Today, President Mario Draghi guided the ECB Board to a status quo decision on the monetary policy of the EU. In yesterday’s NOTES, I opined that when Merkel and Draghi met in Berlin last Friday it was to receive the blessing from the Empress of Europe for a renewed effort at monetary stimulus. Chancellor Merkel was reticent to fan the flames of the AfD and other parties disillusioned with the present state of Germany’s position in the EU. The repression of German savers in an effort to bail out the European financial system is a below the surface issue for voters who are protesting in the streets against the ill-advised policy of a million refugees. Before Draghi can embark on more QE or some other unconventional monetary tool, GERMANY MUST BE SUPPORTIVE.
At the December ECB, meeting President Draghi seemed to fall short of market expectations because an executive board member was able to muster some votes against a more robust QE, greater than the present 60 billion euros. Draghi announced that the ECB will wait for the March meeting but he is very concerned about the lowered expectations for EU deflation. By waiting for the March meeting Draghi can only hope for two developments: First is Chancellor Merkel’s popularity and poll numbers improve as the refugee problems shift from the front page of German magazines and newspapers, or the European economy begins to falter, especially the German export machine.
Seven months ago I wrote a BLOG about the significance of the CHART OF DEUTSCHE BANK. I noted that the price level in U.S. dollars of $27.03 seemed significant because it was the low made the week of July 24, 2012 when Draghi delivered his famous “whatever it takes” to save the euro and the EU. It also was the week when the U.S. 2/10 curve made its low of 117.25, which is being tested this week. The Deutsche Bank low of $27.00 held until the end of September 2015 when the support finally was broken. Deutsche Bank stock closed at $18.78, taking out its low from the financial crisis levels of 2008-2009. The bank is important because it is deemed the crown jewel of European banking.
The lack of a fully developed corporate bond market in Europe has enabled the banks to maintain corporate finance, unlike in the U.S. where the corporate bond market and shadow banking sector has led to the banks being somewhat disintermediated. If there is renewed stress in the European financial system–a product of low inflation creating more non-performing loans (NPLs)–look for President Draghi to move, regardless of Merkel’s support. In an effort to rekindle the engine of monetary stimulus, the greater the financial stress the greater the possibility of the ECB undertaking some drastic action. President Draghi was asked about the recent stress tests conducted by the ECB and SSM on bank finances and danced around the issue by maintaining that European will much sounder than in the 2008 global financial crisis. Draghi’s lips may say yes but the stock prices of many European banks say NO.
***In yesterday’s BLOG I made a quick note to watch the gold/euro as an indicator on the market’s sentiment to the ECB‘s rate decision and Mario Draghi’s nuances during his press conference. The market’s initial response to the STATEMENT was a rally in the euro, a quick selloff in the sovereign debt and a very muted equity market response. The market changed direction even before Super Mario began the press conference and the EURO fell dramatically and the equities began to rally. Somebody was aware “DOWNSIDE RISKS HAVE RISEN.” GEOPOLITICAL RISKS HAVE INCREASED AND EURO INFLATION DYNAMICS HAVE SHIFTED DOWNWARD since the December meeting. BUT BY THE END OF THE DAY THE EURO CURRENCY WAS VIRTUALLY UNCHANGED BUT THE DAX AND SOVEREIGN BONDS HELD THEIR LATE MORNING GAINS.
The GOLD/EURO closed virtually unchanged by the 4:00 p.m. Globex settlement in Chicago at 1012 euros to an ounce of Gold. (The 200-day moving average comes in at 1023.0.) A more interesting chart is the gold/Swiss as the price level of 1107 Swiss francs to an ounce of gold is comfortably above the 1094.2 200-day moving average. I value the gold/Swiss relationship because variables are deemed HAVENS during times of FINANCIAL UNCERTAINTY. Again, it is not wars that drive GOLD higher and I have the scars on my P&L to prove geopolitics have very little lasting effect for gold prices. But if this chart, with what looks like an inverse head and shoulders formation on the daily continuation (CQG), this could prove a STAIRWAY TO HAVEN.
Tags: Angela Merkel, Deutsche Bank, ECB, EU, Euro, Europe, Germany, gold/euro, Mario Draghi
January 21, 2016 at 11:41 pm |
Yra, do you mean the price of gold is headed higher?
January 22, 2016 at 5:06 am |
Reality–that is a good question which will require a full note hopefully on Sunday.Presently,the Gold is making gains against certain currencies but for it to get STRONG against the U.S. Dollar does not appear as yet ready to go—interesting that it hold up tonight and so far this morning even with global equity markets rallying –but the day is forever young as the algos have taught us—but in absolute Dollar terms the GOLD is not yet –will cover what i think as though my long term readers have been privy to my thoughts on this for six years
January 22, 2016 at 11:14 am
Looking forward to this commentary this Sunday?(hopefully). Brought in to the gold today, can see a link between the central banks and a likely QE4. Maybe I am too early, but I see myself losing more money in this volatile market
January 23, 2016 at 7:23 am
I would like to add to Reality’s question BUT taking the contrarian view ( as is my wont). Given that gains take the stairs and losses take the express elevator, could you please give some indication of what we should have looked for when gold topped. I am thinking a Hindsight trading type paragraph. I was wondering if alternatives to gold ( real estate, exotic bonds, sov wealth invest) have made a difference in the metals trading pattern over the years. I know NOTHING about gold been a poor peasant and “I know my place”..
January 22, 2016 at 1:31 am |
Yra, excellent commentary on European markets the last few days, thank you. As a euro based saver, Mr Draghi’s sword of Damocles hangs over mine and other European savers’ heads. We wonder what our purchasing power be in the global asset market 6 or 12 months from now. Commentary on the US dollar adds to the concern. Concensus is for the dollar to go through the roof, probably at the expense of the euro. But my question is: does the US really want such a strong dollar, and if not, why can they not soften it? CBs have that power surely?
Mr Draghi alluded to the refugee crisis as a positive for future growth of the eurozone. Let’s face it: the refugee “crisis” was planned. How else can the eurozone compete in the global market? Mrs Merkel’s mistake was to pretend it happened by accident. I think she will pay dearly for this mistake.
January 22, 2016 at 5:12 am |
Costas—thanks for the support.We will cover this more thoroughly in regards to the resolution of the Ghost Bank and recent bail-ins in Italy—the new rules are certainly complicating the picture and with bail ins it seems that the impact will be increased deflation as people fear putting money in the banks—-so where they head for safety?Your supposition about Merkel ‘s false positive I will have to think about as I have not thought about it through that lens.Nice to see that the global elite feared for itself in Davos that four thousand gendarme and military personnel were brought in—-anybody see the obvious hypocrisy when it comes to concern for the general public
January 23, 2016 at 4:49 am
Anecdotally I can tell you Yra, that Greeks holidaying on some of the refugee pass-through islands last summer were surprised at the affluence of the refugees, and also with the timing of the mass entry that followed immediately after Tsipras’s return from Bruxelles in the infamous U turn on the majority’s NO vote. Then, we have seen a few articles pop up around Europe encouraging the public to view immigration as a positive for economic growth; and this is actually correct. Germany did very well out of Turkish immigrants and the British out of Indian and Pakistani immigration in the sixites. Of course, the latter were British citizens so technically not immigrants. But if the US is going to benefit from low cost Mexcan labour, not to mention the growing contribution of prison labour, and China is able to tap into its heartland, where Europe’s version of that? Clearly its North Africa and the Levant. I dont have a problem with the concept of immigration but the execution of the project and its coordination among member states has been utterly appalling. These bureaucrats are clearly overpaid and unfit to even organise a trip to the sweet shop.
January 22, 2016 at 7:47 am |
Technically it’s very hard to call any sort of bottom or potential rally in Gold from a PROBABILITY point of view.
All 3 charts, D-W-M need to do some work, they still need time to change the very tenacious bear move. That sort of long term selling doesn’t turn on a sixpence/dime.
So be patient Gold bulls (or new bulls), there will be plenty of time and opportunities to get on board the Gold train when it starts.
And let’s not forget the boys LOVE to mess with this market so if/when the bull move starts the boys will be painting those charts to get everyone in and then slamming them via vicious downside THRUST to steal their long positions, then we’ll move higher. That strategy will probably happen multiple times.
January 22, 2016 at 7:52 am |
Alex–a good quality informative post
January 23, 2016 at 7:53 pm |
Knowing central banks choose the winners, I cannot anticipate the roster has changed. Let the unfortunate exercise in futility resume.
January 25, 2016 at 3:12 pm |
Giant sucking sound at close, 51/2 hours following the warning bell.