Report from Europe: Golden Bulls Rule

The slumbering bull went walkabout yesterday ahead of the kickoff in earning season as the cheerleaders of the V shaped recovery heralded the pickup in the US service sector. Indeed in the past 24 hours the news flow has certainly had a better tone, as evident in the bounce in US and European equity markets. The gain in services ISM to 50.9 means it is above 50 for the first time in 12 months. In terms of the details, business activity and new orders posted the strongest gains. The employment index, however, remained below 50 at 44.3. So the data remains equivocal, bearing in mind the Nonfarm Payrolls and the Manufacturing disappointments last week.

The US markets have opened up sharply with the likes of Alcoa (AA) (ahead of their earnings tomorrow), AK Steel (AKS) and Newmont Mining (NEM) bid on a strong performance by mining and metal producers in Europe. Barrick Gold (ABX) is moving ahead with the yellow metal at $1039 and Exxon (XOM) is well supported with the black stuff back over $71 barrel. Corning (GLW) is getting a lift from a UBS upgrade to a “buy” on demand from China. Regional financial names like Hartford (HIG), Zions Bancorp (ZION) and Regions Financial (RF) are also seeing a lot of buying this afternoon.

Aussies Raise Interest Rates
The move away from ZIRP has begun as the marquee event of the Asian session was Australia’s central bank unexpectedly increasing its key rate by 0.25% to 3.25%. Who will be next? Norway? New Zealand? Note overnight data showed that New Zealand business confidence recovered to the highest level in a decade in the third quarter, pushing the Kiwi dollar to its highest in a year versus the greenback. The Norwegian Krone and Aussie Dollar are of course also very bid. There’s an article out saying the Aussie Central Bank will hike again on Melbourne Cup day in November.

What Next For Gold After Its New Record High
Gold jumped to above $1039 on dollar weakness, a Bank of America supportive report and strong Indian jeweller demand. That’s above the previous record intra-day high of $1034, hit on 17th March 2008. Indeed, factors that could still drive the gold price higher:

1. An increase in inflation fears, which have played only a small part in the rally so far.
2. A creeping loss of confidence in paper currencies and the US dollar.
3. The psychology of the market. The headlines that gold is setting new record highs in nominal terms will inevitably draw attention to the fact that gold is still trading well below the all-time high of around $2,300 in real (inflation-adjusted) terms, which was seen briefly in 1980. This will encourage talk of the potential for further explosive price gains.

The upshot is that I would not be surprised to see gold break still higher in the coming weeks. However, a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices. Recall that after peaking at around $850 on 18th January 1980, gold quickly slumped to $650 by the end of January and below $500 again by April.

The Demise Of The Dollar
An article in the Independent has stirred the pot and has the potential to significantly knock confidence in the USD. The article, without citing any sources, says that Middle East oil producers are deep in negotiations with China, Russia, Japan and France to shift from transacting oil in dollars to a basket of other currencies, including gold. It is difficult to know how much weight to place on this report, but there has been a steady stream of BRIC comments and actions this year that have undermined confidence in the dollar (this includes calls for an alternative reserve currency system, promoting and investing in SDRs, and promoting BRIC currencies in trade). Until now, though, Middle East oil producers have expressed support for the dollar. If the market suspects that this major holder of FX reserves and sovereign wealth funds is factoring in a reduced role for the dollar, then the currency may crumble.

The Saudi Central Bank Chief and the Russian Deputy Finance minister have rubbished the story. I’d say it’s about 10 years too soon.

Fed Speak
The NY Fed’s Bill Dudley, the closest to the markets and hence arguably speaking directly to participants, repeated the stock phrase of FOMC statements that the Fed Funds rate will likely remain ‘exceptionally low for an extended period’. He really emphasised the extent to which the Fed is concerned by disinflation (always careful not to use ‘deflation’). He said the US is likely to see excess slack for some time yet and as a result will see meaningful downside risks to inflation over the next couple of years. He also said that the unemployment rate is much too high, and the recovery will be a lot less robust than desired (note that in the wake of payrolls there have been a run of jobless rate upgrades, including one from UBS to a peak of 10.3% from 9.7%). Overall Dudley said he expected the US recovery will be moderate by historical standards.

Dallas Fed’s Richard Fisher tried to soften, or at least clarify, some of last week’s comments to indicate that he’s not pushing for an imminent policy reversal. He said now is not the time to remove the policy stimulus. He said the Fed will need to see the impact of the current stimulus before making any further decisions. He said while he didn’t feel that a double dip was the most likely outcome, he did warn that the issue at the moment is excess slack and disinflationary forces acting on the economy. Fisher said the economy is unlikely to pick up aggressively in the foreseeable future.

More Positive UK Housing Reports
Estate agents Savills reports that the number of banks prepared to lend significant amounts for real estate investment in the UK has almost doubled over the past six months. Out of over 100 lenders monitored by Savills, there are 23 currently prepared to lend more than £20m with six willing to lend over £100m. This represents a significant change in conditions since March, when Savills reported that only 12 lenders were consistently prepared to back deals over £25m, of which eight were German. Savills attributes the change to pricing corrections and reduced funding costs but cautions that business volumes remain reduced due to scarcity of good-quality product and still cautious lending policies. This is good news for NAMA, which will have an element of its loans backed by UK land.

According to the Halifax index, UK’s house prices rose for a third straight month in September. They increased 1.6% mom, leaving them 4.8% below the level prevailing a year earlier and 3.6% above their June trough. This is an encouraging sign of stabilisation, even though prices are still 18.1% below their summer of 2007 peak.

A Reality Check From UK Industrial Production
But the real kicker today was a worse-than-expected industrial production number, unexpectedly falling 2.5% mom in August to a level 11.2% lower than a year earlier. This left the actual level of manufacturing activity at its lowest level since 1992 (probably the last time when talking about a “double dip” was fashionable). The pace of decline in the last 18 months has been dizzying and has virtually wiped out the gains of the past 17 years. The declines were broad based across industries, with all the seven major industries output declining with respect to the previous month. Label it “W”, “double dip” or whatever suits your fancy, but these latest set of numbers are proving a wake-up call. If governments and multilateral agencies sounded to anyone too coy when talking about its fragility, now you know what they were talking about. You don’t need to be a hardcore Roubini fan to understand that under present circumstance, policy stimulus will not be removed anytime soon.

New FSA Rules
The FT highlights the requirements set by the UK’s FSA to force banks to increase their liquidity and capital. The FSA’s measures could force banks and investment companies to increase their cash and government bond holdings by £110bn and then cut reliance on short-term funding by 20% in the first year of the rules. The FT noted that ‘if the FSA ramps up the requirements in subsequent years, as is likely, banks might have to increase their holdings of easily saleable assets by a total of £370bn or significantly cut their reliance on short-term funding. Yesterday’s announcement puts the UK at the forefront of international efforts to prevent a repeat of bank collapses, such as Lehman Brothers and Northern Rock’.

Successful Irish Bond Issue
Closer to basecamp, Ireland launched a monster €7bn 15 year deal (demand was said to be for close to twice this amount). The ease at which the country can prefund next years borrowing requirement (this represent 30% of what next years deficit is projected to be) is very good news for Ireland Inc and in particular the banks who would now be expected to step out from the guarantee and do some longer dated funding in their own (unguaranteed) name.

Towards A Two-Tier Money Market
Aurelio Maccario writes about the long-term refinance operation by the ECB in June, as part of which €442bn in new liquidity was provided to the banking sector. A closer analysis suggests that it was mainly small and medium sized banks that participated, which suggests that there are quite a number of market participants in trouble. The latest main refinancing operation, again at 1%, attracted bids of €67bn, while short-term money market rates are as low as 0.35%. He says that his impression is that a non-negligible part of the banking system is cut-off from market funding.

Company News

• The European morning saw higher commodities prices lifting the shares of metal producers, and basic materials producers while financial shares advanced after Merrill Lynch analysts recommended a punt on European banks. The usual suspects were up i.e. Rio Tinto (RTP), Kazakhmys, Randgold Resources (GOLD) and BHP Billiton (BHP).
• Banking names seeing buying included Credit Agricole (up 5% and now rated a “buy” at Merrill Lynch), Dexia after announcing it plans to possible sell it stake in Credit du Nord to Soc Gen who were themselves in the news on moves to pay state funds and bolster capital via a €4.8bn rights issue. Irish financials Bank of Ireland and AIB also saw buying after the Irish Central Bank said they now foresaw the economy shrinking LESS than previously envisioned.
• Airline stocks also saw some buying. EasyJet was up after the discount carrier said passenger numbers rose in Sept by 5.5%, the best number for 5 months. Ryanair and Aer Lingus were also both up 3-6% after the former said that there was no basis for the rumour that they planned to take over the former Irish national carrier to be funded via a rights issue.
• Northern Foods’ trading in the six months to Sept 26th showed like-for-like sales up 2.9% with strength evident in chilled (+8.8%) and bakery (+3.9%). The trends in Northern are helpful to Greencore and imply a reasonably robust market despite the evidence of trading down to lower price points. Despite this the stock is down 4.8% as Panmure Gordon and Numis Securities both recommended investors sell the shares.
• Tesco’s H1 net profits of £1.03bn came in line with expectations. UK consumers are showing signs of greater optimism with UK same store sales are up 2.7%. This too is reassuring for suppliers such as the Irish agri-food group.
• German paper Die Welt reported this morning that the strong MAN share price performance of yesterday reflected a possible takeover bid from VW (VLKAY.PK). VW Chairman Ferdinand Piech has on several occasions made clear his intention to expand VW’s brand portfolio from 10 to 12. Certainly any move on MAN in the short term would be an aggressive move, in particular with the funding for the Porsche transaction remaining incomplete. It is a remainder though of VW’s relatively aggressive intentions, which with both the German scrapping scheme now winding down and a much tougher 2010 in prospect across Europe.

And Finally… We Got A *Bailout* Now (Jailhouse *Bailout*)

Disclosures = None

Comments

[Mayascribe:]

Mole: Figured you knock out a great article about today's golden move...but that "Jailhouse Bailout" video was effing hilarious!

Good work!

Oct 06 11:54 AM

[spald_fr:]

I've got to agree, that video is too much.

Really enjoy your work.

Oct 06 02:29 PM

[Hot Richard:]

A Saudi, a Russian, a Chinese man, and a French man walk into a bar...and none of them use the US$ for anything.

99% of American voters won't understand this joke.

Oct 06 04:35 PM

[Roger Knights:]

"Recall that after peaking at around $850 on 18th January 1980, gold quickly slumped to $650 by the end of January and below $500 again by April."

This time there's backup--China will (?) be buying on dips.

Oct 06 10:17 PM

[Denis Gould:]

What are you thinking Hot Richard? Saudi's don't go to bars for religious reasons, the Russian got stopped at the door because he was carrying too many guns, the Chinese guy is far too busy working to go to bars, and the Frenchman walked straight back out because the bar only served new world wines.

If there is one great consensus in the world it is that the dollar is going down. Any contrarians out there? If so buy some long bonds as well.

Oct 06 11:23 PM

[Gold Bug:]

Source : maxkeiser1.blogspot.com
Gold could be the next Bubble :
Max Keiser on Alex Jones Tv Kiss The Dollar Goodbye

Oct 09 06:02 PM

[Clint007:]

The next bubble will be Lithium and REE

Oct 11 10:03 PM