The global markets are on tenterhooks waiting for the European leaders to come to some definitive plan of action to secure the European banking sector and provide relief to the problem of sovereign solvency issue of the so-called PIIGS. This problem has plagued the financial landscape since January 2010, when the Chinese SWF failed to buy a Greek 25 billion euro bond offering. When China didn’t fund Greece, the spotlight was directed to the European debt markets and the result has been a steady decay in the value of the sovereign debt of the European peripheries. After previous crisis meetings to stem the debt crisis, the time has come for the EUROCRATS and their political leaders to provide a program that has some genuine credibility.
The G-20 has demanded that Europe confront its liquidity/solvency issue before the contagion of another round of GLOBAL DELEVERAGING LEADS TO A WORLD DEPRESSION AND ALL THE POLITICAL UGLINESS THAT WILL ACCOMPANY A MASSIVE ECONOMIC DOWNTURN. I am so tired of writing about this so “fondly do I hope and fervently do I pray” that the Europeans finally provide a plan with substance. Today’s headline that caused the markets to drop precipitously was that the ECOFIN WAS CANCELING ITS MEETING.
The rumor that immediately circulated was that Wednesday’s European Leaders meeting was off, which led to a quick drop in equities and a strong rally in the DOLLAR. After the headline was clarified, the equities bounced and the DOLLAR was resold–risk on. All the confusion that clouded the markets led to profit taking on the significant moves of the three previous trading sessions.
The only asset that rallied all day was the GOLD as the uncertainty from Europe keeps the metal bid as a haven from the lunacy of Brussels. During all the posturing, a new problem has developed in Greece. As the size of the haircut on Greek sovereign debt has grown, there has been a quiet run on the deposits of Greek banks. It seems that Greeks want to remove their EUROS from the banks and keep them at home fearing that the Greek banks will be insolvent, thus all savings accounts frozen. Also, if Greece defaults and leaves the EURO currency, it is better to hold the higher value asset and spend whatever is the weakest. This is the onset of GRESHAM’s LAW and it is one of the truths of economics. A run on Greek banks will raise the fear of some type of EXCHANGE CONTROLS, which will immediately put a BID to GOLD as the ULTIMATE HAVEN.
*** The Bank of Canada held the short-term lending rate at 1%. This was certainly the consensus (YRA was the lone dissenter as he expected an increase), but the Canadian dollar was sold hard as the market reacted to what it perceived was the dovish nature of BOC statement. The bank’s Governor, Mark Carney, raised the issue of the euro area experiencing a brief recession. It sees further global deleveraging constraining consumer demand and the fear of fiscal drag in the U.S. creating diminished household confidence. Overall, it was not the Canadian economy that was the principal problem, but rather the incipient weakness in global growth. The BOC expects the main driver of Canadian strength, exports, to be a source of uncertainty until the European situation is somewhat resolved.
***Even with today’s broad-based correction, the CRUDE OIL market held its rally, even though it closed substantially off its highs. The CRUDE market has recently gone into BACKWARDATION as the SPOT PRICE has risen above some of the further out futures contracts. Why the bid for spot oil? This is a rare event in the futures markets and there seems to be much conjecture as to the reason.
I don’t have anything solid in this regard but I will raise the possibility that the U.S. announcement to pull all the troops out of Iraq by year-end may be leading to some quiet concern about the OIL REGION OF THE GULF. I have believed that the large U.S. troop presence in Iraq prevented the U.S. and Israel from militarily confronting Iran on its NUCLEAR PROGRAM, but once the troops leave the situation changes dramatically. This is pure CONJECTURE on my part, but something is making the OIL markets nervous and I hope that readers of this BLOG will post any qualitative thoughts they may have on the price action in the CRUDE.