a pretty dire assessment of the US economy. Broad-based risk aversion has prompted flows out of stocks and commodities and into the perceived safety of dollars and low yielding sovereign debt. While this risk-off trade is also weighing on gold, because of its allocation to commodity pools and funds, the safe-haven aspects of the yellow metal suggests that downside potential may prove to be limited in the face of all the global uncertainty.

It would seem that Europe is on the verge of recession, on top of heavy stresses associated with the sovereign debt crises. Meanwhile, even the Chinese economy may be sputtering under the weight of carrying the water for the rest of the world. As for the US economy, leading indicators were up slightly in August, but initial jobless claims once again disappointed, remaining well above 400k.

The Fed moved on Wednesday to offer additional accommodations via an Operation Twist, hoping that in driving down longer term yields, it might spark some economic activity. While this move was widely anticipated, the market’s assessment seems to be that simply swapping $400 bln in maturities less than 3-years for $400 bln in maturities greater than 6-years, is unlikely to have any meaningful impact on growth. The Royal Bank of Canada summed it up thusly, “the economic impact will be low; the private sector is simply not responding to low yields and the housing market is languishing amid low confidence and demand while mortgage lending standards are tightening.” Arguably, the private sector is being prevented from responding to lower yields by those tighter lending standards.

The weaker growth outlook certainly mitigates inflation risks, and that may be factoring into gold’s return to the low end of the 5-week range as the dollar jumped on FX flows out of the euro and into something perhaps not quite as ugly. However, a return to recession also heightens systemic risks (just look at banking shares today), raising expectations that the central banks of the world will react in the only way they know how, with the blunt-instrument of ever-more accommodative monetary policy. The Fed and the BoE at least are very unlikely to sit idly by and allow for deflation. They will print and pump to maintain at least some inflation.

It appears that the BoE is very likely to launch additional QE measures, perhaps as early as next month. The ECB, due to hotly contested rate hikes earlier in the year, has some limited maneuvering room. The Fed, in opting for Operation Twist, has left the arrow of more full-on QE in the quiver, to perhaps be used at a later date. On top of all that, there are rumors circulating today that the Fed is planning to slash rates on the swap lines that were vastly expanded last week; a further indication of just how tight liquidity is getting.

If further expansion of the monetary base, here in the US and elsewhere in the industrialized world, is to be forthcoming — and given the well-established trend, it’s hard to believe that it won’t be — then gold’s pullback within the range is likely to be short-lived.

22-Sep (Financial Times) — The eurozone economy is on the brink of recession, according to a closely-watched survey showing private sector activity contracted this month for the first time in more than two years.

The worse-than-expected deterioration in eurozone purchasing managers’ indices adds to evidence that the region’s recovery has gone into reverse. It increases pressure on the European Central Bank to cut interest rates.

Economic prospects have been hit by sharp falls in consumer and business confidence amid the escalating eurozone debt crisis, as well as fiscal austerity measures across the continent and gloom about US growth.

[source]

22-Sep (MarketWatch) — HSBC’s preliminary China Manufacturing Purchasing Managers’ Index, or “flash” PMI, fell to a two-month low in September, indicating a broadening slowdown in the Chinese economy, with industrial output swinging from a modest expansion to a deterioration.

The weak data were a factor in the broad equities sell-off in Hong Kong Thursday.

[source]

22-Sep (The Economist) — BUY on the rumour, sell on the news. It is an old market adage that may explain why the the equity market has sold off so sharply in the wake of the Fed’s announcement of Operation Twist. But the scale of the sell-off (the FTSE 100 is off nearly 5% as I write and below the 5,000 mark, while the Dax is off more than 4%) suggests that something else is at work.

Perhaps the Fed’s downbeat assessment of the economy was to blame? That is possible and the mood will not have been helped by today’s European purchasing manager indices, which are below 50 on the composite measures (and around 50 in Germany), a level that indicates declining activity.

…That would suggest that, like Oliver Twist, the markets were hoping for something more, a commitment to (or at least a hint of) full-blown QE, in defiance of the Republican leadership.

…Broadly speaking, then, one can say that market reaction to the Fed shows either the fear that the central bank is running out of ammunition (at a time when fiscal policy is also constrained) or that the Fed will simply have to act more decisively (just as many believe the ECB will eventually have to buy a lot more Italian and Spanish bonds).

[source]

22-Sep (USAGOLD) — Gold has extended losses back toward the low end of the 5-week range as a plethora of weak data fuels concerns over global growth risks. This has weighed heavily on stocks, as well as the commodity complex today. Most commodity funds and indexes have a gold component, so in exiting these instruments, investors are also selling gold; even if they believe gold is where they really want to be. As stocks fall, investors must frequently liquidate profitable positions (including those in gold) to cover margin calls.

The “risk-off” mindset has fueled flows into dollars and low yielding sovereign debt like US Treasuries, German bunds and JGBs. The dollar has gotten an additional boost to new 7-month highs as a result of persistent sovereign default woes in Europe, which have pushed the euro below 1.3400 for the first time since January. The general inverse correlation between the dollar and gold may also be fueling some speculative interest on the short side of the yellow metal, but as we’ve seen recently, these types of breaks have attracted strong buying interest in the physical market.

Finally, given dubious success of past quantitative easing measures, there seems to be a growing consensus that the Fed’s Operation Twist that was announced yesterday — the swapping of $400 bln in short-term Treasuries for an equal amount of longer-term Treasuries — has little chance of reinvigorating the moribund US economy.

• US initial claims -9k to 423k in the week ended 17-Sep, above market expectations, vs upward revised (again!) 432k in previous week.
• Canada retail sales -0.6% in Jul, below market expectations of -0.3%; ex-autos flat, also below expectations.
• UK CBI Industrial Trends Monthly – Total Orders -9 in Sep, below market expectations of -5, vs +1 in Aug; Export orders -12.
• Eurozone Reuters PMI – Composite (advance) fell to 49.2 in Sep, below market expectations, vs 50.7 in Aug; Mfg 48.4, Servs 49.1.
• Eurozone industrial orders (sa) -2.1% m/m in Jul, well below market expectations of -1.2%, vs negative revised -1.2% in Jun; 8.4% y/y pace.
• Eurozone Flash consumer confidence edged lower to -17.0 in Sep, below market expectations, vs -16.6 in Aug.
• New Zealand Q2 GDP weaker than expected at just 0.1% q/q.
• China HSBC/Markit Flash Manufacturing PMI 49.4 in Sep, below expectations, vs upward revised 49.9 in Aug.
• Taiwan unemployment rate (sa) ticks lower in Aug to 4.36%, vs 4.37% in Jul.

21-Sep (USAGOLD) — The Fed’s FOMC committee announced today that they would keep the target range for the federal funds rate at 0 to 1/4 percent, reiterating the guidance from last month that rates would likely remain exceptionally low at least through mid-2013.

They have added an Operation Twist on top of their current QE2.5 re-monitization program, with plans to sell $400 bln in Treasuries with remaining maturities of 3-years or less and buy an equal amount of Treasuries with remaining maturities of 6 to 30 years by the end of June 2012. This will in effect ‘twist’ of flatten the yield curve.

The Fed also said that they would reinvest principal payments from their holdings of agency debt and agency mortgage-backed securities to buy additional agency mortgage-backed securities in the hope that it will provide lower mortgage rates.

“Fuller discussion” provided by extra day added to FOMC meeting, failed to sway any of the dissenters; Fisher, Plosser, & Kocherlakota.

The QE hits keep coming…

[FOMC Statement]

21-Sep (Bloomberg) — Bank of America Corp. and Wells Fargo & Co. had their long-term credit ratings downgraded by Moody’s Investors Service, citing a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup Inc.’s short-term rating also was cut.

The government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” Moody’s wrote in statements today on Bank of America and Wells Fargo. While Citigroup may lose backing as well, its stand-alone credit has shown improvement, Moody’s said, confirming the bank’s long-term rating.

[source]

20-Sep (CNN) — Our government is utterly broke. There are signs everywhere one looks. Social Security can no longer afford to send us our annual benefit statements. The House can no longer afford its congressional pages. The Pentagon can no longer afford the pension and health care benefits of retired service members. NASA is no longer planning a manned mission to Mars.

We’re broke for a reason. We’ve spent six decades accumulating a huge official debt (U.S. Treasury bills and bonds) and vastly larger unofficial debts to pay for Social Security, Medicare, and Medicaid benefits to today’s and tomorrow’s 100 million-plus retirees.

The government’s total indebtedness — its fiscal gap — now stands at $211 trillion, by my arithmetic.

[source]

21-Sep (Bloomberg) — President Barack Obama said the global economic recovery is fragile and requires urgent, unified action to sustain it.

“We acted together to avert a depression in 2009,” Obama said in the text of his remarks to the United Nations General Assembly today in New York. “We must take urgent and coordinated action once more.”

The U.S. president didn’t specify what steps should be taken.

[source]

PG View: Major central banks agreed last week to pump liquidity like mad into Europe. The BoE has indicated that additional QE is likely and the Fed may well do the same later today. I wonder what exactly the President has in mind, beyond his jobs bill that has little hope of passing the House…

21-Sep (The Wall Street Journal) — Gold was trading in a narrow range in Asia with investors reluctant to take new positions amid cautious trading ahead of the much-awaited outcome of the U.S. Federal Reserve’s two-day policy meeting.

“Investors are mostly on the sidelines and prices are likely to remain range-bound ahead of the Federal Reserve’s decision,” said a Hong Kong-based trader.

Much would depend on the extent of the Fed’s determination to push with a solution.

If Chairman Ben Bernanke comes out with another stimulus by extending the average duration of the Fed’s asset holdings, it is unlikely to have a major impact on markets as current price levels have factored that in already.

But “if there is additional guidance, or something more accommodative comes out of the meeting, the dominant uptrend in gold would likely start to re-exert itself,” Peter Grant, economist at USAGOLD-Centennial Precious Metals.

[source]

21-Sep (Washington Post) — Nearly half of the euro area’s $9 trillion in outstanding government debt is “at heightened credit risk,” the International Monetary Fund said Wednesday in a report that slams leaders of the developed world for their lack of action on public debt and outlines the potentially devastating fallout if the problem widens.

Already, the IMF estimated, the rising threat of losses on the government bonds of half a dozen countries — Greece, Portugal, Ireland, Italy, Spain and Belgium — represents an implicit cost to banks of around $240 billion.

With so much total debt outstanding, and markets worried that a large country such as Italy may need a bailout that Europe and the IMF can’t afford, the situation has caused investors to steadily abandon weaker countries.

[source]

by Global Macro Monitor
20-Sep (CreditWritedowns.com) — Here’s a great chart just released by the International Monetary Fund. Note that almost half — 47 percent – of the US$14.7 trillion U.S. federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors. Stunning!

[source]

PG View: I would argue that “non-market/non-profit oriented investors” own the vast majority of government debt, because the risk/reward ratios have been so grossly distorted by government and central bank interventions that real investors have no interest is such assets. And it sure looks like official efforts to continue mispricing risk are going to continue.

21-Sep (Bloomberg) — Bank of England officials said they may need to buy more bonds to bolster a faltering recovery after holding off adding stimulus this month in a decision that was “finely balanced.”

Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 8 decision said. “For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting.”

[source]

PG View: It remains to be seen what the Fed will do today, but it sure appears that global central banks are inclined to flood the world with even more liquidity.

20-Sep (Financial Times) — The gold market is revving up to reach new record highs in excess of $2,000 an ounce in the next year, according to the average forecast of bankers, traders and investors at the gold industry’s largest annual gathering.

The bullish prediction, if correct, suggests that the gold bull market remains intact, despite the price of the metal having already gained almost 30 per cent this year and 600 per cent over the past decade.

The widespread optimism at the London Bullion Market Association conference in Montreal, the largest gathering of the gold industry, comes as the gold market has been transformed from a backwater dominated by jewellery demand to one of the hottest investment assets.

…The bullish sentiment has been underpinned by the strength of demand for coins and small bars from retail investors from Germany to China.

[source]

20-Sep (King World News) — With gold hovering near the $1,800 level, a trader out of London told King World News, “China is trading gold at a $17 premium today vs COMEX futures. Silver is trading at a premium of $2.48 vs futures price (COMEX). What this tells you is that these people in China are willing to pay the equivalent of roughly $12,500 more per contract than what silver is being traded for on the COMEX.”

London Trader continues:

“As soon as China closes trading each day, that is when the selling starts in the paper markets. These raids on the price are designed to get weaker players flushed out of the futures markets so they (commercials) can cover some of their short positions.

If there is that strong of a bid for gold out of the Eastern hemisphere, what that tells me is that all of the heavily leveraged paper manipulation in the West will not have much more downside impact. All the manipulators are doing at this point is compressing a spring, but at some point this market is eventually going to gap up incredibly hard against them.

…There are massive orders for tonnage of gold, incredible amounts between $1,715 and $1,760. This has the effect of putting a physical floor under the price of gold.

[source]

20-Sep (Xinhua) — Three years after the outbreak of the global financial crisis, the world economy still grows at a painfully slow pace as both the United States and the European Union (EU) face unprecedented levels of public debt and heightened economic uncertainty.

During the darkest days of the financial crisis late 2008, China, together with other major developed and emerging economies, rolled out ambitious stimulus plans, helping to stabilize the global financial markets and successfully bring the world economy back from an unfathomable abyss.

However, stimulus measures in many countries are running out of steam and private sectors have failed to live up to the task of leading economic growth. These negative signs, coupled with unsustainable debt and deficit levels in many developed countries, mean the world economy now faces substantial downward pressure.

For the United States and Europe, the worst part of the ongoing economic mess is that they have little policy maneuvering room to boost their economies compared to three years ago.

[source]

PG View: Message from China seems to be, “Hey, our massive FX reserves may come in handy given the dire economic circumstances in the West. Shun us at your own peril.”

Gold Range Bound, Awaiting FOMC Decision

20-Sep (USAGOLD) — Gold remains well contained within the recent range, awaiting the Fed’s decision tomorrow regarding further accommodations. The FOMC meeting that commenced today was expanded by an additional day to “allow for a fuller discussion,” which probably more accurately translates into chairman Bernanke needs more time to get dissenters, Fisher, Plosser and Kocherlakota, in-line behind new measures.

Getting the dissenters to at least concede that risks to growth have increased dramatically in recent weeks should be fairly easy, given the fact that no new jobs were added in August and confidence has plunged. Even the Fed itself has negatively revised its growth outlook and last week’s release of the Fed report on household balance sheets through Q2 showed some pretty devastating declines in net worth that are expected to continue through Q3. Today’s negative revisions by the IMF to both global an US growth forecasts for this year and next, tip-in the reality that everyone seems to already be aware of, that the US is slipping back toward recession. And that in turn, is weighing heavily on global growth prospects.

Bernanke might also argue that with the economic slowing, price risks have moderated. Additionally, further stimulus on the fiscal side — in the form of President Obama’s jobs bill — has very little chance of advancing. It’s up to the Fed to act, or there will likely be a double-dip.

Undoubtedly, events unfolding on the other side of the pond are factoring heavily into the FOMC’s discussions as well. The Fed’s agreement last week to basically provide unlimited dollar liquidity to Europe is an ominous acknowledgement to the direness of the situation on the Continent. Market analyst John Mauldin wondered this week, what “is the Fed doing, giving essentially unlimited funds to European banks? What are they seeing that we do not?” His conclusion seems to be that the Fed, in conjunction with the ECB, SNB, BoE and BoJ, are seeking to build a firebreak against a catastrophic Lehman-type default. If the answer for Europe is more liquidity, the likely answer for US banks is to bolster liquidity here as well.

With short-term interest rates at 0% and the 10-year yield trading below 2.0%, the Fed really has limited options at their disposal. They can pump the liquidity domestically via the traditional means of quantitative easing, buying shorter-dated securities, confirming their commitment to keep short-term rates exceptionally low into mid-2013. However, after the previous QE1, QE-lite, QE2 and the ongoing QE2.5 operations, that strategy has proven to be largely ineffective. That leaves an attack on the long-end of the curve as a new potential ‘twist’ to QE; selling their shorter-dated holdings and buying 7- to 10-year notes to twist the yield curve and bring down longer-term rates. While this would arguably drive down rates on longer-term business loans and mortgages, there’s still a huge problem with getting businesses and people qualified for these loans.

There is additionally the chance for even more explicit guidance than the “mid-2013″ offered up last month. They could also stop paying the admittedly paltry 0.25% rate that they are currently giving on reserves, in the hope that it might force some of those funds into circulation. The latter strikes me as having limited value.

The most likely scenario is that the Fed will announce some plan along the lines of Operation Twist to extend the maturities on their balance sheet. That is largely baked into the cake at this point, so if the Fed meets expectations, I wouldn’t expect any kind of big market reaction. But, I would also say that it wouldn’t be detrimental to gold’s long-term uptrend. On the other hand, if there is additional guidance, or something even more accommodative comes out of the meeting, the dominant uptrend in gold would likely start to re-exert itself.

20-Sep (Bloomberg) — Gold futures rose as European debt concerns and prospects for more steps by the Federal Reserve to bolster the U.S. economy spurred demand for the precious metal as an alternative investment.

Standard & Poor’s cut Italy’s credit rating yesterday, adding to concern that Europe’s fiscal crisis will raise borrowing costs for countries in the region. Fed officials begin a two-day meeting today and may decide to replace some of the short-term Treasuries in its $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists.

“The Fed may announce some stimulus measures today,” Graham Leighton, a director of metals at Newedge USA LLC in New York, said in a telephone interview. “The long-term bullish story for gold remains intact.”

[source]

PG View: The FOMC statement actually won’t come out until tomorrow as the meeting was expanded to an extra day.

20-Sep (USAGOLD) — Gold has regained the $1800 level once again, following yesterday’s late downgrade of Italy by S&P. The only surprise there was that it was S&P, rather than Moody’s, that issued the downgrade. It was widely anticipated that Moody’s would downgrade Italy late last week when their normal 90-day review period lapsed. They have yet to do so, as the review apparently continues. The euro pretty readily absorbed the news, dipping briefly back below 1.3600, but it didn’t stay down for long.

The IMF slashed both global and US growth expectations this morning: The IMF now believes the global economy will grow just 4% this year and next, a negative revision from their June estimates of 4.3% for 2011 and 4.5% next year. IMF cut its US growth forecasts to 1.5% for this year, versus 2.5% previously and 1.8% for 2012, versus 2.7% previously. The IMF’s confirmation of growth risks intensifies expectations that the Fed will be forced to offer additional accommodations when the 2-day FOMC meeting concludes tomorrow.

• US housing starts -5.0% to 571k pace in Aug, well below market expectations of 593k, vs negative revised 601k in Jul.
• Canada leading indicator flat in Aug, above market expectations of -0.1%, vs +0.1% in Jul.
• Canada wholesale trade +0.8% in Jul, just above expectations, vs flat in Jun.
• Switzerland trade balance CHF0.8 bln in Aug, vs 2.825 bln in Jul.
• Sweden GDP – Final (sa) revised down to 0.9% in Q2, just below market expectations, vs 1.0% previously.
• Italy industrial orders (sa) +1.8% m/m in Jul, vs 4.1% in Jun; 6.5% y/y.
• Germany PPI -0.3% m/m in Aug, below market expectations of 0.2%, vs 0.7% in Jul; 5.5% y/y.
• Germany ZEW economic sentiment falls to -43.3 in Sep, below market expectations, vs -37.6 in Jul; Current situation drops to 43.6 from 53.5.
• Japan leading index (revised) 2.6 m/m in Jul, vs 2.7 previously.

19-Sep (Bloomberg) — Venezuelan President Hugo Chavez ordered the nationalization of the gold industry and gave companies 90 days to form joint ventures with the state as he seeks to boost control over the nation’s metals producers.

The government will hold at least 55 percent of any joint ventures, according to a decree in today’s Official Gazette. The decree sets a royalty rate of 10 percent to 13 percent and says that all Venezuelan gold production will be sold to the state.

Chavez first announced the nationalization of the industry and plans to repatriate Venezuela’s foreign gold reserves on Aug. 17.

[source]

20-Sep (CNNMoney) — The International Monetary Fund lowered its global growth outlook, warning that “the global economy is in a dangerous new phase.”

The IMF, a global financial institution comprising 187 nations, released excerpts from the latest edition of its World Economic Outlook Tuesday, ahead of its fall meeting in Washington this weekend.

It now expects the world’s economic output to increase 4% in both 2011 and 2012, compared with growth of 5.1% in 2010. In June, the IMF had forecasted slightly more robust growth rates of 4.3% for this year.

The IMF also sharply reduced its forecast for economic growth in the United States this year to 1.5%, down from 2.5% in June. It also lowered its expectations for growth in 2012 to 1.8% from 2.7%.

[source]

20-Sep (Financial Times) — Standard & Poor’s has cut Italy’s credit rating in a move that buffeted stock markets and the euro, and underlined how the eurozone’s third-largest economy is being sucked deeper into the sovereign debt crisis.

S&P on Monday downgraded Italy by one notch to A with a negative outlook, meaning further downgrades are possible. The move – S&P’s first downgrade of Italy since 2006 – places S&P’s rating on Italy three notches below that of Moody’s, the rating agency that many had expected to cut first. Moody’s on Friday said it was extending its review of Italy’s finances.

[source]