The German High Court sustained the ESM but laid out that the BAILOUT FUND had to stick to its agreed cap (EU190 BILLION) and that as suspected any further moves to enhance the bond buying program would have to be decided by the BUNDESTAG. It sustained the position of Chancellor Merkel for the time being, thus it makes President Draghi’s move to keep the period of financing to the short-term (LTRO FOREVER) a wise strategic move. The BUNDESTAG will be under pressure to adhere to the concept of “STRICT CONDITIONALITY” as Merkel and Schaeuble will have to be very attuned to the mood of the German citizenry as the Merkel government faces national elections in 2013.
The markets performed as generally expected. The EURO held its recent rallies as the narrowing Spanish and Italian debt/German debt spreads continued to narrow. Global equity markets were relieved as the verdict sustained the status quo and ZERO INTEREST RATES continue to trump all other fundamentals. The PRECIOUS METALS at first had a sizable rally but late profit taking in silver and gold had the two havens close lower as some longs cut positions ahead of the FOMC announcement tomorrow. PLATINUM has been the recent star as the PLAT/GOLD spread has narrowed from a $215-wide deficit at the start of the South African labor problems to close at $85 deficit today. The PLATINUM has also benefited from the recent EURO rally as some FUNDS were shorting PLAT as a play on the collapse of the European economy. The European auto industry uses many diesel engines, which utilize more PLAT in their catalytic converters so slowing auto sales would result in less demand for PLAT. It seems the PLAT shorts have received a double whammy.
As I begin writing tonight, there is no confirmed winner in the DUTCH ELECTIONS. It appears that the fringe parties of the left and right have been handily defeated and there may be a coalition of LIBERAL/LABOR parties–both are centrist type and support the EU. The difference is one of degrees on austerity plans both domestic and EU-wide. If LABOR were to control the coalition it would be a less austere outlook while the present LIBERAL-led coalition would continue with a more austerity-based outlook. This would not represent any significant change on the present state of EU politics. Thus the issue of the EUROPEAN CORE will be for Draghi in control and the AUSTERITY PRONE who have to be satisfied with CONDITIONALITY for a formal request for debt relief. So the FRIENDS OF THE DEBT STRESSED WILL PROVIDE BENEFITS BUT ONLY WITH CONDITIONS.
***The USDA‘s crop report was a mixed bag as CORN closed lower and BEANS staged a strong rally after first being sold. The CORN report revealed that BUSHELS PER ACRE were not as bad as initially thought. BEANS were as expected also but GLOBAL STOCKS are very low heading into the fall harvest and the spring planting season in South America. Global demand is assuring that U.S. grain prices will remain strong but with the BRAZILIAN REAL much weaker this year–2.02 versus last SEPTEMBER USD/BRL of 1.70–look for Brazilian farmers to PLANT FENCEPOST TO FENCEPOST. Also, Brazilian Central Bank rates are at record lows. The spreads in BEANS and CORN will be very volatile as the weather watching will turn to the Southern hemisphere. Also, I want to know where all the OATS are as production was very low and U.S. oat stocks are very well–but as Dennis Gartman always told me, gentleman don’t trade oats.
***Tonight the RBNZ (Reserve Bank of New Zealand) held its lending rate at 2.5% and cited concerns about a slowdown in Europe and is watching the Chinese situation to see if slowing continues in its neighbors. The strong KIWI was not deemed a problem but consumers were switching to cheaper imports and inflation fell below the 2% level. Housing construction was strong as the rebuilding after the Christchurch earthquake was advancing. Again, the theme is concern about global trade.
***Tomorrow the SWISS NATIONAL BANK meets and will decide what to do to prevent EUR/CHF weakness. The CROSS has recently rallied with the EURO and so there is less pressure on the SNB to be aggressive on providing an extra punch by officially taking rates NEGATIVE, but if I was SNB PRESIDENT THOMAS JORDAN, I would give the SWISS FRANC a push and get some momentum in the EUR/CHF and get it further away from the 1.20 EUR/CHF FLOOR before deflation sets into the SWISS economy.
***The FOMC will release its statement at 11:30 a.m. CST and then a press conference at 1:15 p.m. I have said enough about the way forward–QE no, but something creative. Negative rates, coupled with funds for lending scheme: If that DREAM happened, then put on the STEEPENERS and WAIT ON A SUNNY DAY (BRUCE SPRINGSTEEN).