23-Sep (Financial Times) — Time is running out to find a solution to the eurozone crisis and prevent another global recession, finance ministers warned on Friday, as they hinted that discussions were under way to boost the firepower of European rescue funds.

Financial markets experienced another day of intense volatility as investors struggled to interpret an emergency statement from the Group of 20 leading economies, which met on the sidelines of the International Monetary Fund and World Bank meetings in Washington.

…Gold continued to slide sharply and US oil prices traded below $80 a barrel, their lowest in more than a year. Shares rallied modestly in Europe and the US, accompanied by selling in government bonds and the dollar.

[http://www.ft.com/intl/cms/s/0/9bedaa82-e603-11e0-960c-00144feabdc0.html#axzz1YUm6X1iD]

23-Sep (MarketWatch) — The CME Group CME +0.00% , the parent company of the New York Mercantile Exchange, on Friday raised margin requirements for some gold, silver and copper futures contracts. Margins are money investors must put up to be able to trade and hold futures contracts. Initial requirements for gold’s benchmark contract rose 21% to $11,475 per contract, from $9,450 and maintenance margins climbed to $8,500 from $7,000 per contract. Initial requirements for silver’s benchmark contract rose 16% to $24,975 per contract, from $21,600 and maintenance margins climbed to $18,500 from $16,000 per contract.

[source]

PG View: It is likely that expectations of this margin hike factored into today’s sell-off.

23-Sep (Bloomberg) — Gold fell, capping the biggest two- day plunge since 1983, on investor sales following routs in global equity and commodity markets.

More than $3.4 trillion has been erased from equity values this week, sending a global measure of shares into a bear market, on concern that governments are running out of tools to avert a recession. The Standard & Poor’s GSCI Index of 24 commodities fell to a nine-month low today. Gold has dropped 15 percent since reaching a record $1,923.70 an ounce on Sept. 6.

“Gold has become the source of liquidity for global margin calls,” said Michael A. Gayed, the chief investment strategist at Pension Partners LLC. “Also, deflationary pressures are acting on gold.”

[source]

PG View: We’ve seen very strong physical buying interest on this retreat. Savvy investors know from experience that deleveraging breaks provide buying opportunity. The dollar and bonds may be up for now, but most realize that they aren’t the true safe-havens that they once were, and such allocations are therefore unlikely to prove sticky.

23-Sep (Wall Street Journal) — Fears of a possible Greek default and the U.S economy dipping back into recession pushed the Dow Jones Industrial Average to its worst weekly decline since the depths of the financial crisis.

Stocks edged slightly higher on Friday, as a pledge from global officials to maintain financial stability alleviated some investor anxiety. The slim gains, however, failed to overshadow the market’s poor weekly performance.

The Dow edged up 37.65 points, or 0.4%, to 10771.48. But the index, which plunged 675 points on Wednesday and Thursday, finished the week down 6.4%, its worst performance since the week ended Oct. 10, 2008.

[source]

23-Sep (Financial Times) — The Group of 20 leading economies pledged a “strong and co-ordinated” effort to stabilise the global economy in an attempt to calm tumbling equities markets spooked by fears of recession in the eurozone and a gloomy economic outlook in the US.

Bowing to pressure from investors to take action, finance ministers from the G20 economies said in a communiqué issued late on Thursday that they would stop the European debt crisis from deluging banks and financial markets, and take the necessary steps to bolster the eurozone’s rescue fund and assist banks to boost capital reserves in line with new global regulations. The statement followed a day in which the equity markets suffered some of the biggest falls since the collapse of Lehman Brothers in 2008, as investors rushed to safety in a widespread sell-off.

“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group said in a statement. “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines.”

[source]

23-Sep (Financial Times) — Risk aversion in equity and commodities markets drove the dollar higher this week as hopes for economic recovery were dealt another blow by the Federal Reserve’s latest assessment of US growth.

The dollar climbed across the board on Thursday as investors sought safety and global equity markets tumbled with other risk assets, including industrial metals and oil. The latest catalyst for investors to flee for cover was the Fed’s statement on Wednesday that there were now “significant downside risks to the economic outlook”.

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PG View: Should more accurately say “perceived” or “relative” safety.

23-Sep (MarketWatch) — Gold futures slid below $1,700 an ounce on Friday, losing more than 4% as turmoil in global financial markets continued and investors rushed to sell metals positions to raise cash.

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23-Sep (USAGOLD) — Gold extended sharply lower in overseas trading, pushing below the $1700 level for the first time in 7-weeks, as the global asset rout continues. The dollar remains well bid, trading near 7-month highs, bolstered by flight out of stocks and out of the euro.

The G20 vowed “strong and co-ordinated” support in their communiqué late yesterday, saying “We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required.” However, the absence of specifics did little to reassure markets. The market now looks to weekend IMF and World Bank meetings for guidance.

Meanwhile, Congress is embroiled in yet another partisan battle, this time centered on a continuing spending resolution. The Republican controlled House passed a spending bill yesterday, but the Democrat controlled Senate has vowed to shoot it down. Failure to pass a resolution could result in a government shut-down next week. This is exactly the kind of behavior that promoted S&P to downgrade the US.

• France business confidence falls to 99 in Sep, below market expectations, vs 105 in Aug; production outlook tumbles to -29.
• Italy retail sales (sa) -0.1% m/m in Jul, below market expectations of +0.2%, vs negative revised -0.3% in Jun; -2.4% y/y.

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.

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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.

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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.

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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.

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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.

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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!

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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.”

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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.

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